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

                               ----------------

                                   FORM 10-K

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

  For the fiscal year ended December 31, 1999
                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

  For the transition period from         to         .

                       Commission file number 000-27287

                               ----------------

                      INTERTRUST TECHNOLOGIES CORPORATION
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                       <C>
        Delaware                            52-1672106
(State of incorporation)       (I.R.S. Employer Identification No.)
</TABLE>

            4750 Patrick Henry Blvd., Santa Clara, California 95054
         (Address of principal executive offices, including ZIP code)

                                (408) 855-0100
             (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, $0.001

                               ----------------

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

   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. [_]

   The aggregate market value of voting common stock held by non-affiliates of
the registrant as of February 29, 2000 was approximately $5,114,830,620.
Shares of common stock held by each officer and director have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

   As of February 29, 2000, 79,408,518 shares of the registrant's common stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Part III--Portion's of the registrant's definitive Proxy Statement to be
issued in conjunction with the registrant's Annual Meeting of Stockholders to
be held on June 1, 2000.

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                      INTERTRUST TECHNOLOGIES CORPORATION

                                   FORM 10-K

                               DECEMBER 31, 1999

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 Item                                                                  Page No.
 ----                                                                  --------
                                PART I

 <C> <S>                                                               <C>
 1.  Business.......................................................       1
 2.  Properties.....................................................      27
 3.  Legal Proceedings..............................................      27
 4.  Submission of Matters to a Vote of Security Holders............      27

<CAPTION>
                               PART II

 <C> <S>                                                               <C>
     Market for Registrant's Common Equity and Related Stockholder
 5.  Matters........................................................      28
 6.  Selected Consolidated Financial Data...........................      30
     Management's Discussion and Analysis of Financial Condition and
 7.  Results of Operations..........................................      31
 7A. Quantitative and Qualitative Disclosure About Market Risk......      39
 8.  Financial Statements and Supplementary Data....................      39
     Changes in and Disagreements with Accountants on Accounting and
 9.  Financial Disclosure...........................................      39

<CAPTION>
                               PART III

 <C> <S>                                                               <C>
 10. Directors and Executive Officers of the Registrant.............      40
 11. Executive Compensation.........................................      40
     Security Ownership of Certain Beneficial Owners and
 12. Management.....................................................      40
 13. Related Party Transactions.....................................      40

<CAPTION>
                               PART IV

 <C> <S>                                                               <C>
     Exhibits, Financial Statement Schedule, and Reports on Form 8-
 14. K..............................................................      41
     Signatures.....................................................      43
</TABLE>

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                                    PART I

ITEM 1. BUSINESS

   All statements in this discussion that are not historical are forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act, including statements regarding our "expectations", "beliefs",
"hopes", "intentions", "strategies" or the like. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. We caution investors that there
can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
risk factors discussed in this Annual Report on Form 10-K. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statements are based.

Overview

   We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce
system. We provide our DRM platform as software and tools to licensees, which
we call partners. These partners intend to offer digital commerce services and
applications that collectively will form a global commerce system, which we
have branded as the MetaTrust Utility.

   DRM technologies protect and manage the rights and interests in digital
information of artists, authors, producers, publishers, distributors, traders
and brokers, enterprises, governments and other institutions, and consumers.
The Internet and the music industry have dramatized the need for protection
and management of digital information. The very characteristics that make the
Internet ideal for distributing digital information also make it ideal for
pirating. DRM is needed by any industry that distributes information that can
be put into digital form.

   Our DRM platform provides a foundation for people and organizations to
define rules for using digital information and building commercial models. Our
technology is designed to protect digital information, apply rules
persistently after information is distributed, and automate many of the
commercial consequences of using the information. Our general purpose DRM
platform is designed to manage a broad range of rights across digital
information and media types.

   Our current partners include ASPSecure.com, ARM, BMG Entertainment Storage
Media, Cirrus Logic, Creative Technology, Computacenter, Diamond Multimedia
Systems, LOAD Media Network, Massive Media Group, Mediascience, Mitsubishi
Corporation, MusicMatch, National Westminster Bank (Magex),
PricewaterhouseCoopers, PublishOne, Reciprocal, RioPort, Samsung SDS, SingTel,
Spectra.Net, Universal Music Group, and Wave Systems. We also have alliances
with Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut,
Marimba, Portal Software, QDesign, and Sony Corporation. These partners,
including alliance partners, actively endorse or promote our products and
services through various sales and marketing activities, including press
releases and trade shows. Some of our partners are conducting, or are planning
to conduct, commercial trials, and have announced that their applications and
services will be commercially available in the MetaTrust Utility in 2000.

Industry Background

   The Internet has emerged not only as the fastest growing communications
medium in history, but also as one of the most efficient distribution channels
for commerce. According to International Data Corporation, total worldwide
Internet commerce spending was $50.4 billion in 1998 and is estimated to grow
to $1.3 trillion in

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2003. International Data Corporation further estimates that worldwide Internet
commerce spending per online buyer will grow from $1,635 in 1998 to $7,216 per
year in 2003.

   While most Internet commerce to date has involved the delivery of physical
goods like books and compact discs ordered online, the Internet is poised to
become a leading distribution channel for digital goods as well. Today, most
content is in, or can be easily put into, digital form. This content includes
music, videos, software, games, publications, business information, and
images. The Internet can be used to disseminate this digital information
efficiently to broad audiences without geographic boundaries, and can
eliminate many of the traditional costs associated with manufacturing,
packaging, and distribution. The use of the Internet for digital goods is
being supported both by the growing number of households and businesses
connected to the Internet, and by electronic devices other than the personal
computer, such as set-top boxes, portable music players, mobile phones, and
other hand-held devices, all of which are becoming connected to the Internet.
In addition, downloading digital content is becoming significantly easier with
the emergence and adoption of broadband technologies including digital
subscriber lines and cable modems, and enhanced compression technologies
including MP3 for music and MPEG-4 for video. The Internet will add to the
existing channels for distributing digital goods on physical media like
compact discs and DVDs.

   The characteristics that make the Internet ideal for distributing digital
goods also make it ideal for pirating and misusing them. Digital goods, if not
protected and managed, can be easily copied without any degradation in
quality, altered and defaced, and distributed with the touch of a button to a
large number of recipients. These threats are increased by advances in
broadband and compression technologies, wider uses of portable devices, and
wider availability of re-writeable compact disc and DVD devices. As the number
of users connected to the Internet and the amount of digital information
transmitted over the Internet increases, these users and this information
become more vulnerable to parties who wish to interfere with the integrity of
digital information and digital transactions.

   Recent events in the music industry provide the most visible example of an
industry facing the problem of protecting and managing its rights related to
digital information. A technology called MP3 that compresses music with near-
compact disc quality has rapidly become recognized as a major threat to the
industry. With readily available MP3-enabled software, music can be copied
from compact discs into computers, compressed to under 10% of its former size,
redistributed, played, and even copied back onto a blank compact disc for
private use or pirated resale. Songs in the MP3 format can be moved from
personal computers to new portable consumer devices and can then be played
through headphones or stereo speakers. Every compact disc published and
distributed is at risk of being copied. Already, many popular titles have been
digitized in MP3 form multiple times across the Internet and a new channel of
direct MP3 distribution is emerging.

   Digital rights management is needed across all content industries,
including music, video, software, games, publications, business information,
and images, and by all of the constituencies in these industries. These
constituencies, including artists, authors, producers, publishers, and
distributors, are all concerned about protecting and managing their rights in
digital content. All parties want to get paid. Artists and authors want to
protect the integrity of their works. Consumers want easy transparent access
to good content but are concerned about protecting their privacy. Producers,
publishers, and distributors want to structure and optimally manage their
business models.

   DRM applies to more than content industries. The Internet is becoming a
principal means for digital interaction among organizations and individuals. A
vast amount of data about organizations and individuals is digitized on
computers, sent over networks, and stored in electronic form. Much of this
information is confidential and proprietary, including trade secrets and
supply chain and product information. Some of this information is also
personal in nature, including financial and medical records. This information
is gathered, stored, and exchanged among many entities, including
corporations, governments, schools, hospitals, and individuals. These
organizations and individuals need to manage their digital rights in the flow
of proprietary and personal information, so that only the appropriate people
can use the information. DRM is also useful for protecting rights as these
information flows become more automated, in trading, brokering, regulatory
compliance, and other industries.

                                       2
<PAGE>

   Current computing environments and security techniques are not designed to
provide sufficient protection and management of digital rights. Historically,
computers, networks, and operating systems were designed primarily for
creating, processing, and distributing information. Similarly, security
technologies evolved to protect computers and networks from the outside
environment and to protect information during a point-to-point transmission,
not to protect information and rights once information has been received and
properly accessed by a user. In commercial transactions in current computing
environments, information is generally stored and transactions are processed
at remote mainframes or servers, even when it is less efficient, because the
client and other parts of the environment do not provide adequate protection
and security. As a result, these security technologies either do not consider
an authorized user as a potential threat, or fail to provide sufficient
mechanisms to prevent the improper use of information. With digital commerce,
the threat comes not only from the outside--a hacker trying to break into the
protected computer or decrypt an encrypted transmission. The threat comes also
from the inside--a user may be authorized initially to access digital
information but performs an unauthorized act, such as making or distributing
copies. Moreover, the requirement for centralized transaction processing and
information storage is less efficient, harder to scale, and more constrained
in use than systems that distribute secure processing.

   Current techniques for DRM that are built on these centralized security
approaches generally only provide secure digital distribution. For example,
these techniques generally lack the ability to persistently manage digital
information, especially when offline, and essentially allow only a limited
number of inflexible business relationships that are predetermined by the
technology provider. These techniques usually require online interaction,
which increases costs, limits consumer convenience, and makes some business
models uneconomical.

   A new computing technology is required to address all of these concerns--
one that, when distributed over a vast array of computers and devices,
consistently protects and manages rights related to digital information and
processes, online and offline, wherever this information and these processes
may occur. Creators, publishers, distributors, service providers, governments
and other institutions, and users must have the ability both to create and
associate rights and rules that persistently apply to digital information and
processes, and to modify the rights and rules, if permitted, even after the
information is distributed. These rights and rules might represent information
regarding ownership, access, payment, promotion, warranty, privacy, and other
elements of commerce in information. When these rights and rules are based on
a common foundation, they can form a basis for an interoperable global system
for digital commerce.

InterTrust Solution

   We have developed a general purpose DRM platform to serve as a foundation
for providers of digital information, technology, and commerce services to
participate in a global e-commerce system for digital commerce. Protected
information can flow from party to party, as it would in normal commerce, and
be managed throughout its lifecycle in compliance with specified rules. Our
platform consists of:

  .  DRM Software and Technology--We license platform software and tools to
     partners that build products and operate commerce services. Our
     technology is designed to operate on the personal computers, devices,
     and servers in this global system and to provide the capability to
     package and publish protected information with rules for use. These
     rules are designed to be flexible, and can be applied and changed
     dynamically, enabling our partners to develop and program their business
     models easily. The rules are designed to be persistently enforced
     wherever the content may travel.

  .  MetaTrust Utility Services--We maintain and administer the
     specifications that are designed to ensure the interoperability,
     security, and trustedness of the global digital commerce system being
     built by our partners. Through our TrustNet clearinghouse, we also
     provide an infrastructure for our partners to pilot and test their
     applications and services. This utility service enables our DRM platform
     to offer a common, neutral basis for publishers, merchants,
     organizations, consumers, and other participants to conduct business and
     exchange protected information.

                                       3
<PAGE>

   Our focus on providing DRM technology and MetaTrust Utility services allows
our partners to develop their own commercial models. They build the
applications and operate the commerce services themselves. A content provider
can establish a relationship with one or more of our partners and have its
content managed consistently as it flows throughout the entire system. As in
traditional commerce, a content provider can select several commerce service
providers and provide users with a choice of payment methods.

   Our general purpose DRM platform is designed to have broad capabilities to
address the needs of all parties seeking to distribute and manage digital
goods. We believe our platform provides the following benefits:

  .  Robust Security--Our highly sophisticated use of multiple layers of
     security and tamper-resistance techniques are designed to provide
     varying levels of security depending on the commercial value and nature
     of digital information consistent with the rights and interests of all
     parties.

  .  Persistent Protection and Management--Our platform is designed to allow
     content providers to protect persistently both the information itself
     and the rules of use. Persistent protection means that these rules
     continue to apply even after the information arrives, online or offline,
     each time the information is accessed, and even when it may be forwarded
     to other people.

  .  Flexible Business Models--Our platform is designed to allow content
     providers to specify and establish their own commercial models with
     fully programmable rules that manage the use of digital information.
     These rules can be easily changed, even after content is distributed,
     for example to permit promotional offers, to accommodate changing
     commercial circumstances, or to automatically present differing offers
     under differing circumstances. Our platform is also designed so that
     these rules can also adjust themselves dynamically to each consumer's
     unique identity characteristics and circumstances of access, for
     example, student or senior citizen discounts, membership in affinity
     groups, or employment at a specific corporation.

  .  Superdistribution--We believe content providers can take advantage of
     superdistribution--allowing and encouraging consumers to become
     redistributors of content in the system. Superdistribution means that
     users of content, if permitted by rules, can forward content to others,
     with persistent application of rules and protection of content. Our
     platform is designed to enable providers to get paid and users to act
     naturally by forwarding content they like to their associates or
     friends. If these parties are not already part of the digital commerce
     system, they have an incentive to join so that they may use the content.

  .  Multiple Content and Media Types--Content providers can use our platform
     for multiple content types. Our platform is designed to permit
     distributors to employ various means of digital distribution, including
     compact discs, DVDs, the Internet, and broadband. Consumers may sign up
     to use any one content type, like music, but then can use our client
     software for other content or services in the MetaTrust Utility system.
     Payment processors can use our technology both for digital goods
     transactions and to process payments for physical goods sold
     electronically.

  .  Efficient Transaction Processing--We believe processing partners can
     take advantage of significant increases in efficiency, including offline
     processing, immediate payment across all participants in the chain of
     distribution, and automated application of rules. Our platform is
     designed to securely store usage and payment transactions that take
     place offline, accumulate them until a minimum threshold is met, for
     example 30 days or $50, and then automatically forward the stored
     transactions for processing. This allows both micropayments and
     efficient collection of usage information. In addition, as required by
     provider-supplied rules, when processing these transactions, immediate
     payment can be made throughout the distribution chain, eliminating
     multiple parties handling payment.

  .  New Advertising Models--Today, advertising on the Internet is largely
     limited to viewing banners and other promotional materials on a web
     page. With our technology, we believe advertising can be managed and
     audited locally on a user's machine every time the user sees the
     advertisement, whether the user is on-line or off-line. Our platform is
     designed to allow a rule to be applied to a brief product placement, for
     example, the appearance of a car within a music video, so that the car
     company

                                       4
<PAGE>

     promotes its products and pays for the promotion each time the car is
     viewed. This feature, combined with our ability to operate offline and
     securely store and later forward collected data, enables new cost-
     effective ways for companies to price content and generate revenue from
     advertising.

  .  Personalized Marketing--Our platform is designed so that marketing
     organizations can use many different aspects of our platform to identify
     and profile individual consumers and match content, offers, and ads to
     specific users or class of users, subject to user consent and privacy
     rights. Because our technology is designed to locally process ads and
     promotions as easily as digital content, this automated personalization
     can occur on the network or offline on the consumer's personal computer.

 The MetaTrust Utility

   We license our DRM platform as software and tools to partners to build
applications and operate services for electronic commerce. By offering
commercial products and services based on our specifications and MetaTrust
Utility services, our partners can collectively build a global digital
commerce system, which we have branded as the MetaTrust Utility. Our DRM
platform is designed to enable creators, publishers, distributors, service
providers, governments and other institutions, and users to persistently
associate rights and rules with digital information.

   The user experience with the MetaTrust Utility will typically begin by
activating our client software, called the InterRights Point, which our
partners will either preinstall or distribute through a variety of means,
including digital download and optical disk distribution. The user will
activate the InterRights Point by establishing a relationship with one of our
commerce service partners. Users will provide basic identity and
authentication information in a largely automated process. Once initialized,
the InterRights Point is designed to interact with any of the services and
content available in the system, from any of our partners. The following
diagram illustrates the lifecycle of content commerce in the system.

                             Commerce Flow Example




Narrative Description of Graphic in the Business Section

Graphic titled "Commerce Flow Example." In the upper right hand corner is a
box titled "Key" in which there are four symbols. The first is a sphere with
three arrows pointing to its center labeled "InterRights Point." The second is
a cube labeled "DigiBox container." The third is the symbol "$" labeled
"Payment." The fourth is the letter "i" inside a circle labeled "Usage
information."

In the center is a cube labeled "Distributor." Above and to the right is a
picture of a piece of paper titled "Usage Rules." From the cube an arrow with
a cube in the middle points down towards a box labeled "User." Inside the box
is a human form, a sphere with three arrows meeting in its center, and a
picture of a computer monitor with an image, entitled "Agree to Rules,"
projecting from the screen.

From the box an arrow with a sphere in the middle points to the right to a
picture of an electronic device entitled "Information Appliance."

From the box an arrow points to the left to a box entitled "Commerce services
provider." In the middle of the arrow is a web brower labeled "www" next to
two compact disks and a floppy disk. Inside the box there are two buildings
and a sphere with three arrows that meet in its center. The building on the
left is marked with the symbol "$" in a circle. The building on the right is
marked with the letter "i" in a circle.

Two arrows, one with the symbol "$" in the middle and one with the letter "i"
in the middle, both in clear cubes, point to a box titled "Publisher." Inside
the box is a human form, a sphere with three arrows meeting in its center and
a computer monitor. Pointing towards the sphere is a picture of a piece of
paper captioned "Usage rules" and a sphere with the caption "Digital
information." An arrow with a cube in the middle points back to the cube in
the center of the graphic.

                                       5
<PAGE>

  .  Packaging Content--With an application developed by one of our partners
     using our DRM technology, system participants can be both creators and
     consumers of digital information. Working from a personal computer, in
     this example, a user creates digital information and, using an
     InterRights Point, associates business rules with the information and
     packages the information securely in a DigiBox container.

  .  Distributing Content--The information is disseminated in DigiBox
     containers over networks, on optical disks, or by other means of
     delivering digital information. The information can securely travel
     through unsecure networks, because the information in a DigiBox
     container is itself protected. Distributors, portals, and web sites can,
     as enabled by the rules of the publisher, add additional rules for use
     or modify the rules--for example, mark up price, make promotional
     offers, bundle the content with other content, or establish frequent
     buyer programs. Importantly, rules for use can be easily changed, even
     after content is distributed.

  .  Using Content--A user can receive content in a DigiBox container, select
     the content and set in motion a secure process. The InterRights Point
     compares identity characteristics of the user or machine with the rules
     that have been associated with the requested event, for example, listen
     or view, and presents the appropriate offers. The event occurs only as
     permitted by the rules. If the rules permit, protected content can be
     transferred to other devices. Our technology, if present, will continue
     to manage the information's use.

  .  Processing Transactions--The InterRights Point can process transactions
     involving both payment and usage information, for example, special
     surveys or information on interaction with an advertisement. These
     transactions could be processed immediately, much like a credit card
     event, or deferred, much like running up a tab, or any combination of
     immediate and deferred processing, as specified by the rules. The
     InterRights Point forwards the transactions in secure DigiBox containers
     to our processing partners which ensure that everyone who is supposed to
     get paid gets paid, that usage information is made available to agreed
     upon parties, and that the privacy of the individual is protected.

