<PAGE>

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

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

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

                                   Form 10-Q

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

   For the quarterly period ended September 30, 2001

                                      OR

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

   For the transition period from       to

                       Commission File Number 000-27287

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

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

        Delaware                    52-1672106
(State of incorporation) (IRS Employer Identification No.)

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

                                (408) 855-0100
             (Registrant's telephone number, including area code)

                                     None
(Former name, former address and former fiscal year, if changed since last
                                    report)

   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) Yes  X  No    , and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_].

   The number of shares outstanding of the Registrant's Common Stock as of
October 31, 2001 was 95,046,956.

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

<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                                     INDEX

<TABLE>
<CAPTION>
                                                                                               Page No.
                                                                                               --------
<C>      <S>                                                                                   <C>
Part I.  Financial Information

Item 1.  Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.     3

         Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
           September 30, 2001 and 2000........................................................     4

         Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
           September 30, 2001 and 2000........................................................     5

         Notes to Condensed Consolidated Financial Statements.................................     6

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations    12

Item 3.  Qualitative and Quantitative Disclosures About Market Risk...........................    30

Part II. Other Information

Item 1.  Legal Proceedings....................................................................    32

Item 2.  Changes in Securities and Use of Proceeds............................................    32

Item 3.  Defaults Upon Senior Securities......................................................    32

Item 4.  Submission of Matters to a Vote of Security Holders..................................    32

Item 5.  Other Information....................................................................    33

Item 6.  Exhibits and Reports on Form 8-K.....................................................    33

Signature.....................................................................................    35
</TABLE>


                                      2

<PAGE>

PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

                      INTERTRUST TECHNOLOGIES CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                             September 30, December 31,
                                                                                 2001          2000
                                                                             ------------- ------------
                                                                              (unaudited)    (Note 1)
<S>                                                                          <C>           <C>
                                  ASSETS
------
Current assets:
   Cash and cash equivalents................................................   $  20,219    $  23,811
   Short-term investments...................................................      93,069      134,707
   Accounts receivable, net of allowance of $2,300 in 2001 and $178 in 2000.       1,255        3,928
   Other current assets.....................................................       1,805        2,771
                                                                               ---------    ---------
       Total current assets.................................................     116,348      165,217
   Property and equipment, net..............................................      11,358        8,919
   Restricted long-term investment..........................................         945          944
   Long-term investments....................................................      28,413       16,783
   Goodwill and other intangible assets, net................................       6,251       29,453
   Other assets.............................................................       2,218        5,557
                                                                               ---------    ---------
                                                                               $ 165,533    $ 226,873
                                                                               =========    =========
                   LIABILITIES AND STOCKHOLDERS' EQUITY
                                  (DEFICIT)
------------------------------------
Current liabilities:
   Accounts payable.........................................................   $   1,922    $   2,728
   Accrued compensation.....................................................       2,693        2,155
   Other accrued liabilities................................................       1,679        1,110
   Deferred revenue.........................................................       5,181        5,915
                                                                               ---------    ---------
       Total current liabilities............................................      11,475       11,908
Deferred revenue--long-term portion.........................................       4,903        7,617
Other long-term liabilities.................................................       2,711           --
                                                                               ---------    ---------
                                                                                  19,089       19,525
Commitments.................................................................          --           --

Stockholders' equity:
   Common stock, $0.001 par value, 120,000,000 authorized 94,999,228 and
     87,776,991 issued and outstanding at September 30, 2001 and 2000.......          95           88
   Additional paid-in capital...............................................     371,230      340,380
   Deferred stock compensation..............................................      (2,440)      (3,274)
   Notes receivable from stockholders.......................................          --         (516)
   Accumulated other comprehensive income...................................         988          376
   Accumulated deficit......................................................    (223,429)    (129,706)
                                                                               ---------    ---------
       Total stockholders' equity...........................................     146,444      207,348
                                                                               ---------    ---------
                                                                               $ 165,533    $ 226,873
                                                                               =========    =========
</TABLE>

                            See accompanying notes.