Strategy

   Our goal is to empower multiple providers of digital information,
technology, and commerce services to build a global system for digital
commerce based on our DRM platform. The key elements of our strategy are:

 Expand Key Strategic Partnerships

   We are focused on bringing into the MetaTrust Utility an optimal
combination of digital information, technology, and commerce service
participants. Through this focus we intend to create mutually-reinforcing
widespread dissemination of our technology, an expanding consumer base, and
ever-broader participation by information providers. We are targeting
relationships that will establish our DRM initially in several large markets,
including entertainment, business information, and publishing. We intend to
leverage early success in any one market to help encourage adoption and usage
in other markets. We encourage potential participants to enter into
relationships with us, as well as with our partners, in the following key
areas:

   Content--We intend to continue entering into direct relationships with
premier and emerging publishers, distributors, and packagers of content. We
have established strategic relationships with Universal Music Group and BMG
Entertainment Storage Media. In addition, we will encourage premier content
providers to participate in the MetaTrust Utility through our partners.

   Technology--We will continue to target leading technology and device
companies that can build our technology into the infrastructure of several
industries, including computers, consumer electronics, the Internet, and
communications. We have established strategic relationships with Diamond
Multimedia Systems and RioPort to build our technology into portable music
devices and software players.

                                       6
<PAGE>

   Commerce Services--We are targeting partners with trusted brands and
operations, including Mitsubishi Corporation, National Westminster Bank
(Magex), and PricewaterhouseCoopers. We believe that these partners'
reputations, markets, and customer base will facilitate user acceptance of the
MetaTrust Utility.

   By having a combination of content, technology, and commerce service
participants in multiple markets in the MetaTrust Utility, we would not depend
on any one partner, any specific commercial model, or any specific vertical
market to succeed.

 Promote Widespread InterRights Point Deployment

   We have designed our client technology and our licensing structure to
achieve efficient and rapid deployment. Our technology is designed so that it
can be conveniently activated by consumers. It is also designed so that it can
be flexibly deployed by our partners through a variety of means, including
digital download, optical disk distribution, and pre-installation. We will
also work with our partners to develop business models that promote rapid
deployment, for example, superdistribution which allows users to drive
InterRights Point deployment through redistribution of content. Through our
OpenRights initiative, we will also make openly available select components
and application building blocks intended to accelerate the adoption of our DRM
platform to developers in various vertical markets.

 Leverage the MetaTrust Utility Model

   We believe that our neutral utility model is fundamental to achieving
widespread adoption of our DRM platform. We believe partners are more likely
to participate in building a global commerce system if they perceive that the
provider of the foundational technology is unlikely to engage in commercial
models that directly compete with them. We intend to provide technology and
maintain policies needed for an interoperable, secure, and trusted foundation
for all participants in the MetaTrust Utility. Partners can take advantage of
the global interoperability and general purpose nature of this system to build
on the success of our other partners; as more partners and users participate
in the system, participation in the system becomes more efficient and
valuable. In addition, by structuring our compensation as a small share of the
value of goods and services flowing through the system, we align our interests
with those of our partners. From time to time, we may provide special
assistance to new ventures using our technology and may in return take limited
equity positions if we believe it will not compromise our neutrality. In
addition, we have developed and plan to develop further special technology and
services to assist our partners in promoting the use of the MetaTrust Utility
in various vertical markets.

 Maintain Technology Lead

   We believe we are the leader in DRM technology and intend to continue
advancing the state-of-the-art of DRM. We have attracted a group of computer
scientists in both our engineering team and in STARLab, our electronic
commerce research facility, to focus on a broad range of topics important to
advancing DRM. These include commerce language, streaming media, security,
software tamper resistance, secure processing hardware, and watermarking. We
currently have 14 United States patents and one European patent, and will
continue to develop our intellectual property in the fields of digital rights
management and electronic commerce.

Strategic Partners and Markets

   We license our DRM technology to our partners to build digital commerce
services and applications. In addition, we intend to leverage our partners'
activities as they bring their own partners and customers into the MetaTrust
Utility. While we have received initial license fees from our partners, over
time we anticipate that our revenues will be derived primarily from
transaction fees from our partners' and their customers' commercial deployment
of applications and services.

                                       7
<PAGE>

   We currently have five basic types of partnering arrangements: commerce
service licenses, business licenses, applications licenses, hardware licenses,
and alliance agreements. These partners actively endorse and promote our
products at marketing events, including trade shows and conferences, as well
as through press releases. A summary of our primary relationships follows.

 Commerce Services

   Our commerce service partners have broad rights to process and clear
transactions for the MetaTrust Utility, and to create and deploy applications.
They operate data centers, provide various clearinghouse services, and may
distribute applications or host application services. These partners are
actively focused on establishing relationships with multiple digital content,
enterprise, and government customers. Our current commerce service partners
collectively have the ability to provide services both in the United States
and internationally, with bases of operations in the United States, Europe,
and Asia-Pacific.

   Magex--National Westminster Bank Plc is one of the world's largest banks
and a leading processor of credit card transactions and multi-currency credit
card clearing. NatWest recently announced a digital commerce service called
Magex, which is based on our Commerce software. NatWest's license allows it to
create financial and usage clearinghouses, develop software applications, and
act as a deployment manager.

   Mitsubishi--Japan-based Mitsubishi Corporation is one of the largest
trading companies in the world. Mitsubishi's license to our Commerce software
allows it to create financial and usage clearinghouses, develop software
applications, and act as a deployment manager.

   PricewaterhouseCoopers--PricewaterhouseCoopers LLP is the world's leading
professional services organization. Pricewaterhouse's license allows it to
create financial and usage clearinghouses, develop software applications, and
act as a deployment manager.

   Reciprocal--Reciprocal, Inc. is a venture-backed company formed in 1996 by
SOFTBANK Services Group to provide DRM solutions and clearinghouse services.
Reciprocal's license with us allows it to create financial and usage
clearinghouses, develop software applications, and act as a deployment
manager. Reciprocal has recently made public announcements concerning its
initiatives based on our DRM technology in various vertical markets including
music, business information, and education information.

   Samsung SDS--Samsung SDS, part of the Samsung Group, is Korea's leading
information services company. Samsung SDS's license to our Commerce software
allows it to create financial and usage clearinghouses, develop software, and
act as a deployment manager in Korea, for commercial and enterprise customers.

   SingTel--National Computer Systems Pte Ltd., a subsidiary of Singapore
Telecommunications Ltd., is a leading IT service provider in Singapore.
SingTel's license allows it to create financial and usage clearinghouses,
develop software applications, and act as a deployment manager.

 Business

   We have licensed business partners to operate services in one or more
content or application markets. We intend to license additional business
partners, and also believe that many content companies will participate in the
MetaTrust Utility through our partners.

   ASPSecure.com--ASPSecure.com Corporation was founded in August 1999 to
develop applications and services based on our DRM technology. ASPSecure.com's
license to our Commerce software allows it to create a usage clearinghouse and
software applications and services for the application service provider, or
ASP, market. We licensed our Commerce software to ASPSecure.com and received
an initial license fee in the form of a minority equity position in
ASPSecure.com.


                                       8
<PAGE>

   Bertelsmann--BMG Entertainment Storage Media, a unit of Bertelsmann AG, one
of the world's leading media companies with significant interests in all areas
of media, services BMG Entertainment music labels and other Bertelsmann
companies, including Random House, Inc. BMG Entertainment Storage Media's
license to our Commerce software enables it to develop applications and
services in a wide range of vertical markets including music, business
information, software, and computer games.

   Massive Media Group--Massive Media Group was founded in October 1999 to
develop entertainment and advertising applications and services based on our
DRM technology. Massive Media Group's license to our Commerce software allows
it to create a usage clearinghouse and software applications and services for
entertainment and advertising. We licensed our Commerce software to Massive
Media Group and received an initial license fee in the form of a minority
equity position in Massive Media Group.

   PublishOne--PublishOne Inc. was founded in February 1999 to develop digital
publishing applications and services based on our DRM technology. PublishOne's
license to our Commerce software allows it to create a usage clearinghouse and
software applications and services for publishing. PublishOne's initial focus
will be on business information, but it also plans to have future activities
in other content areas, including education. We licensed our Commerce software
to PublishOne and received an initial license fee in the form of a minority
equity position in PublishOne.

   Reuters--Reuters Group PLC is one of the largest news and information
groups in the world. Reuters has announced trials with NatWest and is a
strategic business partner of Reciprocal, both of which are our commerce
services partners.

   Universal--Universal Music Group is the largest of the five major music
labels. Universal's license to our Commerce software allows it to create a
financial and usage clearinghouse, to develop software applications, and act
as a deployment manager, for various entertainment markets.

 Applications

   Application partners are licensed to develop applications, embed our
technology into software or devices, or perform hosting integration and other
services for users of our DRM technology.

   Computacenter--UK-based Computacenter Plc is one of the largest European
information technology providers. Computacenter's license to our Commerce
software allows it to develop a usage clearinghouse for enterprises and to
develop applications and services for enterprises and commercial customers. We
will also work with Computacenter to establish them as a center of excellence
authorized to provide training, support, system integration, and other
services.

   Creative--Singapore-based Creative Technology is a leading provider of
multimedia solutions for personal entertainment. Creative has licensed our
Commerce application developer's kit and our Rights/PD technology to use with
the Creative Nomad player and other hardware and to develop software
applications for distributing entertainment content.

   Diamond--Diamond Multimedia Systems, Inc. is a multimedia and hardware
device company. It introduced the Rio, the first commercially available
portable player of music files in the MP3 format, in November 1998. Diamond
has licensed our Commerce application developer's kit and additional
InterTrust DRM technology to use with the Diamond Rio player, and to develop
software applications for distributing music in connection with Diamond's
Rioport.com web site.

   LOAD Media--LOAD Media Network, Inc. is a leading video delivery network
over the Internet. LOAD has licensed our Commerce application developer's kit
to develop applications and services for distributing entertainment content.

                                       9
<PAGE>

   Mediascience--Mediascience, Inc. developed and distributes the Sonique MP3
player, which is one of the leading MP3 music players. Mediascience licensed a
music player-related application developer's kit to enable Mediascience to
develop a software music player with DRM capabilities.

   MusicMatch--MusicMatch, Inc. was the first company to introduce an MP3
jukebox music player, which is still one of the most popular MP3 music
players. Its music portal is among the most popular MP3 music sites.
MusicMatch licensed a music player-related application developer's kit to
enable MusicMatch to develop a software music player with DRM capabilities.

   RioPort--RioPort Inc. is a leader in the digital audio download market.
RioPort has licensed our Commerce application developer's kit to develop
applications and services for distributing music in connection with its
RioPort.com web site.

   Spectra.Net--Spectra.Net Communications, Inc., developer of the ThrottleBox
multimedia software system, licensed our Commerce application developer's kit
to enable Spectra.Net to develop applications and services for distribution of
entertainment content.

   Wave Systems--Wave Systems Corp. is creating a secure distributing digital
solution for content. Wave Systems licensed our Commerce application
developer's kit and Rights/PD technology to enable Wave Systems to integrate
our DRM technology into its content distribution services and hardware
platform.

Our Commerce Services, Business and Applications Partners and Potential
Markets

   Through the end of 1998, we were in the development stage and had a limited
number of licensees. Mitsubishi, a stockholder, accounted for 91% of total
revenues in 1997 and 25% of total revenues in 1999. Reciprocal accounted for
9% of total revenues in 1997, 66% in 1998, and 13% in 1999. Bertelsmann
accounted for 21% of total revenues in 1998. NatWest accounted for 13% of
total revenues in 1998. Computacenter accounted for 12% of total revenues in
1999. Our success depends on significantly increasing the number of companies
that license our technology and use it for the sale and management of digital
content and services.

                                      10
<PAGE>

   The following table shows the markets in which our commerce services,
business, and applications partners have indicated an interest in pursuing
products and services using our DRM technology. This table is based on our
partners' current interest, which may change, and there is no assurance that
there will be any deployments by our partners in any of these markets.

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                  Market  Entertainment:  Publishing:             Regulated:           Enterprise:
        Partner           . music         . business information  . government         . secure document
                          . video         . financial information . healthcare           exchange
                          . audio books   . traditional media     . education          . enterprise
                          . games         . images                . telecommunications   information portals
                                                                  . secure email       . trading/brokering
------------------------------------------------------------------------------------------------------------
  <S>                     <C>             <C>                     <C>                  <C>
  Magex                          X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  Mitsubishi                     X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  PricewaterhouseCoopers         X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  Reciprocal                     X                   X                     X
------------------------------------------------------------------------------------------------------------
  Samsung                        X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  SingTel                        X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  ASPSecure.com                                                            X                     X
------------------------------------------------------------------------------------------------------------
  Bertelsmann                    X                   X
------------------------------------------------------------------------------------------------------------
  Massive Media Group            X                   X
------------------------------------------------------------------------------------------------------------
  PublishOne                                         X
------------------------------------------------------------------------------------------------------------
  Reuters                                            X
------------------------------------------------------------------------------------------------------------
  Universal                      X
------------------------------------------------------------------------------------------------------------
  Computacenter                  X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
  Creative                       X                   X
------------------------------------------------------------------------------------------------------------
  Diamond                        X
------------------------------------------------------------------------------------------------------------
  LOAD Media                     X
------------------------------------------------------------------------------------------------------------
  Mediascience                   X
------------------------------------------------------------------------------------------------------------
  MusicMatch                     X
------------------------------------------------------------------------------------------------------------
  RioPort                        X
------------------------------------------------------------------------------------------------------------
  Spectra.Net                    X
------------------------------------------------------------------------------------------------------------
  Wave Systems                   X                   X                     X                     X
------------------------------------------------------------------------------------------------------------
</TABLE>

 Hardware

   We have entered into several agreements aimed at developing chips
containing our DRM.

   ARM--ARM is a leading provider of high performance, low-cost, power
efficient RISC processors, peripherals, and system-on-chip designs to leading
international electronics companies. ARM has licensed our technology to
integrate our DRM technology into ARM's designs for its family of core
microprocessors.

   Cirrus Logic--Cirrus Logic Inc. is a leader in Internet audio chip
technology. Our technology development agreement and license with Cirrus Logic
is aimed at integrating our DRM technology in Cirrus Logic's secure system-on-
a-chip (SOC) solution for digital audio players, personal digital assistants,
electronic books, cellular telephones, and other information appliances.
Cirrus Logic has announced that it is offering the secure SOC.

                                      11
<PAGE>

 Alliances

   We have entered into several alliance agreements to help us penetrate
various vertical markets. The alliance agreements provide for cooperative
activities regarding product development and targeting specific strategic
business opportunities. To date, we have entered into alliance agreements with
Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut, Marimba,
Portal Software, QDesign and Sony Corporation.

Products and MetaTrust Utility Services

   Our general purpose DRM platform is comprised of both proprietary software
and technology, and the utility services needed for security,
interoperability, and trustedness of the MetaTrust Utility.

 Products

   Our Commerce software is a general purpose DRM platform and includes
systems software, development tools, and applications for building, deploying,
and managing digital commerce applications. We shipped the general
availability version of our Commerce software at the end of December 1998.
Digital information providers and software companies can use the product to
integrate rights management capabilities into applications that securely
manage, control usage of, and fulfill digital information commerce through
digital distribution channels. Payment processing and Internet infrastructure
companies can use the product to provide various commerce services, including
payment clearing, usage reporting, market analysis and user profiling,
advertising, regulatory compliance, affinity marketing, and automated trading
systems.

   Our software is designed to be fully scalable and comes in several
packages, depending upon the scope of rights licensed by our partners. The key
components of our Commerce software are:

  .  InterRights Point--software that processes DigiBox containers, and
     manages usage of digital information throughout its lifecycle. It may
     function as a client or server, as determined by rules;

  .  Application Developer's Kit--software and tools for systems integrators,
     applications developers, software vendors, and web sites enabling them
     to develop end-user applications and services;

  .  Sample Applications--software and components that assist development of
     applications and services;

  .  RightsWallet Application--client software that manage identities,
     memberships, budgets, and transactions;

  .  Transaction Authority Framework--software and databases for handling
     communications with InterRights Points and processing transactions; and

  .  Deployment Manager Application--software for activating and managing
     InterRights Points.

   We have an enterprise edition of our Commerce software designed for
enterprises to manage private information, including work flow information. It
provides an information security and policy management system for the
enterprise and selected secure document exchange applications.

   We have developed and plan to develop further special technology to assist
our partners in promoting the adoption of our DRM platform in various vertical
markets. For example, we created Powerchord technology, comprised of tool kits
and full-featured demonstration applications, to help appropriate partners
accelerate the adoption of our DRM platform for protected digital music
distribution.

   We have also developed a product called Rights/PD that is designed to
extend our DRM platform to embedded systems, including portable devices and
set-top boxes. Rights/PD is designed to implement a range of DRM functions,
including persistent protection of digital information of all types, and
support for simple to complex business models.

                                      12
<PAGE>

 MetaTrust Utility Services

   We plan to maintain the specifications and administer the interoperability,
security, and trustedness of the MetaTrust Utility. We do this through our
MetaTrust certification program, which has three essential elements:

  .  Specifications--Our partners and their products and services must comply
     with our specifications. These specifications establish policies that
     address technical, procedural, and related matters designed to promote
     the security, trustedness, integrity, interoperability, and performance
     of products and services in the MetaTrust Utility.

  .  Certification--We test and certify, or provide the means for testing and
     certifying, that products and services of participants in the MetaTrust
     Utility comply with our specifications. Certification applies to all
     applications that interface with an InterRights Point as well as partner
     sites and operations. We expect to provide various procedures designed
     to make certification an easy process, including pre-certification of
     components.

  .  Security--Our system addresses numerous areas of security, including
     securing digital information after initial use and providing tamper
     resistance in the InterRights Point software. We have designed, and plan
     to continue to design, countermeasures that we intend to implement if
     security is compromised. We also plan on assisting our partners in
     cryptographic key management.

   Through our TrustNet clearinghouse, we also provide an infrastructure for
our partners to pilot and test their applications and services.

Technology

   Our DRM platform is based on our proprietary software and technology that
we believe add fundamental new functionality to traditional computing
environments. By using proven security technologies plus this new
functionality, we have created platform software designed to enable computing
environments to perform a broad range of new operating functions relating to
managing, not merely protecting, rights in digital information.

   Our DRM platform is general purpose and is
designed to enable digital commerce to operate in
compliance with provider-specified rules through a
network of independent, protected processing
environments, which we have branded as InterRights
Points. Our technology is currently implemented as
software and includes tools, components, sample
applications, documentation, and training that
allow our partners and their customers to build
digital commerce applications and services and take
advantage of the reusable, common foundation of the
MetaTrust Utility. The accompanying diagram shows
the primary architectural elements of our platform.

Narrative Description of Graphic in the Business Section

Box titled "InterTrust DRM Platform." Below the heading, the caption
"InterRights Point" next to a picture of a sphere with three arrows meeting in
its center; the caption "DigiBox container" next to a picture of a cube; the
caption "Usage rules" next to a picture of a piece of paper; and the caption
"Transaction authority" next to a picture of a building.

  .  InterRights Point. The core element of our architecture is the
     InterRights Point, which operates on personal computers and servers in
     the MetaTrust Utility. DRM processing occurs at InterRights Points. Each
     InterRights Point acts as a secure virtual machine, a software
     application acting as a processing device, that is designed to manage
     each party's digital rights remotely. Each InterRights Point creates a
     local, secure database that stores the users' rights, identities,
     transactions, budgets and keys. We are currently developing different
     implementations of the InterRights Point for use in other electronic
     devices. In particular, we are developing technology for securely
     managing the transfer of digital information to portable electronic
     devices like MP3 music players.

  .  DigiBox Container. Protected information in our system is encrypted and
     stored in a format called a DigiBox container. Once in a DigiBox
     container, the information can flow across unsecured networks, and only
     an InterRights Point can access the information. Our design permits
     information in a DigiBox container to remain protected even after a user
     has accessed it, providing persistent protection of the information and
     continuing control over its use regardless of where the information
     travels.

                                      13
<PAGE>

  .  Usage Rules. Content usage is managed by rules, including price, payment
     offer, play, view, print, copy, save, superdistribution, and others. We
     offer a variety of tools designed to allow providers to create and
     change rules and to associate them with digital information. Rules are
     protected in the same way content is protected. Like content, they are
     stored in DigiBox containers for distribution. Rules are designed to
     travel with the information, or separately, allowing our partners the
     flexibility to change any rule, including rights or price, after content
     has been delivered. InterRights Points are designed to ensure that
     applicable rules are followed every time an information usage event is
     requested.

  .  Transaction Authority Framework. InterRights Points connect into our
     processing partners' data centers through a communications controller
     system called the transaction authority framework. The transaction
     authority framework is designed to receive transaction records from
     InterRights Points, store the records, and forward them, as specified by
     usage rules, for further processing, including payment fulfillment. The
     transaction authority framework is also designed to store messages
     resulting from this further processing, like payment confirmation, and
     when the InterRights Point next connects to the data center, send these
     messages to the InterRights Points. The transaction authority framework
     includes administrative software, called the deployment manager, that is
     designed to activate InterRights Points and manage them after
     activation, including fraud detection, revocation, security updates, and
     back-up services.

   Currently most of our software runs on Windows 95, Windows NT,and Windows
98. Our transaction authority framework runs on Windows NT and Solaris
operating system environments. Our software is currently being modified to run
on additional operating systems. These efforts are in the development stage.

Sales and Partner Development

   Our sales activities are designed to establish the initial relationships
with potential partners and help them understand the services and applications
that can be developed using our technology. Our partner development
organization helps our partners and their potential customers understand both
the business and the technical benefits of the products, and assists them in
expanding their businesses with our technology. The sales organization will
generally make the initial contact with a potential partner. The organization
assigns a representative that will serve as our primary contact point for
managing the potential relationship throughout the due diligence and business
discussion process. Our sales organization consisted of 20 employees as of
February 29, 2000, 12 in Santa Clara, one in Washington D.C., four in London,
England, two in Sydney, Australia and one in Tokyo, Japan.

   Our partner development organization provides a single point of
coordination for all interactions with the customers after they become
partners. These personnel are skilled in both business consulting and systems
design to facilitate the successful deployment of our products. The partner
development organization works with our partners on using our DRM technology
as well as on developing cross-partner and new customer relationships. Our
partner development organization consisted of nine employees as of February
29, 2000.

Marketing

   We market our products worldwide primarily through our partners in
combination with our own efforts. We conduct a variety of marketing programs
worldwide to educate our target market, create awareness and generate leads
for our MetaTrust Utility. To achieve these goals, we have engaged in
marketing activities including joint partner marketing, print and online
advertising campaigns and trade shows. These programs are targeted at key
business unit executives as well information technology officers. In addition,
we conduct comprehensive public relations programs that include establishing
and maintaining relationships with key trade press, business press, and
industry analysts. We have established consistent branding guidelines for all
of our partners to increase our brand awareness. Our programs are designed to
assist our partners in developing their internal marketing programs and
capabilities. Our marketing organization consisted of 13 individuals as of
February 29, 2000.

                                      14
<PAGE>

Research and Development; Training and Support

   Our research and development organization is divided into product
development, training and support, and STARLab. To date, substantially all
software development costs have been expensed as incurred. Research and
development expenses were $8.3 million in 1997, $13.0 million in 1998, and
$16.5 million in 1999.

   As of February 29, 2000, our research and development and training and
support organizations were comprised of 123 employees and nine contractors.

 Product Development

   The product development organization is responsible for designing,
developing, and supporting commercial implementations of our DRM technology
and developing future enhancements to our software. There are six engineering
groups in the product development organization: core rights technology,
appliance technology, applications and components, security and tamper
resistance, product architecture, and advanced development. These six
engineering groups are supported by quality assurance, product management,
documentation, deployment operations, and developer support. The quality
assurance group implements a process designed to identify software defects
through the entire development cycle, including operational deployments. The
product management group is responsible for all functional and certification
specifications, schedules, and overall project coordination. The documentation
group is responsible for end user, administrator, and developer documentation
and support for our products. The deployment operations group is responsible
for MetaTrust Utility operations and management, including emergency response,
fraud detection, key management, and application certification. Developer
support is responsible for technical support to our partners' engineering
staffs.

 Training and Support

   Our training and support organizations work closely with the partner
development organization to provide partners with the training and support
contemplated under their license. We believe that customer satisfaction is
essential for our long-term success. In general, our license agreements
provide for a limited period of support and training, including onsite visits,
and email and web site support. We plan on providing our partners with a
variety of standard support packages after this initial support period. As our
partner base grows, we intend to increase the size of our support
organization.

 STARLab

   We have attracted a group of computer science experts for STARLab, our
electronic commerce research organization. STARLab projects cover a broad
range of topics necessary for advanced DRM, including commerce language,
streaming media, security, software tamper resistance, secure processing
hardware, and watermarking. The activities of STARLab are integrated with our
important strategic objectives, including:

  .  extending our portfolio of intellectual property;

  .  developing and prototyping new digital rights management technology;

  .  providing an engineering consulting resource to assist product
     development;

  .  participating in and leading standards efforts; and

  .  advising governmental, research, and other institutions.

Competition

   The market for DRM solutions is new, intensely competitive, and rapidly
evolving. We expect competition to continue to increase both from existing
competitors and new market entrants. The DRM market is new and we are not
aware of any one competitor that has established a dominant position in the
market. However, it is

                                      15
<PAGE>

possible that one or more companies could become a dominant, competitive force
in the future. Our primary competition currently comes from or is anticipated
to come from:

  .  companies offering secure digital distribution systems, including Adobe,
     AT&T, IBM, Liquid Audio, Microsoft, Preview Systems, and Xerox; and

  .  companies offering hardware-based content metering and copy protection
     systems, including Sony and the 4C Entity, comprised of IBM, Intel,
     Matsushita, and Toshiba.

   In addition to these two categories, in the future, operating system
developers like Microsoft or Sun Microsystems may also develop or license
digital rights management solutions for inclusion in their operating systems.

   The primary bases of competition for providers of DRM solutions include:

  .  range of content types and markets, from specific content type to
     general purpose, multiple markets;

  .  flexibility of pricing and other business options, from narrow, fixed
     rules to flexible, dynamic rules;

  .  price of solution, from as high as 30-40% to a nominal percentage of
     transaction value;

  .  range of usage environments, from personal computer-based, online-only
     to multiple devices, offline and online;

  .  choice of service providers, from being tied to a single vendor that
     also provides DRM technology and processing services, to being able to
     choose among multiple, competing service providers; and

  .  business model of DRM provider, from vertically-integrated technology
     provider to neutral utility model.

   We believe that our ability to compete depends on many other factors both
within and beyond our control, including:

  .  the ease of use, performance, features, and reliability of our solutions
     and our partners' applications and services as compared to those of our
     competitors;

  .  the timing and market acceptance of new solutions and enhancements to
     existing solutions developed by us, our partners, and our competitors;

  .  the quality of our partner development and support organization and
     similar organizations of our partners; and

  .  the effectiveness of our sales and marketing efforts, and of similar
     efforts of our partners.

   We believe that we currently compete favorably with our competitors in
these areas.

   Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have broader customer relationships that could be
leveraged, including relationships with many of our customers. These companies
also have more established customer support and professional services
organizations than we do.

Intellectual Property

   Our success will depend in part on our ability to protect our intellectual
property and other proprietary rights in our software and other technology. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright, and trade secret law, and confidentiality and license agreements
with our employees, customers, partners, and others. Despite these
protections, others might use our intellectual property without our
authorization. If this occurs, a party might copy or obtain and use our
products or technology to develop similar technology. If we are unable to
protect our intellectual property adequately, it could materially affect our
financial

                                      16
<PAGE>

performance. Moreover, potential competitors might be able to develop
technologies or services similar to ours without infringing our patents. In
addition, if our agreements with employees, consultants and others who
participate in product and service development activities are breached, we may
not have adequate remedies, and our trade secrets may become known or
independently developed by competitors.

 Patents

   We have devoted substantial time, resources, and capital to protecting our
intellectual property. We currently hold 14 United States patents and one
European patent. We also have filed 38 additional United States patent
applications, as well as counterpart foreign applications in many instances.
We believe that our issued patents and patent applications cover a broad range
of subjects generally relating to protecting electronic rights and content,
enabling secure electronic transactions, and applying DRM technology in the
digital economy. Expenses associated with the preparation of new patent
applications, patent application processing fees, and attorneys costs
associated with patent applications and maintaining our patent portfolio
totaled $334,000 for the year ended December 31, 1997, $237,000 for the year
ended December 31, 1998, and $244,000 for the year ended December 31, 1999.

   Any pending or future patent applications may not be granted, existing or
future patents may be challenged, invalidated or circumvented, and the rights
granted under a patent that has issued or any patent that may issue may not
provide competitive advantages to us.

   Many of our current and potential competitors dedicate substantial
resources to protection and enforcement of intellectual property rights,
especially patents. If a blocking patent has issued or issues in the future,
we would need either to obtain a license or to design around the patent. We
might not be able to obtain a required license on acceptable terms, if at all,
or to design around the patent.

   In part due to our broad range of technologies, we have not conducted and
do not conduct comprehensive patent searches to determine whether technology
that is used in our products infringes patents held by other third parties. In
addition, it is difficult to proceed with certainty in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, relating to similar
technologies. In the past, we have received notices alleging potential
infringements by us of the proprietary rights of others. In January 1996, we
received a letter from an attorney representing E-Data Corporation containing
an allegation of infringement of a patent E-Data allegedly owns. We exchanged
correspondence with E-Data's attorneys ending in September 1996. We have not
heard from any representative of E-Data since that time. In November 1997, we
received a letter from representatives of TAU Systems Corporation informing us
of two patents held by TAU Systems. In the letter, the representatives stated
their opinion that our Commerce software contained various elements recited in
the two patents and requested that we discuss licensing the technology of
these patents. We responded to the letter stating that, although we had not
undertaken a detailed review of the patents, we were unaware of any of our
products having one of the elements required by the patent claims. We have not
received any further correspondence from TAU Systems. In May 1999, we received
a letter from representatives of TechSearch LLC offering us a license to a
patent held by TechSearch. We have reviewed the patent and do not believe that
we need to obtain a license to this patent. In the future, we could be found
to infringe upon the patent rights of E-Data, TAU Systems, TechSearch, or
other companies. Furthermore, companies in the software market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. If we were to discover that our products violate
third-party proprietary rights, we might not be able to obtain licenses to
continue offering these products without substantial reengineering. Efforts to
undertake this reengineering might not be successful, licenses might be
unavailable on commercially reasonable terms, if at all, and litigation might
not be avoided or settled without substantial expense and damage awards.

                                      17
<PAGE>

 Other Intellectual Property

   We have received United States and selected foreign registrations for our
InterTrust and DigiBox trademarks. We also have pending applications for
United States and foreign registration of several of our trademarks and
service marks, including MetaTrust, the MetaTrust Utility, InterRights,
Rights/PD, TrustMail, TrustNet, and others. We do not know if these marks will
be approved. In addition, a significant portion of our marks use the words
inter, trust, meta, or digi. We are aware of other companies that use one or
more of these words in their marks, alone or in combination with other words.
We do not expect to be able to prevent all third-party uses of these words. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States, and effective
patent, copyright, trademark, and trade secret protection may not be available
in these jurisdictions. We license our proprietary rights to third parties,
and these licensees may fail to abide by compliance and quality control
guidelines relating to our proprietary rights or may take actions that would
harm our business.

   Our partners may rely in part on licenses included within the sealed
packaging of commercial software and licenses on a web site that are entered
into by clicking with a computer mouse on a button denoting assent to the
terms of the license displayed on the web site. These licenses, however, may
be or become unenforceable under the laws of some jurisdictions. As with other
software products, our products are susceptible to unauthorized copying and
uses that may go undetected. Policing unauthorized use is difficult.

   Any claims relating to the infringement of third-party proprietary rights,
even if meritless, could result in the expenditure of significant financial
and managerial resources and could result in injunctions preventing us from
distributing particular products and services. These claims could harm our
business. We also rely on technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products and services to perform key functions. Third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these technologies could harm our
business. Although we generally seek to be indemnified against claims that
technology licensed by us infringes the intellectual property rights of
others, we do not receive indemnification in some cases. In some cases
indemnification is not available for all types of intellectual property and
proprietary rights, and in other cases the scope of indemnification is
limited. Even if we receive broad indemnification, third-party indemnitors are
not always well-capitalized and may not be able to indemnify us in the event
of infringement, resulting in substantial liability to us. Infringement or
invalidity claims may arise from the incorporation of third-party technology,
and our customers may make claims for indemnification. These claims, even if
meritless, could result in the expenditure of significant financial and
managerial resources in addition to potential product or service redevelopment
costs and delays, all of which could harm our business.

Standards Bodies and Industry Groups

   We participate in selected industry groups to promote digital rights
management in the computer, consumer electronics, and entertainment markets.
With this aim in mind, we have most recently been involved with the following
standards bodies and industry groups: Moving Picture Experts Group, Secure
Digital Music Initiative, Open Platform Initiative for Multimedia Access, The
Open eBook Initiative, The Cross Industry Working Team, and Copy Protection
Technical Working Group. We believe our activities in the Moving Picture
Experts Group and the Secure Digital Music Initiative are of particular
importance.

   MPEG-4, the standard for multimedia software and devices, includes an
intellectual property management and protection architecture that permits DRM
systems to be used in future MPEG-4 systems, including set-top boxes, DVD
players, and game machines. We played a major role in the definition of the
intellectual property management and protection interface, which is consistent
with our technology. MPEG-4 content developers can use our technology to
incorporate intellectual property management and protection capabilities into
their applications.

   The Secure Digital Music Initiative was started by the Recording Industry
Association of America, the International Federation of the Phonographic
Industry, and the Recording Industry Association of Japan shortly

                                      18
<PAGE>

after the first release of the Diamond Rio MP3 music player in an effort to
establish a standard for secure digital delivery and use of recorded music. We
have participated in the Secure Digital Music Initiative from the beginning.
We have been active as one of three vice-chairs of the first working group,
which devised the specifications for secure digital music compliant-portable
devices. Following the approval of the Secure Digital Music Initiative
portable devices specification, we believe our technology will enable the
protection and management of digital audio content on the Internet, personal
computers, and portable devices. We plan to continue participating actively
and developing our technology to be compliant with emerging Secure Digital
Music Initiative specifications.

Employees

   At February 29, 2000, we had a total of 190 employees. Of the total, 123
were in research and development and training and support, 42 were in
marketing, sales and partner development, and business development, and 25
were in administration and finance. None of our employees is subject to a
collective bargaining agreement, and we believe that our relations with our
employees are good.

   Our future operating results depend in significant part on the continued
service of our key technical, sales, and senior management personnel, none of
whom is bound by an employment agreement with specified terms. Our future
success also depends on our continuing ability to attract and retain highly
qualified technical, sales, and senior management personnel. Competition for
these personnel is intense, and we may not be able to retain our key
technical, sales and senior management personnel or to attract these personnel
in the future. We have experienced difficulty in recruiting qualified
technical, sales, and senior management personnel, and we expect to experience
these difficulties in the future. If we are unable to hire and retain
qualified personnel in the future, this inability could seriously harm our
business.

                                      19
<PAGE>

RISK FACTORS

   In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating our business and us:

Risks Related to Our Business

 Our business model is new and unproven, and we may not succeed in generating
sufficient revenue to sustain or grow our business.

   Our business model is new and unproven and may not generate sufficient
revenue for us to be successful. The success of our business depends upon our
ability to generate transaction fees in the form of a percentage of fees
charged by our licensees in commercial transactions. However, our licensees
have not yet used our technology in any significant commercial distribution of
their products and we have not earned any transaction fees under this business
model. The volume of products and services distributed using our technology
may be too small to support or grow our business. While some companies have
licensed our technology, other companies may wish to use other technology
based on different business models, including the payment of a one-time
license fee without sharing in ongoing revenues. If we are unable to generate
revenues from transaction fees, our current revenues, consisting of initial
license fees and support fees, will be insufficient to sustain our business.

 Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.

   Our operating results have varied from period to period and, in some future
quarter or quarters, will likely fall below the expectations of securities
analysts or investors, causing the market price of our common stock to
decline.

   Our quarterly operating results may fail to meet these expectations for a
number of reasons, including:

  .  a quarterly decline in the overall demand for digital goods and
     services;

  .  a quarterly decline in the demand for our Commerce software product;

  .  our failure to quickly reduce costs in the event of unanticipated
     declines in revenues in a given period;

  .  delays in the timing of licensing our Commerce software and services;

  .  the nature and types of our licensing arrangements;

  .  expenses related to the issuance of stock to our partners;

  .  the inability of our licensees and their customers to commercialize our
     technology, or delays or deferrals in this commercialization; and

  .  customer budget cycles and changes in these budget cycles.

 We have a history of losses, and we expect our operating expenses and losses
to increase significantly.

   Our failure to increase our revenues significantly would seriously harm our
business. We have experienced operating losses in each quarterly and annual
period since inception, and we expect to incur significant and increasing
losses in the future. We incurred net losses of $11.7 million in 1997, $19.7
million in 1998, and $28.6 million in 1999. As of December 31, 1999, we had an
accumulated deficit of $74.1 million. We expect to

                                      20
<PAGE>

significantly increase our research and development, sales and marketing, and
general and administrative expenses. As a result of these additional expenses,
we must significantly increase our revenues to become profitable. We expect to
incur significant losses for at least the next several years.

 If third parties do not deploy our technology and create a market for digital
commerce, our business will be harmed.

   Relationships with leading digital information, technology, and commerce
service providers are critical to our success. Our business and operating
results would be harmed to the extent our licensees fail, in whole or in part,
to:

  .  deploy our technology;

  .  develop an infrastructure for the sale and delivery of digital goods and
     services;

  .  generate transaction fees from the sale of digital content and services;

  .  develop and deploy new applications; and

  .  promote brand preference for InterTrust products and services and the
     MetaTrust Utility.

 We need to significantly increase the number of companies that license our
technology to sustain and grow our business.

   We will not generate sufficient revenue to grow our business unless we
maintain relationships with existing licensees and significantly increase the
number of companies that license our technology and use it for the sale and
management of digital information and services. We have not yet attracted, and
may not in the future be able to attract, a sufficient number of these
companies. To date, only 22 companies have licensed our software for
commercial use. Our ability to attract new licensees will depend on a variety
of factors, including the following:

  .  the performance, reliability and security of our products and services;

  .  the scalability of our products and services--the ability to rapidly
     increase deployment size from a limited number of end-users to a very
     large number of end-users;

  .  the cost-effectiveness of our products and services; and

  .  our ability to market our products and services effectively.

   Our ability to attract new licensees will also depend on the performance of
our initial licensees and the overall success of the MetaTrust Utility. Many
potential licensees may resist working with us until our and our licensees'
applications and services have been successfully introduced into the market
and have achieved market acceptance. We may not be able to attract a critical
mass of licensees that will develop products and establish clearinghouses and
other commerce services, and our licensees may not achieve the widespread
deployment of users we believe is necessary for us to become successful.

   In addition, we may not be able to establish relationships with important
potential customers if we have already established relationships with their
competitors. Therefore, it is important that we are perceived as a neutral and
trusted technology and service provider. In addition, we require that products
and services operating within the MetaTrust Utility comply with specifications
administered by us. Potential licensees may be unwilling to be subject to the
control of these specifications.

 The long and complex process of licensing our Commerce software could delay
the deployment of our technology and harm our business.