                                      3

<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

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

<TABLE>
<CAPTION>
                                                                Three Months Ended   Nine Months Ended
                                                                   September 30,       September 30,
                                                                ------------------  ------------------
                                                                  2001      2000      2001      2000
                                                                --------  --------  --------  --------
<S>                                                             <C>       <C>       <C>       <C>
Revenues:
   Licenses.................................................... $  1,542  $  1,188  $  4,491  $  2,764
   Software support and training...............................      185       861     1,343     2,153
   Services....................................................      205        48       720       194
   Hardware....................................................       --        --        12        --
                                                                --------  --------  --------  --------
       Total revenues..........................................    1,932     2,097     6,566     5,111
Cost of revenues:
   Licenses....................................................      112       133       339       346
   Software support and training (exclusive of amortization of
     deferred compensation of $5 and $6 for the three months
     ended September 30, 2001 and 2000 and $18 and $28 for
     the nine months ended September 30, 2001 and 2000,
     respectively).............................................      161       236     1,074       565
   Services....................................................      954       934     4,433     2,291
   Hardware....................................................       --        --       840        --
                                                                --------  --------  --------  --------
       Total cost of revenues..................................    1,227     1,303     6,686     3,202
                                                                --------  --------  --------  --------
Gross profit (loss)............................................      705       794      (120)    1,909
Operating costs and expenses:
   Research and development (exclusive of amortization of
     deferred compensation of $173 and $150 for the three
     months ended September 30, 2001 and 2000 and $515 and
     $698 for the nine months ended September 30, 2001 and
     2000, respectively).......................................    9,786     6,470    28,181    17,446
   Sales and marketing (exclusive of amortization of deferred
     compensation of $441 and $125 for the three months ended
     September 30, 2001 and 2000 and $655 and $486 for the
     nine months ended September 30, 2001 and 2000,
     respectively).............................................    3,552     4,493    16,609    12,511
   General and administrative (exclusive of deferred
     compensation expense of $224 and $465 for the three
     months ended September 30, 2001 and 2000 and $770 and
     $1,478 for the nine months ended September 30, 2001 and
     2000, respectively).......................................    4,055     2,520    12,530     7,021
   Purchased in-process research and development...............      567        --       567     6,100
   Amortization of goodwill and other intangible assets........      259       923     4,815     1,845
   Amortization of deferred compensation.......................      843       746     1,958     2,690
   Impairment of long-lived assets.............................       --        --    31,086        --
   Non-recurring charges.......................................      540        --     1,710        --
                                                                --------  --------  --------  --------
       Total operating costs and expenses......................   19,602    15,152    97,456    47,613
                                                                --------  --------  --------  --------
Loss from operations...........................................  (18,897)  (14,358)  (97,576)  (45,704)
Interest and other income, net.................................    1,966     3,306     6,851     8,184
Loss on equity investments.....................................       --        --    (2,996)       --
                                                                --------  --------  --------  --------
Net loss....................................................... $(16,931) $(11,052) $(93,721) $(37,520)
                                                                ========  ========  ========  ========
Basic and diluted net loss per share........................... $  (0.18) $  (0.13) $  (1.01) $  (0.45)
                                                                ========  ========  ========  ========
Shares used in computing basic and diluted net loss per share..   93,981    85,434    92,825    82,871
                                                                ========  ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      4

<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                          Nine Months
                                                                                      Ended September 30,
                                                                                      ------------------
                                                                                        2001      2000
                                                                                      --------  --------
<S>                                                                                   <C>       <C>
Operating activities
Net loss............................................................................. $(93,721) $(37,520)
Adjustments to reconcile net loss to net cash used in operating activities:
   Stock issued for services.........................................................      122        --
   Depreciation and amortization of property and equipment...........................    2,864     1,341
   Amortization of goodwill and other intangible assets..............................    5,175     1,845
   Amortization of deferred stock compensation.......................................    1,794     2,750
   Compensation expense related to forgiveness of notes receivable from stockholders.       16        --
   Impairment of long-lived assets...................................................   31,086        --
   Gain from sales of investments....................................................     (194)       --
   Purchased in-process research and development.....................................      567     6,100
   Loss on equity investments........................................................    2,996        --
   Changes in operating assets and liabilities
       Accounts receivable...........................................................    2,676       806
       Other current assets..........................................................    1,124    (2,327)
       Accounts payable..............................................................   (1,372)      917
       Accrued compensation..........................................................      538     3,294
       Other accrued liabilities.....................................................   (1,310)     (468)
       Deferred revenue..............................................................   (3,448)       16
                                                                                      --------  --------
Net cash used in operating activities................................................  (51,087)  (23,246)