   Licensing our Commerce software is a long and complex process. If initial
license fees are delayed or reduced as a result of this process, our future
revenue and operating results could be impaired. Before committing to license
our product, our licensees must generally consider a wide range of issues
including product benefits,

                                      21
<PAGE>

installation and infrastructure requirements, ability to work with existing
computer systems, ability to support a large user base, functionality,
security, and reliability. The process of entering into a licensing agreement
with a company typically involves lengthy negotiations. As a result of our
long sales cycle, which in the past has generally ranged from six months to 18
months, it is difficult for us to predict the quarter in which a particular
prospect might sign a license agreement.

 Because our technology must be integrated into the products and services of
our licensees, there will be significant delay between our licensing the
software and our licensees' commercial deployment of their products and
services, which will delay our receipt of transaction fee revenue.

   Our success depends upon the deployment of our technology by a potential
licensee in the use and sale of digital content. Our licensees undertake a
lengthy process of integrating our technology into their existing systems or a
new system. Until a licensee deploys our technology, we do not receive
transaction fees from that licensee.

   We expect that the period between entering into a licensing arrangement and
the time our licensee commercially deploys applications based on our Commerce
software will be lengthy and will vary, which makes it difficult for us to
predict when revenue will be recognized.

 Our Commerce software has only recently been used by our licensees in pilot
programs, making evaluation of our business and prospects difficult.

   We began offering the general availability release of our Commerce software
in December 1998, and released version 1.2.3 in February 2000. Our licensees'
applications and services based on our Commerce software are in development or
have only been released for evaluation in very limited pilot programs. Our
licensees have not yet commercially deployed their applications or services on
a large scale. It is possible that we or our licensees may uncover serious
technical and other problems resulting in the delay or failure of major
commercial deployment of our licensees' implementation of our Commerce
software, including problems relating to security, the ability to support a
large user base, and interoperability of our software or the combination of
our software with our licensees' software. We may not successfully address any
of these problems, and the failure to do so would seriously harm our business
and operating results.

 Security breaches of our software and our licensees' software could result in
decreased demand for our technology by our licensees or their customers or in
litigation.

   The secure transmission and trusted management of proprietary or
confidential information over the Internet are essential to establishing and
maintaining confidence in our Commerce software and the software and services
developed using our software. Without this confidence, potential or current
licensees may not use our technology and their customers may not trust and use
our licensees' products. Therefore, security concerns and security breaches of
our and our licensees' software could harm our business and operating results.
Advances in computer capabilities, new discoveries, or other developments
could result in a compromise or breach of the security technology, including
cryptography technology, that we and our licensees use to protect customer
digital content and transaction data. Security breaches could damage our
reputation and expose us to a risk of loss or litigation. Our insurance
policies have low coverage limits that may not be adequate to reimburse us for
losses caused by security breaches. We cannot guarantee that our security
measures will prevent security breaches.

 Defects in our software and the software of our licensees could delay
deployment of our technology and reduce our revenues.

   Defects or errors in current or future products could result in delayed or
failed deployment of our technology, lost revenues, or a delay in or failure
to achieve market acceptance, any of which could seriously harm our business
and operating results. Complex software products like ours often contain
errors or defects, including errors relating to security, particularly when
first introduced or when new versions or enhancements

                                      22
<PAGE>

are released. Because this is a system used for commerce, we believe the
standards for reliability and performance may be very high.

   If our licensees' products and services contain errors or defects not
discovered in the process of development and pilot programs, it could
seriously undermine the perceived trust and security needed for a commercial
system and could delay or prevent market acceptance of digital commerce
resulting in serious harm to our business and operating results.

   The deployment and use of our products expose us to substantial risks of
product liability claims because our products are expected to be used in
sensitive and valuable digital commerce transactions and because we require
our partners to comply with our specifications. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, it is possible that these limitations of liability
provisions may not be effective as a result of existing or future laws or
unfavorable judicial decisions. A product liability claim brought against us,
even if not successful, would likely be time consuming and costly to defend
and could significantly harm our business and operating results.

 If we are unable to continue obtaining third-party software and applications,
we could be forced to change our product offering or find alternative
suppliers, which could delay shipment of our product.

   We integrate third-party software with our software. We would be seriously
harmed if the providers from which we license software ceased to deliver and
support reliable products, enhance their current products, or respond to
emerging industry standards. In addition, the third-party software may not
continue to be available to us on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain this software, could result in
shipment delays or reductions, or could force us to limit the features
available in our current or future product offerings. Either alternative could
seriously harm our business and operating results.

 The market for digital rights management will be subject to rapid
technological change and new product introductions and enhancements that we
may not be able to address. We need to develop and introduce new products,
technologies, and services.

   The market for digital rights management solutions is fragmented and marked
by rapid technological change, frequent new product introductions and
enhancements, competing formats, uncertain product life cycles, and changes in
customer demands. To succeed, we must develop and introduce, in response to
customer and market demands, new releases of our Commerce software that offer
features and functionality that we do not currently provide. Any delays in our
ability to develop and release enhanced or new products could seriously harm
our business and operating results. In the past, we have experienced delays in
new product releases, and we may experience similar delays in the future.

 Our markets are highly competitive and we may not be able to compete
successfully against current or potential competitors, reducing our market
share and revenue growth.

   Our markets are new, rapidly evolving, and highly competitive, and we
expect this competition to persist and intensify in the future. Our failure to
maintain and enhance our competitive position could reduce our market share
and cause our revenues to grow more slowly than anticipated or not at all. We
encounter current or potential competition from a number of sources,
including:

  .  providers of secure digital distribution technology like Adobe, AT&T,
     IBM, Microsoft, Liquid Audio, Preview Systems, and Xerox;

  .  providers of hardware-based content metering and copy protection
     systems, including Sony and the 4C Entity, comprised of IBM, Intel,
     Matsushita, and Toshiba; and

  .  operating system manufacturers, including Microsoft or Sun Microsystems,
     that may develop or license digital rights management solutions for
     inclusion in their operating systems.


                                      23
<PAGE>

   Potential competitors may bundle their products or incorporate a digital
rights management component into existing products in a manner that
discourages users from purchasing our products. For example, we expect that
future releases of Microsoft's Windows operating system, which manages the
programs on a computer, will include components addressing digital rights
management functions. Furthermore, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we do.

   Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have more extensive customer bases and broader partner
relationships that they could leverage, including relationships with many of
our current and potential partners. These companies also have significantly
more established customer support and professional services organizations than
we do. In addition, these companies may adopt aggressive pricing policies. For
a more detailed description of our competitive position, including some of our
competitors and competitive products, please see "Business--Competition."

 We and our licensees may be found to infringe proprietary rights of others,
resulting in litigation, redesign expenses, or costly licenses.

   Digital rights management is an emerging field in which our competitors may
obtain patents or other proprietary rights that would prevent, or limit or
interfere with, our, or our licensees', ability to make, use, or sell
products. Furthermore, companies in the software market are increasingly
bringing suits alleging infringement of their proprietary rights, particularly
patent rights. We and our licensees could incur substantial costs to defend or
settle any litigation, and intellectual property litigation could force us to
do one or more of the following:

  .  cease selling, incorporating, or using products or services that
     incorporate the infringed intellectual property;

  .  obtain a license from the holder of the infringed intellectual property
     right; or

  .  redesign products or services to avoid infringement.

   Our licensees' products and services may be subject to a claim of patent
infringement independent of any infringement by our software.

   In the past, we have received notices alleging potential infringement by us
of the proprietary rights of others. In January 1996, we received a letter
from an attorney representing E-Data Corporation containing an allegation of
infringement of a patent E-Data allegedly owns. We exchanged correspondence
with E-Data's attorneys ending in September 1996. We have not heard from any
representative of E-Data since that time. In November 1997, we received a
letter from representatives of TAU Systems Corporation informing us of two
patents held by TAU Systems. In the letter, the representatives stated their
opinion that our Commerce software contained various elements recited in the
two patents and requested that we discuss licensing the technology of these
patents. We responded to the letter stating that, although we had not
undertaken a detailed review of the patents, we were unaware of any of our
products having one of the elements required by the patent claims. We have not
received any further correspondence from TAU Systems. In May 1999, we received
a letter from representatives of TechSearch LLC offering us a license to a
patent held by TechSearch. We have reviewed the patent and do not believe that
we need to obtain a license to this patent. In the future, however, we or our
licensees could be found to infringe upon the patent rights of E-Data, TAU
Systems, TechSearch, or other companies.

 Protection of our intellectual property is limited and efforts to protect our
intellectual property may be inadequate, time consuming, and expensive.

   Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret, and trademark laws, as well as
confidentiality procedures and contractual provisions. These legal protections
afford only limited

                                      24
<PAGE>

protection and may be time consuming and expensive. Furthermore, despite our
efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property. Also, our competitors may
independently develop similar, but not infringing, technology, duplicate our
products, or design around our patents or our other intellectual property.

   Our patent applications or trademark registrations may not be approved.
Moreover, even if approved, the resulting patents or trademarks may not
provide us with any competitive advantage or may be challenged by third
parties. If challenged, our patents might not be upheld or their claims could
be narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources away from our business operations. In
addition, we license our products internationally, and the laws of many
countries do not protect our proprietary rights as well as the laws of the
United States.

 To successfully license our product and grow our business, we must retain and
attract key personnel; competition for these personnel is intense.

   Our success depends largely on the skills, experience, and performance of
the members of our senior management and other key personnel, including our
chairman of the board and chief executive officer, Victor Shear. None of our
senior management or other key personnel must remain employed for any specific
time period. If we lose key employees, our business and operating results
could be significantly harmed. In addition, our future success will depend
largely on our ability to continue attracting, integrating, and retaining
highly skilled personnel. We recently announced that our chief financial
officer, Erwin N. Lenowitz, will be resigning for personal reasons as of the
earlier of the hiring of a replacement or May 30, 2000. If we are unable to
fill this function, our business could be harmed. In addition, competition for
qualified sales and marketing personnel is intense. We may not be able to hire
enough qualified individuals in the future or in a timely manner. New
employees require extensive training and typically take at least four to six
months to achieve full productivity. Although we provide compensation packages
that include stock options, cash incentives, and other employee benefits, the
volatility and current market price of our common stock may make it difficult
for us to attract, assimilate, and retain highly qualified employees.

 Failure to appropriately manage our growth and expansion could seriously harm
our business and operating results.

   Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to
manage growth effectively could seriously harm our business and operating
results. We have grown from 87 employees at December 31, 1997 to 190 employees
at February 29, 2000. 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, engineering, accounting,
finance, marketing, and operations organizations.

Industry-Related Risks

 Our revenues may not grow and our stock price may decline if digital music
commerce over the Internet does not develop.

   We currently devote a significant portion of our time, resources, and
attention pursuing partnerships and business within the music industry. As a
result, if digital music commerce over the Internet does not develop, our
business and operating results will be significantly harmed. A number of
factors could delay or prevent the development of digital music commerce.
These factors include:

  .  music content providers' inability to attract significant music artists,
     record labels, and recordings to be distributed in their format;

  .  lack of development and adoption of compression technology to facilitate
     digital delivery of music or related information like music videos; and

  .  lack of development and adoption of consumer devices that are able to
     play downloaded digital music.

                                      25
<PAGE>

 We may not receive sufficient revenues to be successful and our stock price
will decline if use of the Internet for commercial distribution of digital
content is not widely accepted.

   Acceptance and use of the Internet for commercial distribution of digital
content may not continue to develop at recent rates, and a sufficiently broad
base of consumers may not adopt, and continue to use, the Internet and other
online services as a medium for digital commerce. Because our transaction fees
are derived from digital commerce transactions, if digital commerce is not
accepted for any reason, our revenues would not grow sufficiently and our
business and operating results would be significantly harmed.

   We depend on the widespread acceptance of commerce in digital information
over the Internet, through DVD, and other means. These methods for
distribution of digital information may not be commercially accepted for a
number of reasons, including:

  .  failure to develop the necessary infrastructure for communication of
     digital information and for payment processing;

  .  failure to develop or deploy enabling technologies, including
     compression or broadband technology necessary for distribution of
     particular digital content over the Internet;

  .  reduced demand for paid digital content due to the widespread
     availability of free content online and the ability to use and
     distribute this content without restriction; and

  .  insufficient speed, access, and server reliability, as well as lengthy
     download time for content.

 If standards for digital rights management are not adopted, confusion among
content providers, distributors, and consumers may depress the level of
digital commerce, which would reduce our revenues.

   If standards for digital rights management are not adopted or complied
with, content providers may delay distributing content until they are
confident that the technology by which the content is to be distributed will
be commercially accepted. Standards for the distribution of various digital
content might not develop or might be found to violate antitrust laws or fair
use of copyright policies. In addition, the failure to develop a standard
among device manufacturers may affect the market for digital goods and
services. As a result, consumers may delay purchasing products and services
that include our technology if they are uncertain of commercial acceptance of
the standards with which our technology complies. There is uncertainty in the
market as to the best way to offer music digitally. There are a number of
different software formats available and it is possible that not all music
will play on the same devices. Consumer acceptance of digital delivery of
music depends upon the ability of the various software formats to work
together. Consequently, if a standard format for the secure delivery of
content on the Internet is not adopted, or if the standards are not compatible
with our digital rights management technology, our business and operating
results would likely be harmed.

 We may face increased governmental regulation and legal uncertainties that
could increase our costs and provide a barrier to doing business.

   Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Although we
have obtained approval to export our Commerce software, changes in export laws
and regulations may impose restrictions that affect our ability to distribute
products and services internationally, limiting our ability to gain revenue
and grow our business.

   It is also possible that Congress or individual states could enact laws
regulating or taxing Internet commerce. In addition, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies.
Access fees, sales taxes or any other taxes or fees could increase the cost of
transmitting data over the Internet and reduce the number or amount of
transactions from which we would get our transaction fees.


                                      26
<PAGE>

 Stock-Related Risks

 Our stock price has been particularly volatile and could decline
 substantially because of the industry in which we compete.

   The stock market in general has recently experience extreme price and
volume fluctuations. In addition, the market prices of securities of Internet-
related companies in general, and our stock price in particular, have been
extremely volatile, and have experienced fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
For example, from October 27, 1999, the date of the initial public offering of
our common stock, through February 29, 2000, our stock price has fluctuated
from $9.00 per share to $99.75 and has on many days fluctuated more than 10%.
The trading prices of many technology companies' stocks are at or near
historical highs and reflect valuations substantially above historical levels.
These trading prices and valuations may fall significantly. These broad market
fluctuations could adversely affect the market price of our common stock. In
addition, these fluctuations could lead to costly class action litigation that
could significantly harm our business and operating results.

ITEM 2. PROPERTIES

   Our principal administrative, sales, marketing, and research and
development facilities occupy approximately 121,000 square feet in Santa
Clara, California under two leases that terminate in September 2004. We also
lease office space for a research and development facility occupying
approximately 3,900 square feet in Portland, Oregon under a lease that
terminates in October 2002. InterTrust International, our wholly-owned
subsidiary, has an office located in London, England.

ITEM 3. LEGAL PROCEEDINGS

   None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matters were submitted during the fourth quarter of the year ended
December 31, 1999.

                                      27
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   On February 24, 2000, we consummated a two-for-one stock split. All share
and per share data have been restated to reflect the split.

   Our common stock is traded on the Nasdaq National Market System under the
symbol of ITRU. The following table sets forth, for the periods indicated, the
low and high bid prices per share for our common stock as reported by the
Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                Low     High
                                                               ------  -------
   <S>                                                         <C>     <C>
   Fiscal 1999
   Fourth Fiscal Quarter (beginning October 27, 1999).........  $9.00   $93.63
</TABLE>

   As of February 29, 2000, there were approximately 477 holders of record of
our common stock.

   No dividends have been paid on the common stock. We currently intend to
retain all future earnings, if any, for use in our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.

RECENT SALES OF UNREGISTERED SECURITIES

   On October 12, 1999, we issued 170,000 shares of our class A voting common
stock to Mpeg TV LLC in exchange for the purchase of audio decoding and
rendering technology and related assets and a license to video technology
valued at $1,190,000.

   On March 8, 2000, we issued 230,464 shares of common stock in exchange for
all of the capital stock of Infinite Ink Corporation. The transaction was
accounted for as a purchase at a value of $28.0 million.

   The sale of the above securities was determined to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving any public offering. The recipients of securities in each
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution and appropriate legends were affixed to the share certificates
issued in these transactions. All recipients had adequate access, through
their relationships with us, to information about us.

USE OF PROCEEDS

   On October 26, 1999, a Registration Statement on Form S-1 No. 333-84033 was
declared effective by the Securities and Exchange Commission, pursuant to
which 7,475,000 shares of our common stock, $0.001 par value, were offered and
sold for our account at a price of $18.00 per share, generating aggregate
offering proceeds of $134,550,000. The managing underwriters for the offering
were Credit Suisse First Boston Corporation, J.P. Morgan Securities, Inc.,
Salomon Smith Barney Inc. and SoundView Technology Group, Inc.

   We incurred expenses of approximately $11,118,500, of which $9,418,500
represented underwriting discounts and commissions and approximately
$1,700,000 represented other expenses related to the offering. The net
offering proceeds after total expenses was $123,431,500. No direct or indirect
payments were made to directors, officers, or general partners of us or their
associates, or to persons owning 10% or more of any class of equity securities
of InterTrust and our affiliates.

   From the effective date of the Registration Statement to December 31, 1999,
we have used the net proceeds from the offering to fund working capital and
general corporate purposes. The funds that are not being used to fund short-
term needs have been placed in temporary investments pending future use.

                                      28
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Form 10-K. The consolidated statements of operations data for the
years ended December 31, 1997, 1998 and 1999, and the consolidated balance
sheet data at December 31, 1998 and 1999 are derived from our audited
consolidated financial statements included in this Form 10-K. The consolidated
statements of operations data for the years ended December 31, 1995 and 1996,
and the consolidated balance sheet data at December 31, 1995, 1996 and 1997
are derived from our audited consolidated financial statements not included in
this Form 10-K. The historical results are not necessarily indicative of
future results.

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                ----------------------------------------------
                                 1995     1996      1997      1998      1999
                                -------  -------  --------  --------  --------
                                  (in thousands, except per share data)
<S>                             <C>      <C>      <C>       <C>       <C>
Consolidated Statements of
 Operations Data:
Revenues:
 Licenses.....................  $    --  $    --  $  1,000  $     --  $    778
 Software support and training
  services....................       --       25       100       152       613
 Clearinghouse services.......       --       --        --        --       150
                                -------  -------  --------  --------  --------
  Total revenues..............       --       25     1,100       152     1,541
Cost of revenues:
 Licenses.....................       --                 --        --       141
 Software support and training
  services....................       --        5       102       191       470
 Clearinghouse services.......       --       --        --        --       436
                                -------  -------  --------  --------  --------
  Total cost of revenues......       --        5       102       191     1,047
                                -------  -------  --------  --------  --------
Gross profit (loss)...........       --       20       998       (39)      494
Operating costs and expenses:
 Research and development.....    2,620    4,852     8,287    13,041    16,472
 Sales and marketing..........       --    1,573     2,717     3,870     6,886
 General and administrative...      803    1,735     1,932     2,717     5,588
 Amortization of deferred
  stock compensation..........       --       --        --        --     1,704
                                -------  -------  --------  --------  --------
  Total operating costs and
   expenses...................    3,423    8,160    12,936    19,628    30,650
                                -------  -------  --------  --------  --------
Loss from operations..........   (3,423)  (8,140)  (11,938)  (19,667)  (30,156)
Interest income (expense),
 net..........................     (160)     180       229         5     1,876
                                -------  -------  --------  --------  --------
Loss before provision for
 foreign taxes................   (3,583)  (7,960)  (11,709)  (19,662)  (28,280)
Provision for foreign taxes...       --       --        --        --      (325)
                                -------  -------  --------  --------  --------
Net loss......................  $(3,583) $(7,960) $(11,709) $(19,662) $(28,605)
                                =======  =======  ========  ========  ========
Basic and diluted net loss per
 share........................  $ (0.18) $ (0.33) $  (0.43) $  (0.70) $  (0.71)
                                =======  =======  ========  ========  ========
Shares used in computing basic
 and diluted net loss per
 share........................   20,466   23,826    27,278    27,932    40,426
                                =======  =======  ========  ========  ========
<CAPTION>
                                               December 31,
                                ----------------------------------------------
                                 1995     1996      1997      1998      1999
                                -------  -------  --------  --------  --------
                                              (in thousands)
<S>                             <C>      <C>      <C>       <C>       <C>
Consolidated Balance Sheet
 Data:
Cash and cash equivalents and
 short-term investments.......  $   386  $ 8,359  $  1,884  $  5,575  $140,834
Working capital (deficit).....   (4,590)   7,561       607     4,939   136,551
Total assets..................      603    9,076     3,111     8,280   151,497
Total stockholders' equity
 (deficit)....................   (4,387)   6,708      (847)   (2,014)  133,352
</TABLE>

                                      30
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this Form 10-K. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In many cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "intend" or
"continue," or the negative of such terms and other comparable terminology.
These statements are only predictions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a variety of factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this Form 10-K.

Overview

   We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce
system. InterTrust was formed and incorporated in January 1990. From inception
through 1998, our efforts were principally devoted to research and
development, raising capital, recruiting personnel, and establishing licensing
relationships. As a result, we were considered a development stage enterprise
during this period. The general availability version of our Commerce software
was not delivered to our partners until December 1998, and some of our
partners have conducted or are about to conduct pilot programs using this
software. Some partners began using the technology on a limited commercial
basis in January 2000.

   We license our DRM platform to companies to build digital commerce services
and applications. Our goal is to license to content, technology, and commerce
services partners to achieve widespread dissemination of our technology, an
expanding consumer base, and broad participation by digital information
providers. We currently derive all of our revenues from initial license fees,
associated software support and training services, and TrustNet clearinghouse
services. Our license agreements also generally require our partners to pay a
transaction fee that is a percentage of amounts paid by users or charged by
our partners in commercial transactions and services that use our technology,
and for sales of products incorporating our technology. Some of our license
agreements relating to uses of our technology within enterprises for privately
managing proprietary data may require a per-user fee. Within the next several
years, we anticipate that our revenues will be derived primarily from
transaction fees and, to a significantly lesser extent, from TrustNet
clearinghouse services, initial license fees and software support and training
services fees. However, we do not expect to recognize any transaction revenue
until the third or fourth quarter of 2000. Any future transaction fees are
dependent on the success of our licensees and their customers in commercially
deploying services and applications.

   We are targeting relationships that will establish our DRM platform in
several markets, including entertainment, business information, and
publishing. To date, a significant part of our licensing efforts has been
focused on adoption of our technology by the music industry as we believe it
will be an early implementer of DRM technology. We believe that if our general
purpose platform is adopted in the music market, we will be positioned to have
our platform adopted in additional entertainment markets including games,
audio books, and video, and other markets, including business information and
publications.

   We have four basic types of license agreements: commerce service licenses,
business licenses, applications licenses and hardware licenses. These
agreements provide different rights and technology depending on the commercial
plans of our partners. Initial license fees received from these agreements may
vary in amount depending on factors such as partner commitments, scope of the
license as it relates to commercial markets, territory, and term of agreement.
Examples of partner commitments include deploying licensed products within a
specified time frame, exclusively using portions of our technology, and using
and publicly promoting us as the partner's preferred digital rights management
technology. We have in the past decided, and may in the future decide, to
reduce or eliminate initial license fees based on these factors. We do not
believe that we can determine the amount of foregone revenue due to reduced or
eliminated license fees with any reliable degree of certainty. Our license
fees are negotiated based on the terms and conditions of each individual
agreement and take into

                                      31
<PAGE>

account the scope of the license, the term, and the other commitments made by
our partners that provide strategic value to us. In addition, we have entered
into a limited number of license agreements which have varying license scopes
and terms and which do not provide adequate comparable data to determine the
amount of foregone revenue. In connection with our strategy to promote
widespread use of our technology, through December 31, 1999, we have on three
occasions received initial license fees for our Commerce software in the form
of minority equity positions in the licensees. In the future, we may enter
into other equity payment arrangements.

   Licenses of our Commerce software generally require the payment of an
initial license fee. Initial license revenue, net of any discounts granted, is
recognized upon execution of a license agreement and delivery of our software
if we have no remaining obligations relating to development, upgrades, new
releases, or other future deliverables, if the license fee is fixed or
determinable, and if collection of the fee is probable. Our license agreements
generally include the right to obtain access to upgrades and new releases, on
a when and if available basis, for a specified period. Under these
circumstances, the license payments received, net of any discounts granted, in
advance of revenue recognition are deferred and recognized on a subscription
basis over the period of obligation beginning upon delivery of the licensed
product. In addition, under license agreements where we are obligated to
provide a specified upgrade and do not have vendor specific objective evidence
of fair value of the specified upgrade, all of the license revenue is deferred
until the specified upgrade has been delivered. Upon delivery of the specified
upgrade, license revenue is recognized using the subscription method. We began
recognizing revenue under some license agreements in January 1999, after
shipping the general availability version of our Commerce software at the end
of December 1998. At December 31, 1999, we had approximately $13.2 million of
deferred license revenue that will be recognized in future periods.

   Through December 31, 1999, on three occasions we received license fees in
the form of minority equity positions in non-public entities in exchange for
technology licenses. We received approximately 1.7 million shares of common
stock from one licensee, 882 shares of common stock from the second licensee,
and 148,300 shares of common stock from the third licensee, which we believe
represented approximately 10%, 18% and 5% of the outstanding shares of the
licensees as of the license date. Because the entities were recently formed,
privately-held companies and we were unable to obtain sufficient evidence of
the fair value of the common stock of the entities, we did not record revenue
or deferred revenue from the license fees. We are obligated to provide
unspecified upgrades and new releases, on a when and if available basis, to
the licensees over a two year period under the agreements for additional fees.
We are not obligated to provide any funding to any licensee for the
development of the licensee's software.

   For contracts entered into before 1998, we recognize revenue as the amounts
are earned under the related agreements, provided no significant obligations
exist and the related receivable is determined to be collectible, consistent
with Statement of Position 91-1, Software Revenue Recognition. Our license
revenues in 1997 were derived from licenses of pre-commercial versions of our
software.

   Our license agreements also require the payment of a transaction fee that
is a percentage of revenues received by our partners from transactions and
services that use our technology and sales of products incorporating our
technology. Transactions involving the use of our technology to conduct the
sale, lease, rental, or licensing of commercial content require the payment of
a transaction fee based on the amounts paid by users or charged by our
partners for selling or distributing the content. Transactions involving the
use of our technology for commercial services generally require the payment of
a transaction fee based on the amounts paid by users or charged by our
partners for the services. Transactions involving the sale, lease, rental, or
licensing of products incorporating our technology generally require the
payment of a transaction fee based on the amounts paid by users or charged by
our partners for the product. Our partners are required to pay all amounts due
for transaction fees within specified periods, depending on the licensing
arrangement. Our revenue recognition policy relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter after the transaction. Prepaid transaction fees are recorded as
deferred revenue and will be recognized when the related transactions occur.
We have received $1.5 million in prepaid transaction fees which are included
in deferred revenue as of December 31, 1999. Prepaid transaction fees may
generally be offset against a portion

                                      32
<PAGE>

of transaction fee amounts due in any given quarter. To date, we have not
recognized any transaction fees from commercial transactions or services, or
sales of products.

   Software support and training services, which typically include the right
to telephone and online support and customer training, are generally provided
for in the license agreements for an agreed-upon amount. Software support and
training service revenue is recognized over the period in which the services
are provided, generally two years. Some of our partners were utilizing pre-
commercial versions of our product in the development of their own solutions
and, as a result, were utilizing our software support and training services
before the shipment of the general availability version of our software.

   TrustNet clearinghouse service revenues represent primarily service fees
from our customers for the use of our TrustNet clearinghouse infrastructure in
pilot and test applications and services. Service revenues generally include
consulting and system integration services provided to the customer to
establish an interface with the TrustNet clearinghouse and monthly service
fees to use TrustNet for the clearing of commercial transactions. Consulting
and system integration fees are recognized as services are performed and
monthly service fees are recognized over the term of the service period.

   Through the end of 1998, we were in the development stage and had a limited
number of licensees. Mitsubishi, a stockholder, accounted for 91% of total
revenues in 1997 and 25% of total revenues in 1999. Reciprocal accounted for
9% of total revenues in 1997, 66% in 1998, and 13% in 1999. Bertelsmann
accounted for 21% of total revenues in 1998. NatWest accounted for 13% of
total revenues in 1998. Computacenter accounted for 12% of total revenues in
1999. Our success depends on significantly increasing the number of companies
that license our technology and use it for the sale and management of digital
content and services.

   In view of the rapidly changing nature of our industry and our new and
unproven business model, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and should not
be relied upon as indications of future performance. In addition, our business
model is new and unproven and has not succeeded in generating sufficient
revenue to sustain or grow our business. We also operate in an intensely
competitive market for highly qualified technical, sales and marketing, and
management personnel and periodically make salary and other compensation
adjustments to retain and hire employees. We anticipate that our operating
expenses will substantially increase in future quarters. We expect to incur
additional losses for at least the next several years. As a result, we will
need to generate significant additional revenue to achieve and maintain
profitability. In addition, we have limited and delayed insight on consumer
trends and sales, which makes prediction of our future revenues difficult.

   In October 1999, we purchased audio decoding and rendering technology and
related assets and received a license to video technology from a third party,
in exchange for 170,000 shares of our common stock and $100,000 in cash. The
purchase price of $1.4 million was capitalized as purchased technology and
included intangible assets. We are amortizing the value of the technology
acquired over its estimated useful life of approximately four years.

   In March 2000, we acquired Infinite Ink Corporation, a developer of
software solutions for rendering and protecting electronic publishing. We
acquired all of the shares of capital stock of Infinite Ink in exchange for
230,462 shares of our common stock and assumed all outstanding options of
Infinite Ink, which were converted into options to purchase 68,052 shares of
our common stock. The transaction was accounted for as a purchase with an
estimated purchase price of approximately $28.0 million. We are currently
evaluating the acquisition, including the value of in-process research and
development, in order to determine the allocation of the purchase price.

                                      33
<PAGE>

Results of Operations

Years Ended December 31, 1998 and 1999

 Revenues

   Total revenues increased from $152,000 in 1998 to $1.5 million in 1999.
Software support and training services accounted for 100% of total revenues in
1998. License fees, software support and training services, and TrustNet
clearinghouse services accounted for 50%, 40% and 10% of total revenues in
1999.

   No license revenues were recognized in 1998 as the general availability
release of our Commerce software was not delivered to our partners until
December 1998. License revenues were $778,000 in 1999, and represent the
amortization of deferred license fees.

   Revenues from software support and training services increased from
$152,000 in 1998 to $613,000 in 1999. This increase was due to support and
training fees from additional partner licensing agreements.

   No TrustNet clearinghouse services revenue was recognized in 1998 as the
service was first offered to our partners in the fourth quarter of 1999.
TrustNet clearinghouse services revenues of $150,000 in 1999 were received
from one partner.

 Cost of revenues

   Cost of license revenues consists primarily of the costs incurred to
manufacture, package, distribute our products and related documentation and
the amortization of purchased technology. Cost of software support and
training services consists primarily of the cost of personnel, travel related
expenditures, and training materials. These expenditures are incurred both
onsite at our facilities as well as offsite at partner locations. Cost of
TrustNet clearinghouse services includes the cost of personnel, computer
hardware, and support of the off-site service center. Total cost of revenues
was $191,000 in 1998 and $1.0 million in 1999. The period-over-period increase
resulted from increased costs incurred to support our new partners and the
introduction of TrustNet clearinghouse services in 1999.

   No costs were incurred for licenses during 1998, as we did not deliver the
general availability release of our Commerce software to our partners until
December 1998. Cost of license revenues was $141,000 in 1999. Cost of license
revenues is expected to increase from the amortization of purchased technology
and will fluctuate from period to period depending on the number of new
partners, the number of software releases, and the amount of software
documentation provided to our partners during the period.

   Cost of software support and training services revenues increased from
$191,000 in 1998 to $470,000 in 1999. The increase in cost of software support
and training services revenues represents the increase in support personnel
time required to provide technical assistance and training to a greater number
of partners. Software support and training services costs are expected to
increase as we license to new partners and may vary significantly from period
to period depending on the support requirements of our partners.

   No costs were incurred for TrustNet clearinghouse services during 1998, as
we did not provide this service until the fourth quarter of 1999. Costs of
$436,000 incurred in 1999 reflect the cost of personnel, hardware expenses,
and the cost of the off-site service center.

 Research and development

   Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees, and the cost of software used in
product development. Research and development expenses are expensed to
operations as incurred. Research and development spending was $13.0 million in
1998 and $16.5 million in 1999. This increase was primarily attributable to a
$2.6 million increase in personnel costs and consultant services associated
with both product research and development and $329,000 of recruiting costs.
We believe that continued investment in research and development is critical
to attaining our strategic product objective, and we expect these expenses to
increase significantly in absolute dollars in future periods.


                                      34
<PAGE>

 Sales and marketing

   Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct sales, partner development, marketing, field
service support, consultant fees and advertising, promotional material, and
trade show exhibit expenses. Sales and marketing expenses increased from $3.9
million in 1998 to $6.9 million in 1999. This increase reflects the costs
associated with increased selling efforts. The increase in these costs is
comprised primarily of $1.4 million in increased personnel costs, $900,000 in
increased public relations and other promotional costs, and $500,000 in
increased travel costs. We expect sales and marketing expenses to increase
significantly in absolute dollars due to planned growth of our sales and
partner development organizations, including the establishment of additional
domestic and international offices, and aggressive implementation of
advertising and promotional programs.

 General and administrative

   General and administrative expenses consist primarily of salaries and
related expenses for executive, legal, accounting and administrative
personnel, professional service fees, and general corporate expenses. General
and administrative expenses increased from $2.7 million in 1998 to $5.6
million in 1999. This increase was primarily attributable to a $1.5 million
increase in personnel costs, as a result of increased executive, legal and
accounting personnel, a $399,000 increase in outside legal costs, a $364,000
increase in travel costs, and $200,000 in expenses related to being a public
company. We expect general and administrative expenses to increase in absolute
dollars as we add personnel, incur additional costs to support continued
growth, and implement additional operating systems necessary to support a
public company.

 Deferred stock compensation

   We recorded total deferred stock compensation of $8.3 million in 1999. This
amount represents the difference between the exercise prices of employee stock
options and what were considered to be the fair values of our common stock on
the dates of the grants. We are amortizing this amount over the vesting
periods of the applicable options using a graded vesting method. We recognized
$1.7 million of related compensation expense in 1999. The total charges to be
recognized in future periods from amortization of deferred stock compensation
recorded as of December 31, 1999 are anticipated to be $3.3 million for 2000,
$2.0 million for 2001, $1.1 million for 2002, and $244,000 for 2003.

 Interest income (expense), net

   Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents and short-term investments offset by interest
expense incurred on convertible promissory notes. We recognized $42,000 in
interest income in 1998 and approximately $1.9 million of interest income in
1999. The increase in interest income results from increases in the amount of
interest-bearing investments outstanding, which were primarily derived from
the net proceeds of $123.4 million from our initial public offering in October
1999. We recorded $37,000 in interest expense in 1998 related to convertible
promissory notes that were subsequently converted to preferred stock. We had
no interest expense in 1999.

 Income taxes

   We have incurred net losses since inception for federal and state tax
purposes and have not recognized a domestic tax provision or benefit. In 1999,
we recorded a tax provision of $325,000 related to foreign withholding taxes
on two license agreements for which we may receive a tax benefit in the
future. As of December 31, 1999, we had $58.4 million of federal and $7.4
million of state net operating loss carryforwards to offset against future
taxable income. We also had $1.5 million of federal research and development
tax credit carryforwards. The related deferred tax assets have been fully
reserved through December 31, 1999. The federal net operating loss and tax
credit carryforwards expire in years 2007 through 2019, if not used. The state
net operating loss carryforwards expire in years 2000 through 2004, if not
used. Utilization of net operating losses

                                      35
<PAGE>

and credits may be subject to a substantial annual limitation due to the
change in ownership provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses and credits before utilization.

Years Ended December 31, 1997 and 1998

 Revenues

   Total revenues were $1.1 million in 1997 and $152,000 in 1998. The decrease
in total revenues in 1998 was primarily related to $1.0 million of revenue
recognized from a limited term license recorded in 1997.

   Software support and training services accounted for 9% of total revenues
in 1997 and 100% of total revenues in 1998. Software support and training
services revenues increased from $100,000 in 1997 to $152,000 in 1998. The
increase from 1997 to 1998 was due to support and training fees from
additional partner licensing agreements.

 Cost of revenues

   Total cost of revenues was related entirely to software support and
training services in 1997 and 1998. Total cost of revenues increased from
$102,000 in 1997 to $191,000 in 1998. The increase in the cost of software
support and training services revenues represents the increase in support
personnel time required to provide technical assistance and training to a
greater number of our partners.

 Research and development

   Research and development expenses increased from $8.3 million in 1997 to
$13.0 million in 1998. These increases were primarily attributable to
increases in personnel costs and consultant services associated with product
research and development of $3.7 million in 1998.

 Sales and marketing

   Sales and marketing expenses increased from $2.7 million in 1997 to $3.9
million in 1998. The increase in 1998 was primarily attributable to a $408,000
increase in personnel costs and consultant services associated with increased
selling efforts, and a $176,000 increase in public relations costs and other
promotional expenses.

 General and administrative

   General and administrative expenses increased from $1.9 million in 1997 to
$2.7 million in 1998. This increase was primarily attributable to increases in
legal and accounting personnel that resulted in increases in personnel costs
of $371,000 in 1998. Expenses associated with the preparation of new patent
applications, patent application processing fees, and attorneys costs
associated with patent applications and maintaining our patent portfolio
totaled $334,000 in 1997 and $237,000 in 1998.

 Interest income (expense), net

   Interest income (expense), net, was primarily derived from interest earned
on cash and cash equivalents offset by interest expense incurred on
convertible promissory notes. Net interest income decreased from $229,000 in
1997 to $5,000 in 1998. Interest income decreased from $229,000 in 1997 to
$42,000 in 1998. The change in interest income results primarily from changes
in the amount and rate of interest-bearing investments outstanding during each
period. We recorded $37,000 of interest expense in 1998 related to two
separate convertible promissory notes.

                                      36
<PAGE>

Quarterly Results of Operations

   The following table contains, for the periods presented, selected data from
our consolidated statements of operations. The data has been derived from our
unaudited consolidated financial statements, and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. This unaudited information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses through at least the next several years.