Investing activities
   Capital expenditures..............................................................   (4,230)   (5,541)
   Business acquisition, net of cash acquired........................................     (457)       --
   Purchases of short-term investments...............................................  (34,342)  (38,892)
   Sales and maturities of short-term investments....................................   76,380    40,856
   Purchases of long-term investments................................................  (55,484)  (24,237)
   Sales and maturities of long-term investments.....................................   44,259        --
   Other noncurrent assets, net......................................................     (177)   (1,232)
                                                                                      --------  --------
Net cash provided by (used in) investing activities..................................   25,949   (29,046)

Financing activities
   Proceeds from issuance of common stock, net.......................................   20,145    96,291
   Proceeds from exercise of stock options and warrants..............................    1,036        --
   Proceeds from purchases under employee stock purchase plan........................      365        --
   Notes receivable from stockholders, net...........................................       --        63
                                                                                      --------  --------
Net cash provided by financing activities............................................   21,546    96,354
Net increase (decrease) in cash and cash equivalents.................................   (3,592)   44,062
Cash and cash equivalents at beginning of period.....................................   23,811    98,286
                                                                                      --------  --------
Cash and cash equivalents at end of period........................................... $ 20,219  $142,348
                                                                                      ========  ========
</TABLE>

                                      5

<PAGE>

                      INTERTRUST TECHNOLOGIES CORPORATION

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION

1.  BASIS OF PRESENTATION

   The accompanying unaudited condensed consolidated financial statements have
been prepared by us and reflect all adjustments, consisting only of normal
recurring adjustments, $540,000 and $1,170,000 adjustments for restructuring
charges in the quarters ending September 30 and June 30, 2001, respectively and
a $31.1 million adjustment for the impairment of long-lived assets in the
quarter ended June 30, 2001, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 2000 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosures necessary to
present the statements in accordance with generally accepted accounting
principles. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in our Annual Report on Form 10K for the
year ended December 31, 2000 filed with the Securities and Exchange Commission
on April 2, 2001 (the "Annual Report"). Results of operations for the three and
nine month periods ended September 30, 2001 are not necessarily indicative of
operating results for the full year.

Net Loss Per Share

   Basic and diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding during the period less shares
subject to repurchase. The following table presents the basic and diluted net
loss per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                Three Months Ended   Nine Months Ended
                                                                   September 30,       September 30,
                                                                ------------------  ------------------
                                                                  2001      2000      2001      2000
                                                                --------  --------  --------  --------
<S>                                                             <C>       <C>       <C>       <C>
Net loss....................................................... $(16,931) $(11,052) $(93,721) $(37,520)
                                                                ========  ========  ========  ========
Basic and diluted:
   Weighted-average shares of common stock outstanding.........   94,712    85,718    93,475    83,251
   Less weighted-average shares subject to repurchase..........     (731)     (284)     (650)     (380)
                                                                --------  --------  --------  --------
   Weighted-average shares used in computing basic and diluted
     net loss per common share.................................   93,981    85,434    92,825    82,871
       Basic and diluted net loss per common share............. $  (0.18) $  (0.13) $  (1.01) $  (0.45)
</TABLE>

   We excluded all outstanding warrants and stock options from the calculation
of diluted net loss per share because all such securities are antidilutive for
all periods presented. The total number of weighted average shares excluded
from the calculations of diluted net loss per share was 8,025,000 and
13,230,000 for the three months ended September 30, 2001 and 2000,
respectively, and 7,944,000 and 15,350,000 for the nine months ended September
30, 2001 and 2000, respectively. Warrants and stock options, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.

Revenue Concentration

   Three customers accounted for 21%, 20% and 17% of total revenues in the
three months ended September 30, 2001 compared to 20%, 16%, and 11% of total
revenues in the comparable period of 2000; and three customers accounted for
36%, 25% and 13% of total revenues for the nine months ended September 20, 2001
compared to 35%, 28%, and 11% in the comparable period of 2000. International
revenues were 62% and 56% of total revenues for the three months ended
September 30, 2001 and 2000, respectively, and 49% and 44% for the nine months
ended September 30, 2001 and 2000, respectively.

                                      6

<PAGE>

Goodwill and Other Intangible Assets

   Intangible assets are primarily comprised of goodwill, purchased technology
and patent rights, assets related to acquired workforce in place, 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 two to 17 years.

   During the second quarter of 2001, our management identified indicators of
possible impairment of our long-lived assets, principally goodwill and other
acquired intangible assets. Such indicators included the slower than expected
development of the Digital Rights Management (DRM) market, aggressive marketing
efforts by our principal competitors, an overall decline in industry valuations
and growth rates, and a strategy shift from our existing Commerce product
platform to the new Rights|System product platform.

   We determined that we had three categories of long-lived assets with
attributable and identifiable cash flows: Commerce and related technology,
Rights|System technology, and PublishOne services. Commerce and related
technology long-lived assets include goodwill and other intangible assets
recorded in connection with our acquisitions of Infinite Ink in March 2000 and
PassEdge in December 2000. Rights|System technology assets primarily consist of
property and equipment, patents and acquired workforce. PublishOne services
assets consist of goodwill and other intangible assets recorded in connection
with our acquisition of PublishOne in January 2001.

   With the assistance of independent valuation experts, we performed asset
impairment tests for each of the three identified asset categories. The tests
were performed by comparing the expected undiscounted cash flows for a
five-year period, plus a terminal value for future cash flows after the
five-year period, to the total carrying amount of goodwill, other intangible
assets and property and equipment for each asset category. The assumptions
supporting the estimated cash flows, and an estimated terminal value, reflect
management's best estimates. Based on the results of these tests, we determined
that the carrying amounts of the Commerce and related technology and PublishOne
services long-lived assets were impaired.

   With the assistance of independent valuation experts, we determined the fair
value of the long-lived assets for the impaired asset categories. Fair value
was determined using the discounted cash flow method, using a discount rate of
18% and an estimated residual value. The discount rate was based upon the
weighted average cost of capital for InterTrust and comparable companies. A
write-down of goodwill and intangible assets totaling $31.1 million was
recorded during the second quarter of 2001, reflecting the amount by which the
carrying amount of the assets exceed their respective fair values. The
write-down consisted of $20.9 million for goodwill and $10.2 million for other
acquired intangible assets.

Investments in Privately-held Companies

   Investments in privately-held companies primarily consist of equity and debt
securities in which InterTrust owns less than a 20% interest. InterTrust
invests in entities based upon factors that include the size of the market
opportunity and the barriers to entering that market, the strength of the
entity's products, services, and intellectual property, the previous experience
of the management team and its ability to execute on its business plan, and the
financial projections of the prospect. Additionally, InterTrust also considers
the strategic importance of the entity's technology in furthering the adoption
of DRM technologies.

   InterTrust does not have the ability to exercise significant influence over
any of the companies in which it invests and accordingly accounts for such
investments using the cost method. These investments are assessed for
impairment periodically through review of operations and indications of
continued viability, such as subsequent rounds of financing. As a result of the
deterioration of financial markets and the corresponding effect on private
company valuations and financing prospects during the second quarter of 2001,
we recorded $3.0 million in losses as a result of other than temporary declines
in the value of investments in privately held companies.