<TABLE>
<CAPTION>
                                                     Three Months Ended
                          ------------------------------------------------------------------------------
                          Mar. 31,  June 30,  Sept. 30, Dec. 31,  Mar. 31,  June 30,  Sept. 30, Dec. 31,
                            1998      1998      1998      1998      1999      1999      1999      1999
                          --------  --------  --------- --------  --------  --------  --------- --------
                                                       (in thousands)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues:
  Licenses..............  $   --    $   --     $   --   $   --    $   167   $   142    $   187  $   282
  Software support and
   training services....       25        25         25       77        65       112        176      260
  Clearinghouse
   services.............      --        --         --       --        --        --         --       150
                          -------   -------    -------  -------   -------   -------    -------  -------
   Total revenues.......       25        25         25       77       232       254        363      692
Cost of revenues:
  Licenses..............      --        --         --       --         32        10         24       75
  Software support and
   training services....       40        44         50       57        87       121        126      136
  Clearinghouse
   services.............      --        --         --       --        --        --          90      346
                          -------   -------    -------  -------   -------   -------    -------  -------
   Total cost of
    revenues............       40        44         50       57       119       131        240      557
                          -------   -------    -------  -------   -------   -------    -------  -------
Gross profit (loss).....      (15)      (19)       (25)      20       113       123        123      135
Operating costs and
 expenses:
  Research and
   development..........    3,215     3,143      3,299    3,384     3,436     3,652      4,587    4,797
  Sales and marketing...    1,004       898        956    1,012     1,134     1,315      1,732    2,705
  General and
   administrative.......      554       521        683      959       759     1,358      1,521    1,950
  Amortization of
   deferred stock
   compensation               --        --         --       --         27       168        625      884
                          -------   -------    -------  -------   -------   -------    -------  -------
   Total operating costs
    and expenses........    4,773     4,562      4,938    5,355     5,356     6,493      8,465   10,336
Loss from operations....   (4,788)   (4,581)    (4,963)  (5,335)   (5,243)   (6,370)    (8,342) (10,201)
Interest and other
 income (expense), net..      --         (9)        (2)      16        42       160        279    1,395
                          -------   -------    -------  -------   -------   -------    -------  -------
Loss before provision
 for foreign taxes......   (4,788)   (4,590)    (4,965)  (5,319)   (5,201)   (6,210)    (8,063)  (8,806)
Provision for foreign
 taxes..................      --        --         --       --        --        --         --      (325)
                          -------   -------    -------  -------   -------   -------    -------  -------
Net loss................  $(4,788)  $(4,590)   $(4,965) $(5,319)  $(5,201)  $(6,210)   $(8,063) $(9,131)
                          =======   =======    =======  =======   =======   =======    =======  =======
</TABLE>

   We began recognizing revenue on a subscription basis under a number of
license agreements in January 1999, after shipping the general availability
version of our product at the end of December 1998. The increase in software
support and training services revenue beginning in the quarter ended December
31, 1998 was the result of training services associated with new partner
agreements. Software support and training services revenue in the quarter
ended December 31, 1998 also included a one-time support fee related to a
limited term license. Quarter over quarter increases in the cost of software
support and training services reflect the increased effort of engineering
personnel to provide support services to our partners. During the quarter
ended June 30, 1998, we reduced the amount of employee travel, limited the
amount of hiring, and reduced the number of consultants to InterTrust with the
intention of managing cash flow. As a result of these efforts, our operating
costs and expenses declined in all departments during the quarter ended June
30, 1998. Overall increases in research and development spending since the
quarter ended March 31, 1998 are primarily attributable to increased headcount

                                      37
<PAGE>

and spending on software tools used in the development of our products. The
decrease in sales and marketing spending in the quarter ended June 30, 1998
also reflects a reduction in marketing personnel. Increases in sales and
marketing expenses beginning in the quarter ended September 30, 1998 reflect
additional headcount both domestically and internationally as well as
increased expenses for travel, trade shows, public relations, and other
promotional costs. General and administrative expenses generally increased
quarter over quarter beginning in the quarter ended September 30, 1998,
primarily as a result of increased legal and accounting personnel, costs
associated with patent prosecution including filing and translation fees, and
the use of outside patent counsel. General and administrative expenses in the
quarter ended December 31, 1998 also included higher than normal charges for
executive recruiting commissions, charges related to the writedown of
abandoned computer equipment, and higher building maintenance expenses.
General and administrative expenses in the quarter ended December 31, 1999
include higher expenses related to being a public company and higher building
expenses related to our new corporate facility.

   We anticipate that research and development, sales and marketing, and
general and administrative expenses will increase in absolute dollars as a
result of new hires and related personnel costs. Sales and marketing spending
is expected to increase as a result of our spending on branding, trade shows,
advertising, and promotion. Beginning in the quarter ending June 30, 2000, we
also expect to incur increases in our quarterly operating costs and expenses
of $150,000 as a result of the new facility lease we entered into in January
2000.

   We expect our revenues to vary. If our revenue levels fall below our
expectations, our net loss will increase because only a small portion of our
expenses varies with our revenues. In the future, our operating results may
fall below the expectations of securities analysts and investors. If this
occurs, the market price of our common stock would likely decline.

Liquidity and Capital Resources

   Cash and cash equivalents and short-term investments were $140.8 million at
December 31, 1999, an increase of $135.2 million from December 1998. The
increase in 1999 is primarily the result of cash generated from private
placements of equity securities of $31.4 million, the exercise of employee
stock options and warrants for $4.3 million, and net proceeds of $123.4
million from our initial public offering completed in October 1999.

   Net cash used in operating activities totaled $20.4 million in 1999. The
cash used in 1999 is primarily attributable to the net loss of $28.6 million,
increases in accounts receivable of $1.1 million, other current assets of $1.0
million, and deferred compensation of $1.9 million, offset by an increase of
$4.6 million in deferred revenue and increases of $3.1 million in accounts
payable and accrued liabilities.

   In 1999, our investing activities consisted primarily of capital
expenditures totaling $3.0 million and purchases of investments totalling
$42.7 million. Capital acquisitions were principally comprised of office
furniture and equipment for our new corporate facility and computer equipment
and software used to support our product development and growing employee
base. Although to date our requirements for capital expenditures have been
moderate, we anticipate a substantial increase in capital expenditures and
lease commitments consistent with anticipated growth in operations,
infrastructure, and personnel.

   At December 31, 1999, our principal source of liquidity was $140.8 million
in cash and cash equivalents and short-term investments. We believe that the
net proceeds of this offering, together with our cash and cash equivalents and
credit facilities with our equipment vendors, will be sufficient to meet our
working capital needs for at least the next 12 months. From then on, we may
require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or
private equity financing or from other sources. Additional financing may not
be available at all or, if available, may not be obtainable on terms favorable
to us. In addition, any additional financing may be dilutive and new equity
securities could have rights senior to those of existing holders of our common
stock. If we need to raise funds and cannot do so on acceptable terms, we may
not be able to respond to competitive pressures or anticipated requirements or
take advantage of future opportunities.

                                      38
<PAGE>

   On March 15, 2000, we filed a registration statement on Form S-1 relating
to a proposed offering of 6,500,000 shares of our common stock, of which
3,000,000 shares will be offered by us and 3,500,000 shares will be offered by
certain selling stockholders. We anticipate that the offering will be
consummated in April 2000.

Recent Accounting Pronouncements

   We adopted Statement of Position, or SOP, 97-2, Software Revenue
Recognition and SOP 98-4, Deferral of the Effective Date of a Provision of 97-
2, as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede SOP 98-1. The
adoption of SOP 97-2 and SOP 98-4 did not have a material impact on our
operating results.

   In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to extend the
deferral of the application of some passages provided by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. We believe the adoption of SOP 98-9 will not have a material
effect on our operating results or financial condition.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This bulletin summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We are required to adopt SAB 101
no later than the quarter ended June 30, 2000. We are currently assessing the
impact of SAB 101 and believe that its adoption will not have a material
impact on our results of operations or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

   We develop products in the United States and license our products to
partners in North America, Europe, and Asia. As a result, our financial
results could be affected adversely by various factors, including foreign
currency exchange rates or weak economic conditions in foreign markets.
Transaction revenues from our European and Asian partners will be primarily
denominated in foreign currencies and translated generally on a monthly basis
to United States dollars to determine the amount of fees due to us. As a
result, we could be affected adversely by fluctuations in foreign currency
exchange rates.

   Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required. At December 31, 1999, our cash
and cash equivalents and short-term investments consisted primarily of demand
deposits, money market funds, U.S. government obligations, and corporate debt
securities held by two major financial institutions in the United States.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   Not applicable.

                                      39
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information regarding our Directors and Executive Officers is
incorporated herein by reference from the section entitled "Election of
Directors" of our definitive Proxy Statement (the "Proxy Statement") to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, for our Year 2000 Annual Meeting of Stockholders. The Proxy Statement
is anticipated to be filed within 120 days after the end of our fiscal year
ended December 31, 1999.

ITEM 11. EXECUTIVE COMPENSATION

   Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.

ITEM 13. RELATED PARTY TRANSACTIONS

   Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Related Party
Transactions" of the Proxy Statement.

                                      40
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

   (a)(1) Financial Statements--See Index to Financial Statements and
Financial Statement Schedule at page F-1 of this Form 10-K.

   (a)(2) Financial Statement Schedules--Schedules have been omitted because
the information required to be set forth therein is not applicable or is
readily available in the financial statements or notes thereto.

   (a)(3) Exhibits:

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  3.2*   Sixth Amended and Restated Certificate of Incorporation filed with the
         Secretary of State of Delaware on November 1, 1999.

  3.4*   Amended and Restated Bylaws of the Registrant.

  4.1*   Reference is made to Exhibits 3.2 and 3.4.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3*   Form of Registration Rights under select Convertible Promissory Notes.

  4.4*   Form of Registration Rights under select Class A Common Stock Purchase
         Agreements.

  4.5*   Form of Series A Preferred Stock Registration Rights.

  4.6*   Form of Series B, C, D and E Preferred Stock Registration Rights.

  4.7*   Form of Registration Rights found in a Class B Non-Voting Common Stock
         Warrant.

 10.1*   Form of Indemnification Agreement entered into by the Registrant with
         each of its directors and executive officers.

 10.2*   1999 Equity Incentive Plan and forms of agreements thereunder.

 10.3*   1999 Employee Stock Purchase Plan.

 10.4*   1999 Non-Employee Directors Option Plan.

 10.11*  Lease between Mission West Properties, L.P. and the Registrant dated
         July 21, 1999.

 10.12*  Technology Development, Marketing, and License Agreement by and
         between the Registrant and National Westminster Bank PLC dated August
         18, 1998.

 10.13*  Technology Development and License Agreement by and between the
         Registrant and Universal Music Group, Inc. dated April 13, 1999.

 10.14*  Technology Development and License Agreement by and between the
         Registrant and Upgrade Corporation of America dated August 7, 1996

 10.15*  Technology Development and License Agreement by and between the
         Registrant and Mitsubishi Corporation dated October 7, 1996.

 10.16*  Warrant for the purchase of Class A Voting Common Stock made by the
         Registrant and held by Allen & Company Incorporated, dated September
         7, 1999

 10.17*  Amendment to Technology, Development, Marketing and License Agreement
         by and between the Registrant and National Westminster Bank dated
         August 18, 1998.

 10.18*  Amendment to Technology Development and License Agreement by and
         between the Registrant and Universal Music Group, Inc. dated April 13,
         1999

 10.19** Building Lease Agreement by and between First State Realty of America,
         Inc. and the Registrant dated January 24, 2000.

 21.1*   Subsidiaries of the Registrant.
</TABLE>

                                      41
<PAGE>


<TABLE>
<CAPTION>
 Exhibit
 Number                Description of Document
 -------               -----------------------
 <C>     <S>
 23.1    Consent of Ernst & Young LLP, independent auditors.

 24.1    Power of Attorney. (See page 43)

 27.1**  Financial Data Schedule.
</TABLE>
--------
 * Incorporated by reference to similarly numbered exhibit to the Registration
   Statement on Form S-1 filed by the Registrant (Reg. No. 333-84033).

** Incorporated by reference to similarly numbered exhibit to the Registration
   Statement on Form S-1 filed by the Registrant (Reg. No. 333-32484).

   (b) We filed a Report on Form 8-K dated January 5, 2000 reporting the
resignation of our President, Peter van Cuylenburg, on December 23, 1999.

(c) Exhibits

   See (a)(3) above.

(d) Financial Statement Schedules

   See (a)(2) above.

                                      42
<PAGE>

                                  SIGNATURES

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

March 30, 2000                            INTERTRUST TECHNOLOGIES CORPORATION
                                          (Registrant)

                                          By:       /s/ Victor Shear
                                            -----------------------------------
                                                        Victor Shear
                                                 Chairman of the Board and
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Victor Shear and Edmund J. Fish, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (including post-effective amendments),
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----

<S>                                  <C>                           <C>
          /s/ Victor Shear           Chairman of the Board and     March 30, 2000
____________________________________  Chief Executive Officer
            Victor Shear              (Principal Executive
                                      Officer)

        /s/ David C. Chance          Executive Vice Chairman       March 30, 2000
____________________________________
          David C. Chance


         /s/ Edmund J. Fish          Director, Executive Vice      March 30, 2000
____________________________________  President and Chief
           Edmund J. Fish             Business Officer

         /s/ David Van Wie           Director and Senior Vice      March 30, 2000
____________________________________  President of Research
           David Van Wie
</TABLE>


<TABLE>
<S>                                  <C>                           <C>
       /s/ Bruce Fredrickson         Director                      March 30, 2000
____________________________________
         Bruce Fredrickson

        /s/ Satish K. Gupta          Director                      March 30, 2000
____________________________________
</TABLE>  Satish K. Gupta


<TABLE>
<S>                                  <C>                           <C>
           /s/ David Lund            Controller (Principal         March 30, 2000
____________________________________  Financial and Accounting
             David Lund               Officer)

</TABLE>


                                      43
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  3.2*   Sixth Amended and Restated Certificate of Incorporation filed with the
         Secretary of State of Delaware on November 1, 1999.

  3.4*   Amended and Restated Bylaws of the Registrant.

  4.1*   Reference is made to Exhibits 3.2 and 3.4.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3*   Form of Registration Rights under select Convertible Promissory Notes.

  4.4*   Form of Registration Rights under select Class A Common Stock Purchase
         Agreements.

  4.5*   Form of Series A Preferred Stock Registration Rights.

  4.6*   Form of Series B, C, D and E Preferred Stock Registration Rights.

  4.7*   Form of Registration Rights found in a Class B Non-Voting Common Stock
         Warrant.

 10.1*   Form of Indemnification Agreement entered into by the Registrant with
         each of its directors and executive officers.

 10.2*   1999 Equity Incentive Plan and forms of agreements thereunder.

 10.3*   1999 Employee Stock Purchase Plan.

 10.4*   1999 Non-Employee Directors Option Plan.

 10.11*  Lease between Mission West Properties, L.P. and the Registrant dated
         July 21, 1999.

 10.12*  Technology Development, Marketing, and License Agreement by and
         between the Registrant and National Westminster Bank PLC dated August
         18, 1998.

 10.13*  Technology Development and License Agreement by and between the
         Registrant and Universal Music Group, Inc. dated April 13, 1999.

 10.14*  Technology Development and License Agreement by and between the
         Registrant and Upgrade Corporation of America dated August 7, 1996

 10.15*  Technology Development and License Agreement by and between the
         Registrant and Mitsubishi Corporation dated October 7, 1996.

 10.16*  Warrant for the purchase of Class A Voting Common Stock made by the
         Registrant and held by Allen & Company Incorporated, dated September
         7, 1999

 10.17*  Amendment to Technology, Development, Marketing and License Agreement
         by and between the Registrant and National Westminster Bank dated
         August 18, 1998.

 10.18*  Amendment to Technology Development and License Agreement by and
         between the Registrant and Universal Music Group, Inc. dated April 13,
         1999

 10.19** Building Lease Agreement by and between First State Realty of America,
         Inc. and the Registrant dated January 24, 2000.

 21.1*   Subsidiaries of the Registrant.

 23.1    Consent of Ernst & Young LLP, independent auditors.

 24.1    Power of Attorney. (See page 43)

 27.1**  Financial Data Schedule.
</TABLE>
--------
 * Incorporated by reference to similarly numbered exhibit to the Registration
   Statement on Form S-1 filed by the Registrant (Reg. No. 333-84033).

** Incorporated by reference to similarly numbered exhibit to the Registration
   Statement on Form S-1 filed by the Registrant (Reg. No. 333-32484).


                                      44
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................... F-5
Consolidated Statements of Cash Flows....................................... F-7
Notes to Consolidated Financial Statements.................................. F-9
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
InterTrust Technologies Corporation

   We have audited the accompanying consolidated balance sheets of InterTrust
Technologies Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of InterTrust
Technologies Corporation at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.

                                                          /s/ Ernst & Young LLP

Palo Alto, California
January 14, 2000, except as to
 the paragraph titled "Stock Split"
 of Note 1, as to which the date is
 January 27, 2000