                                      7

<PAGE>

   The remaining investment in privately-held companies of $250,000 at
September 30, 2001 is included in other assets in the consolidated balance
sheet. InterTrust has not participated in subsequent financings for any of the
companies in which it is invested, and it is not obligated or committed in any
way to participate in any future financings of any of its investments.

Recent Accounting Pronouncements

   On January 1, 2001, we adopted SFAS No. 133, ''Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including foreign exchange contracts, and
hedging activities. In June 2001, the FASB issued SFAS No. 138, ''Accounting
for Certain Derivative Instruments and Certain Hedging Activities," which
addresses implementation issues related to SFAS No. 133. SFAS No. 133, as
amended, and SFAS No. 138 are effective for fiscal years beginning after June
15, 2000. Because we currently hold no derivative financial instruments and do
not currently engage in hedging activities, the adoption of SFAS 133 did not
have a material impact on our financial position or results of operations.

   In July 2001 the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results
of operations, but instead would be reviewed for impairment and written down
and charged to results of operations only in the periods in which the recorded
value of goodwill and certain intangibles is more than its fair value. The
provisions of each statement which apply to goodwill and intangible assets
acquired prior to June 30, 2001 will be adopted by us on January 1, 2002. We
expect the adoption of these accounting standards may result in certain of our
intangibles being subsumed into goodwill and will have the impact of reducing
our amortization of goodwill and other intangible assets commencing January 1,
2002; however, impairment reviews may result in future periodic write-downs.

In August, 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long Lived Assets and Long-Lived Assets to be Disposed of"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS 144 establishes a single accounting model for assets to be
disposed of by sale whether previously held and used or newly acquired. SFAS
No. 144 retains the provisions of APB No. 30 for presentation of discontinued
operations in the income statement, but broadens the presentation to include a
component of an entity. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and the interim periods within. We do not believe that the
adoption of SFAS 144 will have a material impact on our financial position or
results of operations.

2.  BUSINESS COMBINATIONS

   On January 30, 2001, we acquired the remaining 92.1% of the outstanding
shares and all of the outstanding options of PublishOne Inc. (PublishOne), a
privately-held company that develops online publishing software solutions and
distribution services for business information publishers. Prior to the
acquisition date, we owned approximately 7.9% of PublishOne's outstanding
stock. The transaction was accounted for as a purchase and the results of
PublishOne's operations have been included in the condensed consolidated
financial statements from

                                      8

<PAGE>

the date of acquisition. The purchase price was $16.9 million and consisted of
1,130,000 shares of InterTrust common stock at a fair value of $5.31 per share,
the assumption of options to purchase 1,155,221 shares of InterTrust common
stock at a fair value of $4.84 per share, assumed liabilities of $5.2 million,
and acquisition costs of approximately $250,000. The InterTrust options issued
in connection with the assumption of the PublishOne options were valued using
the Black-Scholes option pricing model assuming a volatility of 1.6, expected
life of 4 years, risk-free interest rate of 7%, expected dividend yield of 0%
and stock price of $5.31. Additionally, the agreement includes contingent
consideration of 320,000 shares of InterTrust common stock to be issued upon
the achievement of certain milestones. As of September 30, 2001, no milestones
have been met.

   We allocated PublishOne's purchase price based on the relative fair value of
the net tangible and intangible assets acquired. No amount was allocated to
in-process research and development. The purchase price was allocated based on
an independent valuation to tangible and intangible assets as follows (in
thousands):

<TABLE>
<S>                     <C>
Tangible Assets........ $ 1,581
Purchased Technology...   1,671
Acquired Workforce.....   1,452
Other Intangible assets     610
Deferred Compensation..   3,323
Goodwill...............   8,255
                        -------
                        $16,892
                        =======
</TABLE>

   Goodwill, purchased technology and other intangible assets are being
amortized on a straight-line basis over four years. The acquired workforce is
being amortized on a straight-line basis over two years.

   The fair value of the unvested common stock subject to restricted stock
agreements and the intrinsic value of the unvested options held by employees
was allocated to deferred stock compensation. The deferred stock compensation
will be amortized to compensation expense over the remaining vesting term using
a graded method.

   On August 8, 2001, we acquired the remaining 81.1% of Zero Gravity
Technologies Corporation, a developer of a policy based secure email product.
Prior to the acquisition date, we owned approximately 18.9% of Zero Gravity's
outstanding stock. The transaction was accounted for as a purchase and the
results of Zero Gravity's operations have been included in the condensed
consolidated financial statements from the date of acquisition. InterTrust paid
$510,000 (net of cash received), issued 500,000 shares of InterTrust common
stock at a fair value of $0.98, assumed liabilities of $198,000, and paid
$2,000 in acquisition costs to acquire all of the shares of Zero Gravity that
we did not already own. In addition, InterTrust assumed outstanding Zero
Gravity employee stock options equivalent to approximately 60,000 shares of
InterTrust common stock at a fair value of $0.98 per share. The InterTrust
options issued in connection with the assumption of the Zero Gravity options
were valued using the Black-Scholes option pricing model assuming a volatility
of 2.2, expected life of 9.3 years, risk-free interest rate of 6%, expected
dividend yield of 0% and stock price of $0.98. Total acquisition price was
$1,509,000 and was allocated as follows: 38% to in-process research and
development, 30% to acquired workforce and 25% to goodwill. The purchase price
of $1,509,000 was allocated based on an internal valuation as follows (in
thousands):

<TABLE>
<S>                                 <C>
Tangible Assets.................... $  111
In-Process Research and Development    567
Goodwill...........................    831
                                    ------
                                    $1,509
                                    ======
</TABLE>


                                      9

<PAGE>

   Goodwill and other intangible assets will be accounted for in accordance
with the provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets. These assets will not be amortized but will be reviewed annually (or
more frequently if impairment indicators arise) for impairment. The following
pro forma data summarizes the results of operations for the periods indicated
as if the PublishOne and Zero Gravity acquisitions had been completed as of the
beginning of the periods presented. The pro forma data gives effect to actual
operating results prior to the acquisition. No effect has been given to cost
reductions or operating synergies in this presentation. Prior to their
acquisition, PublishOne and Zero Gravity were customers of InterTrust. The pro
forma amounts exclude revenues and expenses recognized in transactions between
PublishOne, Zero Gravity and InterTrust. These pro forma amounts do not purport
to be indicative of the results that would have actually been obtained if the
acquisition had occurred as of the beginning of the periods presented or that
may be obtained in the future.

   Pro forma results for the three and nine months ended September 30, 2001 and
2000 are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                      Three Months Ended   Nine Months Ended
                                         September 30,       September 30,
                                      ------------------  ------------------
                                        2001      2000      2001      2000
                                      --------  --------  --------  --------
<S>                                   <C>       <C>       <C>       <C>
Revenues............................. $  1,932  $  2,097  $  6,569  $  5,111
Net loss............................. $(16,970) $(13,624) $(96,127) $(42,385)
Net loss per share--basic and diluted $  (0.18) $  (0.16) $  (1.04) $  (0.51)
</TABLE>

3. SALE OF SECURITIES

   On January 31, 2001, InterTrust sold 4,000,000 shares of common stock at
$5.00 per share to Nokia Corporation (Nokia) for total cash consideration of
$20,000,000. The fair market value of the stock on that day was $4.6875 per
share. We accounted for the difference of $0.3125 per share as additional
paid-in capital. In connection with its investment, Nokia agreed to license
InterTrust DRM solutions and select InterTrust as its preferred DRM technology.
Additionally, per an agreement, InterTrust has appointed an executive officer
of Nokia to the InterTrust board of directors.

4. RESTRUCTURING COSTS

   On April 30, 2001, we announced and formally adopted a program to reduce our
worldwide workforce. The reduction resulted in the decrease of 43 regular
employees across all business functions, operating units, and geographic
regions. The worldwide workforce reductions were substantially completed in the
second quarter of 2001. Of the 43 terminated employees, 41 had left InterTrust
by June 30, 2001 and the remaining 2 employees left at different dates during
September 2001. We recorded a non-recurring charge of approximately $1.2
million relating primarily to severance and fringe benefits which is included
in non-recurring charges in the statement of operations.