                                      F-2
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                          CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1999
                                                            --------  --------
                          ASSETS
<S>                                                         <C>       <C>
Current assets:
  Cash and cash equivalents................................ $  5,575  $ 98,286
  Short-term investments...................................      --     42,548
  Accounts receivable......................................    1,545     2,562
  Other current assets.....................................      132     1,182
                                                            --------  --------
    Total current assets...................................    7,252   144,578
Property and equipment, net................................      938     3,356
Intangible assets..........................................       90     3,563
                                                            --------  --------
                                                            $  8,280  $151,497
                                                            ========  ========
<CAPTION>
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S>                                                         <C>       <C>
Current liabilities:
  Accounts payable......................................... $    549  $  2,184
  Accrued compensation.....................................      560     1,113
  Other accrued liabilities................................      610     1,678
  Deferred revenue.........................................      594     3,052
                                                            --------  --------
    Total current liabilities..............................    2,313     8,027
Deferred revenue--long-term portion........................    7,981    10,118
Commitments
Stockholders' equity (deficit):
  Convertible preferred stock, $0.001 par value, 10,000,000
   shares authorized, 21,000,774 shares and none issued and
   outstanding at December 31, 1998 and 1999,
   respectively............................................       21       --
  Common stock, $0.001 par value, 120,000,000 shares
   authorized, 29,341,296 and 79,216,996 shares issued and
   outstanding at December 31, 1998 and 1999...............       29        79
Additional paid-in capital.................................   43,672   214,241
Deferred stock compensation................................      --     (6,600)
Notes receivable from stockholders.........................     (276)     (196)
Accumulated other comprehensive income (loss)..............      --       (107)
Accumulated deficit........................................  (45,460)  (74,065)
                                                            --------  --------
    Total stockholders' equity (deficit)...................   (2,014)  133,352
                                                            --------  --------
                                                            $  8,280  $151,497
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                                 ----------------------------
                                                   1997      1998      1999
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Revenues:
  Licenses...................................... $  1,000  $    --   $    778
  Software support and training services........      100       152       613
  Clearinghouse services........................      --        --        150
                                                 --------  --------  --------
    Total revenues..............................    1,100       152     1,541
Cost of revenues:
  Licenses......................................      --        --        141
  Software support and training services........      102       191       470
  Clearinghouse services........................      --        --        436
                                                 --------  --------  --------
    Total cost of revenues......................      102       191     1,047
                                                 --------  --------  --------
Gross profit (loss).............................      998       (39)      494
Operating costs and expenses:
  Research and development......................    8,287    13,041    16,472
  Sales and marketing...........................    2,717     3,870     6,886
  General and administrative....................    1,932     2,717     5,588
  Amortization of deferred stock compensation...      --        --      1,704
                                                 --------  --------  --------
    Total operating costs and expenses..........   12,936    19,628    30,650
                                                 --------  --------  --------
Loss from operations............................  (11,938)  (19,667)  (30,156)
Interest and other income, net..................      229         5     1,876
                                                 --------  --------  --------
Loss before provision for foreign taxes.........  (11,709)  (19,662)  (28,280)
Provision for foreign taxes.....................      --        --       (325)
                                                 --------  --------  --------
Net loss........................................ $(11,709) $(19,662) $(28,605)
                                                 ========  ========  ========
Net loss per share
Basic and diluted net loss per share............ $  (0.43) $  (0.70) $  (0.71)
                                                 ========  ========  ========
Shares used in computing basic and diluted net
 loss per share.................................   27,278    27,932    40,426
                                                 ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                      Convertible                                                   Notes      Accumulated
                    Preferred Stock      Common Stock    Additional   Deferred    Receivable      Other
                   ------------------- -----------------  Paid-In      Stock         From     Comprehensive Accumulated
                     Shares     Amount   Shares   Amount  Capital   Compensation Stockholders Income (Loss)   Deficit
                   -----------  ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S>                <C>          <C>    <C>        <C>    <C>        <C>          <C>          <C>           <C>
Balance at
December 31,
1996.............   10,733,800   $11   27,186,688  $27    $20,760       $ --         $--          $ --       $(14,089)
 Issuance of
 series B
 preferred
 stock...........    1,866,976     2          --    --      3,998         --          --            --            --
 Issuance of
 common stock
 upon exercise of
 warrant.........          --     --       32,000   --         20         --          --            --            --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --      361,832   --        152         --          (68)          --            --
 Compensation
 related to stock
 option granted..          --     --          --    --         49         --          --            --            --
 Net loss........          --     --          --    --        --          --          --            --        (11,709)
                   -----------   ---   ----------  ---    -------       ----         ----         ----       --------
Balance at
December 31,
1997.............   12,600,776    13   27,580,520   27     24,979         --          (68)          --        (25,798)
 Issuance of
 series B
 preferred
 stock...........    6,968,288     7          --    --     14,824         --          --            --            --
 Issuance of
 series B
 preferred stock
 upon conversion
 of convertible
 note payable and
 accrued
 interest........    1,431,710     1          --    --      3,066         --          --            --            --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --    1,637,800    2        727         --         (366)          --            --
 Forgiveness of
 note receivable
 from
 stockholder.....          --     --          --    --        --          --          106           --            --
 Issuance of
 common stock
 upon net
 exercise of
 options and
 related
 compensation....          --     --       57,262   --         50         --          --            --            --
 Issuance of
 common stock
 upon net
 exercise of
 warrant and
 related
 compensation....          --     --       65,714   --         26         --          --            --            --
 Payments on
 notes receivable
 from
 stockholders....          --     --          --    --        --          --           52           --            --
 Net loss........          --     --          --    --        --          --          --            --        (19,662)
                   -----------   ---   ----------  ---    -------       ----         ----         ----       --------
Balance at
December 31,
1998.............   21,000,774    21   29,341,296   29     43,672         --         (276)          --        (45,460)
 Issuance of
 series C
 preferred
 stock...........    1,700,000     2          --    --      5,005         --          --            --            --
 Issuance of
 series D
 preferred
 stock...........    2,284,046     2          --    --      9,705         --          --            --            --
 Issuance of
 series E
 preferred
 stock...........    2,619,400     3          --    --     15,688         --          --            --            --
 Issuance of
 series E
 preferred stock
 upon conversion
 of note
 payable.........      166,666    --          --    --      1,000         --          --            --            --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --    6,354,814    6      3,893         --          --            --            --
 Issuance of
 common stock
 upon exercise of
 warrants........          --     --      630,000    1        374         --          --            --            --
 Conversion of
 preferred stock
 to common stock
 upon completion
 of initial
 public
 offering........  (27,770,886)  (28)  27,770,886   28        --          --          --            --            --
<CAPTION>
                                     Total
                       Total     Stockholders'
                   Comprehensive    Equity
                   Income (Loss)   (Deficit)
                   ------------- -------------
<S>                <C>           <C>
Balance at
December 31,
1996.............      $ --         $ 6,709
 Issuance of
 series B
 preferred
 stock...........        --           4,000
 Issuance of
 common stock
 upon exercise of
 warrant.........        --              20
 Issuance of
 common stock
 upon exercise of
 options.........        --              84
 Compensation
 related to stock
 option granted..        --              49
 Net loss........        --         (11,709)
                   ------------- -------------
Balance at
December 31,
1997.............        --            (847)
 Issuance of
 series B
 preferred
 stock...........        --          14,831
 Issuance of
 series B
 preferred stock
 upon conversion
 of convertible
 note payable and
 accrued
 interest........        --           3,067
 Issuance of
 common stock
 upon exercise of
 options.........        --             363
 Forgiveness of
 note receivable
 from
 stockholder.....        --             106
 Issuance of
 common stock
 upon net
 exercise of
 options and
 related
 compensation....        --              50
 Issuance of
 common stock
 upon net
 exercise of
 warrant and
 related
 compensation....        --              26
 Payments on
 notes receivable
 from
 stockholders....        --              52
 Net loss........        --         (19,662)
                   ------------- -------------
Balance at
December 31,
1998.............        --          (2,014)
 Issuance of
 series C
 preferred
 stock...........        --           5,007
 Issuance of
 series D
 preferred
 stock...........        --           9,707
 Issuance of
 series E
 preferred
 stock...........        --          15,691
 Issuance of
 series E
 preferred stock
 upon conversion
 of note
 payable.........        --           1,000
 Issuance of
 common stock
 upon exercise of
 options.........        --           3,899
 Issuance of
 common stock
 upon exercise of
 warrants........        --             375
 Conversion of
 preferred stock
 to common stock
 upon completion
 of initial
 public
 offering........        --             --
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
                     (in thousands, except share amounts)

<TABLE>
<CAPTION>
                     Convertible                                                    Notes      Accumulated
                   Preferred Stock       Common Stock    Additional   Deferred    Receivable      Other
                   ------------------  -----------------  Paid-In      Stock         From     Comprehensive Accumulated
                   Shares    Amount      Shares   Amount  Capital   Compensation Stockholders Income (Loss)   Deficit
                   -------   --------  ---------- ------ ---------- ------------ ------------ ------------- -----------
<S>                <C>       <C>       <C>        <C>    <C>        <C>          <C>          <C>           <C>
 Issuance of
 common stock in
 public offering,
 net of issuance
 costs of
 $11,123.........        --         -- 14,950,000   15     123,412        --          --            --            --
 Issuance of
 common stock for
 asset
 acquisition.....        --         --    170,000   --       1,190        --          --            --            --
 Issuance of
 option for
 patent
 acquistion......        --         --        --    --       1,919        --          --            --            --
 Compensation
 related to
 issuance of
 common stock
 warrant.........        --         --        --    --          79        --          --                          --
 Deferred stock
 compensation....        --         --        --    --       8,304     (8,304)        --            --            --
 Amortization of
 deferred
 compensation....        --         --        --    --         --       1,704         --            --            --
 Forgiveness of
 note receivable
 from
 stockholders....        --         --        --    --         --         --           80           --            --
 Unrealized loss
 on short-term
 investments.....        --         --        --    --         --         --          --           (107)          --
 Net loss........        --         --        --    --         --         --          --            --        (28,605)
                    -------   -------- ----------  ---    --------    -------       -----         -----      --------
 Total
 comprehensive
 loss............
 Balance at
 December 31,
 1999............        --   $     -- 79,216,996  $79    $214,241    $(6,600)      $(196)        $(107)     $(74,065)
                    =======   ======== ==========  ===    ========    =======       =====         =====      ========
<CAPTION>
                                     Total
                       Total     Stockholders'
                   Comprehensive    Equity
                   Income (Loss)   (Deficit)
                   ------------- -------------
<S>                <C>           <C>
 Issuance of
 common stock in
 public offering,
 net of issuance
 costs of
 $11,123.........         --        123,427
 Issuance of
 common stock for
 asset
 acquisition.....         --          1,190
 Issuance of
 option for
 patent
 acquistion......         --          1,919
 Compensation
 related to
 issuance of
 common stock
 warrant.........         --             79
 Deferred stock
 compensation....         --            --
 Amortization of
 deferred
 compensation....         --          1,704
 Forgiveness of
 note receivable
 from
 stockholders....                        80
 Unrealized loss
 on short-term
 investments.....        (107)         (107)
 Net loss........     (28,605)      (28,605)
                   ------------- -------------
 Total
 comprehensive
 loss............     (28,712)
                   =============
 Balance at
 December 31,
 1999............                  $133,352
                                 =============
</TABLE>


                            See accompanying notes.

                                      F-6
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Operating activities
Net loss......................................... $(11,709) $(19,662) $(28,605)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization..................      283       538       660
  Amortization of deferred stock compensation and
   other stock related compensation charges......       99       182     1,863
  Issuance of preferred stock for accrued
   interest......................................      --         37       --
  Changes in operating assets and liabilities:
    Accounts receivable..........................      --     (1,520)   (1,017)
    Other current assets.........................     (111)       24    (1,040)
    Accounts payable.............................      187      (105)    1,635
    Accrued compensation.........................      190       173       553
    Other accrued liabilities....................      214       193       928
    Deferred revenue.............................    1,000     6,075     4,595
                                                  --------  --------  --------
Net cash used in operating activities............   (9,847)  (14,065)  (20,428)

Investing activities
Purchases of short-term investments..............      --        --    (42,655)
Capital expenditures.............................     (662)     (509)   (3,017)
Other noncurrent assets..........................      (20)      (11)     (295)
                                                  --------  --------  --------
Net cash used in investing activities............     (682)     (520)  (45,967)

Financing activities
Proceeds from issuance of convertible promissory
 notes...........................................      --      3,030     1,000
Proceeds from issuance of preferred stock, net...    4,000    14,831    30,405
Proceeds from exercise of stock options and
 warrants, net...................................       54       363     4,274
Proceeds from issuance of common stock, net......      --        --    123,427
Proceeds from repayment of notes receivable from
 stockholders....................................      --         52       --
                                                  --------  --------  --------
Net cash provided by financing activities........    4,054    18,276   159,106
                                                  --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................   (6,475)    3,691    92,711
Cash and cash equivalents at beginning of
 period..........................................    8,359     1,884     5,575
                                                  --------  --------  --------
Cash and cash equivalents at end of period....... $  1,884  $  5,575  $ 98,286
                                                  ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      F-7
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                               Years Ended
                                                               December 31,
                                                            ------------------
                                                            1997  1998   1999
                                                            ---- ------ ------
<S>                                                         <C>  <C>    <C>
Supplemental schedule of noncash financing activities
Technology asset acquisition:
 Common stock issued in exchange for assets................ $ -- $  --  $1,190
                                                            ==== ====== ======
 Other assets received in exchange......................... $ -- $  --  $   10
                                                            ==== ====== ======
 Other liabilities assumed in exchange..................... $ -- $  --  $  140
                                                            ==== ====== ======
Patent acquired in exchange for stock option............... $ -- $  --  $1,919
                                                            ==== ====== ======
Increase in deferred stock compensation.................... $ -- $  --  $8,304
                                                            ==== ====== ======
Conversion of convertible promissory notes and accrued
 interest into convertible preferred stock................. $ -- $3,067 $1,000
                                                            ==== ====== ======
</TABLE>


                            See accompanying notes.

                                      F-8
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Description of Business

   InterTrust Technologies Corporation (InterTrust) has developed a general-
purpose digital rights management (DRM) platform to serve as a foundation for
providers of digital information, technology, and commerce services to
participate in a global e-commerce system. DRM technologies manage rights and
interests in digital information. InterTrust was formed and incorporated in
January 1990. InterTrust first shipped the general availability version of its
Commerce software at the end of fiscal 1998. All of InterTrust's revenues
through December 31, 1999 have been generated from licenses of and services
related to its Commerce software.

 Stock split

   On January 27, 2000, InterTrust's Board of Directors approved a two-for-one
stock split (in the form of a 100% stock dividend) of the company's common
stock. All share and per share amounts in these consolidated financial
statements have been adjusted to give effect to the stock split.

 Principles of Consolidation

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

 Use of Estimates

   The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

 Revenue Recognition

   InterTrust recognizes revenue from license fees, clearinghouse services,
transaction fees, and software support and training services. License revenue,
net of any discounts granted, is recognized after execution of a license
agreement and delivery of the product, provided there are no remaining
obligations relating to development, upgrades, new releases, or other future
deliverables, and provided that the license fee is fixed or determinable, and
collection of the fee is probable. For contracts entered after January 1,
1998, InterTrust allocates revenue between the elements of the arrangements,
including the license, software support and training services, and the rights
to unspecified upgrades and new releases based on the vendor specific evidence
of the fair value of each of the elements. If Intertrust does not have vendor
specific objective evidence of the fair value of the undelivered elements,
license revenue is deferred for the delivered elements. InterTrust's license
agreements generally include the right to obtain access to upgrades and new
releases, on a when and if available basis, for a specified period. Under
these circumstances, the license payments received in advance of revenue
recognition are deferred and recognized on a subscription basis over the
period of obligation beginning upon delivery of the licensed product. In
addition, under license agreements where Intertrust is obligated to provide
specified upgrades and does not have vendor specific objective evidence of
fair value of the specified upgrade, all of the license revenue is deferred
until the specified upgrade has been delivered. Upon delivery of the specified
upgrade, license revenue is recognized using the subscription method.

   InterTrust began recognizing revenue under some license agreements in
January 1999, subsequent to shipment of the general availability version of
its Commerce software at the end of fiscal 1998. Under license

                                      F-9
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

agreements with two preferred stockholders, InterTrust had received a total of
$4,000,000 from nonrefundable license payments as of December 31, 1999.

   In 1999, InterTrust received license fees in the form of minority equity
positions in three non-public entities in exchange for technology licenses.
InterTrust received approximately 1.7 million shares of common stock from one
licensee, 882 shares of common stock from a second licensee and 148,300 shares
of common stock in a third licensee. InterTrust believes these shares
represent approximately 10%, 18% and 5% of the outstanding shares of the
licensees as of the license date. Because the entities are recently formed,
privately held companies and InterTrust was unable to obtain sufficient
evidence of the fair value of the common stock of the entities, InterTrust did
not record revenue or deferred revenue from the license fees. InterTrust is
obligated to provide unspecified upgrades and new releases, on a when and if
available basis, to the licensees over a two year period under the agreements
for additional fees. InterTrust is not obligated to provide any funding to the
licensees for the development of the licensees' software.

   For contracts entered into prior to 1998, InterTrust recognized revenue as
the amounts were earned under the related agreements, provided no significant
obligations existed and the related receivable was deemed collectible, in
accordance with Statement of Position 91-1, "Software Revenue Recognition."
InterTrust's license revenue in 1997 was derived from a license of a pre-
commercial version of its software.

   InterTrust's license agreements also require the payment of a percentage
transaction fee to InterTrust based on the fulfillment of a transaction that
utilizes its technology. InterTrust's partners are required to pay all amounts
due for transaction fees within 30 to 90 days after the end of each quarter.
InterTrust's revenue recognition policy relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter subsequent to the transaction. Prepaid transaction fees are
recorded as deferred revenue and will be recognized when the related
transactions occur. InterTrust had received $1,000,000 in prepaid transaction
fees from a preferred stockholder, which is included in deferred revenue as of
December 31, 1998 and 1999. No transaction revenue has been recognized from
commercial transactions or services as of December 31, 1999.

   Clearinghouse service revenues represent primarily service fees for the use
of InterTrust's Trustnet clearinghouse. Service revenues typically include
consulting services provided to the customer to establish an interface with
the clearinghouse and monthly service fees to use Trustnet for the clearing of
commercial transactions. Consulting fees are recognized as services are
performed and monthly clearinghouse service fees are recognized over the term
of the service period. Costs incurred to provide consulting personnel,
computer hardware and support of an off-site service center are included as a
component of cost of revenues.

   Software support and training services, which typically include the right
to telephone and online support and customer training, are generally provided
for in the license agreements for an agreed upon amount. Software support and
training service revenue is recognized over the period in which the services
are provided, generally two years. Certain of InterTrust's partners were
utilizing pre-commercial versions of its product in the development of their
own solutions and, as a result, were utilizing InterTrust's software support
and training services prior to the shipment of its commercial release in
December 1998. Costs incurred to provide software support and training
services are included as a component of cost of revenues.

   InterTrust adopted Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of 97-2" (SOP 98-4), as of January 1, 1998. SOP
97-2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on InterTrust's operating results.

                                     F-10
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modifications of SOP 97-2, Software
Revenue Recognition With Respect to Certain Transactions" (SOP 98-9). SOP 98-9
amends SOP 98-4 to extend the deferral of the application of some passages
provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All provisions of SOP 98-9 are effective for transactions entered into
in fiscal years beginning after March 15, 1999. InterTrust will adopt the
provisions of SOP 98-9 on January 1, 2000 and does not expect the application
of this statement to materially impact the Company's revenues, results of
operations or financial condition.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This bulletin summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. InterTrust is required to adopt
SAB 101 no later than the quarter ended June 30, 2000. InterTrust is currently
assessing the impact of SAB 101 and believes that adoption of SAB 101 will not
have a material impact on InterTrust's results of operations or financial
position.

 Cash and Cash Equivalents

   Cash and cash equivalents are stated at cost, which approximates fair
value. InterTrust considers all highly liquid instruments with insignificant
interest rate risk and maturities of three months or less to be cash
equivalents. Cash equivalents consist primarily high-grade commercial paper
and money market funds.

 Short-term investments

   Short-term investments are comprised primarily of U.S. government
obligations and corporate debt securities and are classified as available-for-
sale investments. The carrying value of the investments is adjusted to fair
value with a resulting adjustment to stockholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, both of which are included in interest income. Realized
gains and loses are recorded using the specific identification method and have
been minimal through December 31, 1999.

 Foreign Currency Translation

   The U.S. dollar is the functional currency for InterTrust's foreign
operations. Gains and losses on the translation into U.S. dollars of amounts
denominated in foreign currencies are included in net income.

 Concentration of Credit Risk

   InterTrust operates in the internet industry, which is rapidly evolving and
intensely competitive.

   Financial instruments that potentially subject InterTrust to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents and short-term
investments are custodied with two major financial institutions and such
deposits exceed federally insured limits. InterTrust's accounts receivable are
primarily derived from customers located in North America, Europe, and Asia.
InterTrust performs ongoing credit evaluations of its customers but does not
require collateral from its customers. When required, InterTrust maintains
allowances for credit losses, and to date, these losses have been within
management's expectations.

   One customer, who is also a stockholder, accounted for 91% of total
revenues in 1997 and 25% of total revenues in 1999. A second customer, also a
stockholder, accounted for 9%, 66% and 13% of total revenues in 1997, 1998,
and 1999, respectively. One customer accounted for 12% of total revenues in
1999. Two customers

                                     F-11
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounted for 13% and 21% of total revenues in 1998. One customer accounted
for 74% of accounts receivable at December 31, 1999.

 Fair Value of Financial Instruments

   The carrying values of InterTrust's financial instruments, which include
cash and cash equivalents, accounts receivable, current liabilities, and notes
receivable from stockholders, approximate their fair value.

 Investment in Non-Public Entities

   In 1999, InterTrust received approximately 10%, 18% and 5% equity interests
in three non-public entities as consideration for license fees. Because the
entities were recently formed, privately held companies and InterTrust was
unable to obtain sufficient evidence of the fair value of the common stock of
the entity, InterTrust did not record revenue or deferred revenue from the
license fees.

 Property and Equipment

   Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the leases.

 Intangible Assets

   Intangible assets are primarily comprised of purchased technology and
patent rights, and capitalized patent application costs related to internally
developed technology. These assets are amortized using the straight-line
method over the estimated useful lives of the assets, generally four to
seventeen years. As of December 31, 1999, InterTrust has recorded intangible
assets valued at approximately $3.4 million and $61,000 of related net
accumulated amortization.

   In October 1999, InterTrust purchased audio decoding and rendering
technology and related assets, received a license to video decoding and
rendering technology, and assumed certain liabilities, in exchange for
170,000 shares of InterTrust's common stock which was valued at $1.3 million
and $100,000 in cash. The purchase price of $1.4 million was capitalized as
purchased technology, and is being amortized over a four year expected life.
InterTrust also agreed to pay up to an additional $10,000 for legal fees and
$130,000 for tax liabilities incurred by the selling shareholders for a period
of one year from the date of the agreement.

   In December 1999, InterTrust issued to a consultant a fully vested option
to purchase 60,000 shares of common stock at an exercise price of $55 per
share in exchange for patent rights to certain technology. The option is
exercisable through December 2006. The value of the patent was based on the
fair value of the option of $1.9 million and was capitalized as an intangible
asset. The fair value of the option was determined using the Black-Sholes
method. The asset is being amortized over its expected useful life of
seventeen years

   InterTrust evaluates the recoverability of its long-lived assets in
accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". FAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
InterTrust assesses the impairment of long-lived assets when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable.

                                     F-12
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Stock-Based Compensation

   InterTrust accounts for stock-based compensation for awards to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted
the disclosure only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). InterTrust
accounts for stock-based compensation awards to non-employees using the fair
value method prescribed in FAS 123.

 Research and Development

   Research and development expenditures are expensed to operations as
incurred. Costs incurred in the development of new software and substantial
enhancements to existing software are expensed as incurred until technological
feasibility of the software has been established, at which time any additional
costs would be capitalized in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." To date, InterTrust's software
development has been completed concurrently with the establishment of
technological feasibility and, as a result, no research and development costs
have been capitalized.

 Advertising Expense

   InterTrust recognizes advertising expense as incurred. Advertising expense
has been immaterial in all periods since inception.

 Comprehensive Loss

   Statement of Financial Accounting Standards No. 130,"Reporting
Comprehensive Income", requires companies to report unrealized holding gains
and losses on available-for-sale securities in comprehensive income (loss) and
its components as part of the financial statements. Other comprehensive income
includes changes in equity that are excluded from net income (loss).
Comprehensive income (loss) for the periods ended December 31, 1999 has been
included in InterTrust's Consolidated Statement of Changes in Stockholders'
Equity. There was no difference between the comprehensive loss and the net
loss in either of the years ended December 31, 1997 or 1998.

 Net Loss per Share

   InterTrust computes net loss per share in accordance with FAS No. 128,
"Earnings per Share", and SEC Staff Accounting Bulletin 98 (SAB 98). Under the
provisions of FAS 128 and SAB 98, basic and diluted net loss per share are
computed by dividing the net loss available to common stockholders by the
weighted average number of common and common equivalent shares outstanding
during the period less shares subject to repurchase. Common equivalent shares,
comprised of incremental common shares issuable upon the exercise of stock
options and warrants, have not been included in the computation of diluted net
loss per share as their effect is anti-dilutive.

 Segments

   Effective January 1, 1998, InterTrust adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 changes the way companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial reports
to stockholders. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. InterTrust
operates solely

                                     F-13
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in one segment, and therefore there is no impact on InterTrust's financial
statements as a result of adopting FAS 131. For the year ended December 31,
1999, customers from Asia and Europe accounted for revenue totaling
approximately $597,000 and $349,000, respectively. For the year ended December
31, 1998, revenue from customers outside the United States was $52,000 and was
derived from customers in Europe.

2. INVESTMENTS

   The following is a summary fair value of available for sale securities at
December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                  Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
                                        Cost      Gains      Losses    Value
                                      --------- ---------- ---------- --------
<S>                                   <C>       <C>        <C>        <C>
Money market mutual funds............ $ 24,770     $ --      $ (12)   $ 24,758
U.S. Government and agency
 obligations.........................   30,037       --        (18)     30,019
Auction rate preferred stock.........   28,947        3        --       28,950
Corporate debt and equity
 securities..........................   51,685       --        (80)     51,605
                                      --------     ----      -----    --------
                                      $135,439     $  3      $(110)   $135,332
                                      ========     ====      =====    ========
Included in short-term investments...                                 $ 42,548
Included in cash and cash
 equivalents.........................                                   92,784
                                                                      --------
                                                                      $135,332
                                                                      ========
</TABLE>

   The following table summarizes the fair value of debt maturities at
December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                             Amortized
                                                             Fair Cost  Value
                                                             --------- --------
<S>                                                          <C>       <C>
Due in less than 1 year..................................... $ 95,243  $ 95,209
Due in 1-2 years............................................   11,710    11,674
Due in 2-3 years............................................    3,716     3,691
                                                             --------  --------
                                                             $110,669  $110,574
                                                             ========  ========
</TABLE>

   InterTrust has classified its investments with maturities in excess of one
year as short-term investments as it intends to liquidate the investments
within twelve months.

3. PROPERTY AND EQUIPMENT

   Property and equipment are stated at cost and consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1999
                                                                ------  -------
<S>                                                             <C>     <C>
Computer equipment and software................................ $1,465  $ 2,727
Furniture and equipment........................................    193    1,814
Leasehold improvements.........................................     56      190
                                                                ------  -------
                                                                 1,714    4,731
Accumulated depreciation and amortization......................   (776)  (1,375)
                                                                ------  -------
                                                                $  938  $ 3,356
                                                                ======  =======
</TABLE>

                                     F-14
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. COMMITMENTS

   InterTrust has entered into noncancellable operating leases for facilities
and equipment that expire at various dates through August 2004. Rent under the
agreements is expensed to operations on a straight-line basis over the terms
of the leases. Future minimum lease payments under these leases at December
31, 1999 are as follows (in thousands):

<TABLE>
<S>                                                                      <C>
Years ending December 31:
  2000.................................................................. $2,288
  2001.................................................................. $2,129
  2002.................................................................. $1,784
  2003.................................................................. $1,838
  2004.................................................................. $1,255
                                                                         ------
    Total minimum lease payments........................................ $9,294
                                                                         ======
</TABLE>

   Rent expense for all operating leases was approximately $320,000, $258,000,
and $1,199,000 in 1997, 1998, 1999, respectively.

5. STOCKHOLDERS' EQUITY (DEFICIT)

   In October 1999, InterTrust raised approximately $123.4 million, net of
issuance costs, from an initial public offering of 14,950,000 shares of its
common stock. In connection with the offering all of the then outstanding
shares of Series A, B, C, D,and E preferred stock and Class A and B common
stock were converted into common stock on a one-for-one basis.

 Preferred Stock

   Effective October 1999, the stockholders of InterTrust approved an
amendment to InterTrust's certificate of incorporation authorizing 10,000,000
shares of preferred Stock. The board of directors has the authority to issue
the preferred stock in one or more series and to fix its rights, preferences,
privileges, and restrictions, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and the number of shares constituting any series or
designation of the series.

 1999 and 1995 Stock Option Plans

   Pursuant to the 1999 Equity Incentive Plan and 1995 Stock Option Plan,
incentive stock options may be granted at prices not less than the fair values
as determined by the board of directors, while nonstatutory options granted
under the plans are at prices not less than 85% of the fair values on the
respective dates of the grant. Options expire after ten years. Options
generally vest ratably over a period of no more than five years. The 1999
Equity Incentive Plan provides for an automatic annual increase to the plan by
the lesser of 4% of the outstanding common stock at January 1 or 3,000,000
shares. At December 31, 1999, no options were available for further grant
under the 1995 Stock Option Plan.

 Non Plan Stock Options

   InterTrust's board of directors has granted to eligible participants
nonqualified stock options to purchase shares of common stock. The options
generally expire up to six years after the date of grant or earlier if
employment or relationship is terminated. The options generally become
exercisable ratably over a period of no more than four years. The exercisable
options may be exercised in whole or in part but no more frequently than twice
a year and in amounts of no less than 250 shares.

                                     F-15
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Information about stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                 Shares
                                                          ---------------------
                                                                       Weighted
                                                                       Average
                                                                       Exercise
                                              Available   Outstanding   Price
                                              ----------  -----------  --------
<S>                                           <C>         <C>          <C>
Balance at December 31, 1996................   1,360,092  10,997,992    $0.41
  Shares authorized.........................   4,964,664         --       --
  Options granted...........................  (7,411,264)  7,411,264    $0.73
  Options exercised.........................         --     (461,832)   $0.38
  Options canceled..........................   1,440,088  (1,988,120)   $0.51
                                              ----------  ----------    -----
Balance at December 31, 1997................     353,580  15,959,304    $0.54
  Shares authorized.........................   2,560,000         --       --
  Options granted...........................  (3,232,000)  3,232,000    $2.64
  Options exercised.........................         --   (1,753,214)   $0.46
  Options canceled..........................     522,112    (522,112)   $0.73
                                              ----------  ----------    -----
Balance at December 31, 1998................     203,692  16,915,978    $0.70
  Shares authorized.........................   6,524,056         --       --
  Options granted...........................  (5,830,658)  5,830,658    $6.66
  Options exercised.........................         --   (6,368,706)   $0.64
  Options canceled..........................     828,848    (828,848)   $1.16
  Options expired...........................    (637,338)        --       --
                                              ----------  ----------    -----
Balance at December 31, 1999................   1,088,600  15,549,082    $2.93
                                              ==========  ==========    =====
Exercisable and vested at December 31,
 1999.......................................               6,609,913
                                                          ==========
Shares of common stock subject to repurchase
 at December 31, 1999.......................                 500,001
                                                          ==========
</TABLE>

   During 1998, InterTrust received a note receivable in the amount of
approximately $319,000 from one of its officers upon his exercise of an option
to purchase 640,000 shares of common stock. As of December 31, 1999,
approximately 267,000 of these shares were subject to repurchase by InterTrust
at the original exercise price. The repurchase right lapses ratably over the
48-month vesting period of the underlying option. The note bears interest at
8% per annum and is secured by the related stock and general assets of the
officer. The note and related interest are being forgiven over a period of
four years of employment. InterTrust is recording compensation expense as the
note is forgiven.

   The following table summarizes information about options at December 31,
1999:

<TABLE>
<CAPTION>
                                                           Options
                   Options Outstanding                   Exercisable
      ------------------------------------------------------------------
                                  Weighted   Weighted           Weighted
         Range of                  Average   Average            Average
         Exercise                Contractual Exercise           Exercise
          Prices        Shares      Life      Price    Shares    Price
      --------------  ---------- ----------- -------- --------- --------
                                 (In years)
      <S>             <C>        <C>         <C>      <C>       <C>
      $0.01 - $0.63    3,754,700    4.70      $ 0.36  3,463,321  $ 0.33
          $0.75        3,239,700    7.16      $ 0.75  1,622,734  $ 0.75
      $1.00 - $1.75    3,881,464    8.49      $ 1.38  1,216,511  $ 1.27
      $3.00 - $7.65    3,861,818    9.68      $ 6.17    220,641  $ 5.30
      $9.00 - $62.94     811,400    9.84      $15.52     86,706  $41.14
                      ----------                      ---------
      $0.01 - $3.50   15,549,082    7.66      $ 2.93  6,609,913  $ 1.31
                      ==========                      =========
</TABLE>


                                     F-16
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Stock-Based Compensation

   In connection with the grant of options to employees during the year ended
December 31, 1999, InterTrust recorded deferred stock compensation of
$8,304,000 for the difference between the exercise prices of those options at
their respective dates of grant and what was considered to be the fair values
for accounting purposes of the shares of common stock subject to the options.
These amounts are included as a reduction of stockholders' equity and are
being amortized on a graded vesting method. The compensation expense of
$1,704,000 during the year ended December 31, 1999 relates to options awarded
to employees in all operating expense categories. These amounts have not been
separately allocated between operating expense categories.

   Pro forma information regarding net loss is required by FAS 123 as if
InterTrust had accounted for its stock-based awards to employees granted
subsequent to December 31, 1994 under the fair value method. The fair value
was estimated at the date of grant using the Black-Scholes option pricing
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock volatility. Because
InterTrust's options grants have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards.

   The fair value of InterTrust's stock-based awards to employees was
estimated assuming no expected dividend, a near-zero volatility as a non
public company in 1997 and 1998, and the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                                                 Year ended
                                                                December 31,
                                                               ----------------
                                                               1997  1998  1999
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
Expected life in years........................................ 5.0   4.0   4.0
Risk-free interest rate....................................... 6.0%  6.0%  5.3%
Volatility.................................................... 0.0   0.0   .50
</TABLE>

   The weighted-average fair value of options granted during 1997, 1998 and
1999 was $0.37, $0.61, and $3.54 per share, respectively.

   For purposes of pro forma disclosures, the estimated fair value of the
above stock-based awards is amortized to expense over the vesting period of
the award. InterTrust's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Pro forma net loss............................... $(12,645) $(21,115) $(34,481)
                                                  ========  ========  ========
Pro forma basic and diluted net loss per share... $  (0.46) $  (0.76) $  (0.85)
                                                  ========  ========  ========
</TABLE>

 Employee Stock Purchase Plan

   In 1999, the stockholders approved InterTrust's 1999 employee stock
purchase plan. A total of 700,000 shares of common stock have been reserved
for issuance under this purchase plan. Eligible employees may purchase common
stock at 85% of the lesser of the fair market value of InterTrust's common
stock on the first day of the applicable two-year offering period or the last
day of the applicable six-month purchase period. The 1999 employee stock
purchase plan provides for an automatic annual increase to the plan by the
lesser of

                                     F-17
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2% of the outstanding common stock at January 1 or 700,000 shares. No shares
had been issued from the plan as of December 31, 1999.

 Non-Employee Directors Option Plan

   In 1999, the stockholders approved InterTrust's 1999 non-employee directors
option plan. The director's plan provides for the automatic grant of options
to purchase shares of common stock to non-employee directors of InterTrust. A
total of 700,000 shares of common stock have been reserved for issuance under
the director's plan. The directors plan provides for an automatic annual
increase to the plan at January 1 to restore the available shares to 700,000
shares. No shares had been issued from the plan as of December 31, 1999.

 Warrants

   In September 1999, InterTrust entered into a financial consulting
arrangement and concurrently issued a warrant to purchase 650,000 shares of
common stock at an exercise price of $7.00 per share. The warrant was fully
vested and non-forfeitable upon issuance but is only exercisable as to 50% of
the shares one year after the date of grant and the balance of such shares two
years after the date of grant or immediately prior to a merger or sale of
InterTrust. The warrant expires five years from the date of grant and is
subject to early termination upon the sale or merger of InterTrust. The fair
value of the warrant of $1,466,000 was determined using the Black-Scholes
method and is being amortized over the life of the service agreement.

   In October 1999, InterTrust issued a warrant to purchase 56,008 shares of
common stock at an exercise price of $9.00 per share. The warrant is
exercisable after April 24, 2000 or immediately prior to a merger or sale of
InterTrust. The warrant expires one year after the date of grant and is
subject to early termination upon the sale of InterTrust. The warrant was
issued in exchange for recruiting services. The fair value of the warrant of
$79,000 was determined using the Black-Scholes method and was expensed on the
grant date, when the related services were provided.

   At December 31, 1999, common stock was reserved for issuance as follows:

<TABLE>
<S>                                                                   <C>
Exercise of outstanding stock options................................ 15,549,082
Shares of common stock available for grant...........................  1,088,600
Employee stock purchase plan.........................................    700,000
Non employees directors option plan..................................    700,000
Exercise of warrants.................................................    706,008
                                                                      ----------
                                                                      18,743,690
                                                                      ==========
</TABLE>

6. INCOME TAXES

   For the year ended December 31, 1999, InterTrust recorded a tax provision
of $325,000. This provision represents foreign withholding taxes on license
payments received during the year.

   The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is primarily due to net operating losses not being benefited. For that
reason, there is no provision for federal or state income taxes for the years
ended December 31, 1997, 1998, and 1999.

                                     F-18
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of InterTrust's deferred tax assets are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
<S>                                                          <C>       <C>
Deferred tax assets:
  Net operating loss carryforwards.......................... $ 12,500  $ 20,300
  Capitalized research and development......................    1,800     1,300
  Research credit carryforwards.............................    1,700     2,200
  Deferred revenue..........................................    1,000     5,200
  Other.....................................................    1,500       100
                                                             --------  --------
Gross deferred tax assets...................................   18,500    29,100
Valuation allowances........................................  (18,500)  (29,100)
                                                             --------  --------
Net deferred tax assets..................................... $    --   $    --
                                                             ========  ========
</TABLE>

   The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," provides for the
recognition of deferred tax assets if realization of these assets is more
likely than not. Based upon the weight of available evidence, which includes
InterTrust's historical operating performance and the reported cumulative net
losses in all prior years, InterTrust has provided a full valuation allowance
against its gross deferred tax assets.

   The valuation allowance increased by approximately $7.5 million and $10.6
million during the years ended December 31, 1998 and 1999, respectively.
Approximately $200,000 of the valuation allowance at December 31, 1999 relates
to the tax benefits of stock option deductions that will be credited to
additional paid-in capital when realized.

   As of December 31, 1999, InterTrust had federal and state net operating
loss carryforwards of approximately $58.4 million and $7.4 million,
respectively. InterTrust also had federal research and development tax credit
carryforwards of approximately $1.5 million. The federal and state net
operating loss carryforwards expire in years 2000 through 2019, if not
utilized. The federal research and development carryforwards expire in years
2011 through 2019, if not utilized.

   Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before utilization.

                                     F-19
<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Basic and diluted net loss per share:
  Numerator
    Net loss..................................... $(11,709) $(19,662) $(28,605)
                                                  ========  ========  ========
  Denominator
    Weighted average shares of common stock
     outstanding.................................   27,362    28,372    41,036
    Less weighted average shares subject to
     repurchase..................................      (84)     (440)     (610)
                                                  --------  --------  --------
    Weighted average shares of common stock
     outstanding used in computing basic and
     diluted net per loss share..................   27,278    27,932    40,426
                                                  ========  ========  ========
Basic and diluted net loss per share............. $  (0.43) $  (0.70) $  (0.71)
                                                  ========  ========  ========
</TABLE>

   If InterTrust had reported net income, diluted net income per share would
have included the shares used in the computation of pro forma net loss per
share as well as the effect of approximately 17,274,000, 18,168,000, and
16,255,000 shares purchasable under outstanding options and warrants not
included above for the years ended December 31, 1997, 1998, and 1999,
respectively. The number of common equivalent shares from options and warrants
would be determined on a weighted average basis using the treasury stock
method. The convertible promissory note outstanding in 1999 was also excluded
from the common equivalent share calculation, as it would have been
antidilutive.

8. 401(k) PROFIT SHARING PLAN

   In 1996, InterTrust established a 401(k) Profit Sharing Plan (the "401(k)
Plan") which covers substantially all employees. Under the 401(k) Plan,
employees are permitted to contribute up to 20% of gross compensation not to
exceed the annual 402(g) limitation for any plan year. InterTrust may make
discretionary contributions but no contributions have been made to the 401(k)
Plan since inception.

9. SUBSEQUENT EVENTS (unaudited)

   In March 2000, InterTrust acquired Infinite Ink Corporation ("Infinite
Ink"), a developer of software solutions for rendering and protecting
electronic publishing. Under the terms of the purchase agreement, InterTrust
acquired all of the shares of capital stock of Infinite Ink in exchange for
230,462 shares of InterTrust common stock and assumed all outstanding options
of Infinite Ink which were converted into options for 68,052 shares of
InterTrust common stock. The transaction was accounted for as a purchase with
an estimated purchase price of approximately $28 million. InterTrust is
currently evaluating the acquisition, including the value of in-process
research and development, in order to determine the allocation of the purchase
price.

   In February 2000, InterTrust signed a lease agreement for an additional
58,000 square feet of office space in Santa Clara, California. The lease
commences in March 2000 and expires in August 2004. During the term of the
lease, InterTrust will incur a minimum lease obligation of approximately $6.4
million.

                                     F-20