   On August 2, 2001, we further reduced our worldwide workforce. The reduction
resulted in the decrease of 33 regular employees across all business functions,
operating units, and geographic regions. All 33 terminated employees left
InterTrust, and all cash payments were made by September 30, 2001. We recorded
a non-recurring charge of approximately $540,000 relating to severance and
fringe benefits, and the charge is included in non-recurring charges in the
statement of operations. All severance payments we made during the three months
ended September 30, 2001.
   A summary of workforce reduction costs during the nine months ended
September 30, 2001 is outlined as follows:

<TABLE>
<CAPTION>
                    Total       Cash        Balance at
                    Charge    Payments  September 30, 2001
                  ---------- ---------- ------------------
<S>               <C>        <C>        <C>
Severance........ $1,666,000 $1,666,000    $         --
Other Charges.... $   44,000 $   44,000    $         --
                  ---------- ----------    ------------
       Total..... $1,710,000 $1,710,000    $         --
                  ========== ==========    ============
</TABLE>


                                      10

<PAGE>

5. COMPREHENSIVE INCOME

   Total other comprehensive income (loss) was $175,000 and $354,000 for the
three months ended September 30, 2001 and 2000, respectively and $612,000 and
$(175,000) for the nine months ended September 30, 2001 and 2000, respectively.

6. STOCK OPTION EXCHANGE PROGRAM

   On May 24, 2001, we announced a voluntary stock option exchange program for
our employees. Under the program, our employees were given the opportunity to
cancel outstanding stock options previously granted to them in exchange for an
equal number of new options to be granted at a future date which will be at
least six months and a day from the cancellation date of June 22, 2001. Options
to purchase 2,763,497 shares were returned and cancelled. The exercise price of
these new options will be equal to the fair market value of InterTrust's common
stock on the date of grant, which is expected to be not earlier than December
23, 2001 or later than January 31, 2002. Such new options will have terms and
conditions that are substantially the same as those of the canceled options.
The exchange program is not expected to result in any additional compensation
charges or variable plan accounting. Members of the our board of directors, our
officers and our senior executives were not eligible to participate in this
program.

7. SHAREHOLDER RIGHTS PLAN

   On June 8, 2001, our board of directors approved a stockholders' rights
plan. Under the plan, rights were distributed as a dividend at the rate of one
preferred share purchase right for each share of InterTrust common stock held
by stockholders of record as of the close of business on June 28, 2001. Each
preferred share purchase right entitles the registered holder to purchase from
InterTrust one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.001 per share, at a price of $20.00 per one
one-thousandth, subject to adjustment. The description and terms of the rights
are set forth in a Rights Agreement dated as of June 8, 2001, as the same may
be amended from time to time, between InterTrust and Fleet National Bank, as
Rights Agent, filed as Exhibit 4.1 to our Form 8-K filed June 27, 2001.

8. LEGAL PROCEEDINGS

   Between May 17, 2001 and July 3, 2001, complaints were filed in the United
States District Court for the Southern District of New York naming InterTrust,
certain of its current and former directors and the members of the underwriting
syndicate involved in InterTrust's initial public offering and/or secondary
public offering as defendants in multiple class action lawsuits. The lawsuits
seek unspecified monetary damages and certification of a plaintiff class
consisting of all persons who acquired shares of InterTrust between October 26,
1999 and May 16, 2001. The complaints allege, among other things, that
InterTrust and the individual defendants named in the complaints violated the
federal securities laws by issuing and selling InterTrust common stock in its
initial public offering in October 1999 and its secondary public offering in
April 2000 without disclosing to investors that certain of the underwriters in
the offering allegedly solicited and received excessive and undisclosed
commissions from certain investors. We believe that the claims against us are
without merit and intend to defend against the complaints vigorously. In
addition, Microsoft filed a claim which asserted infringement of two patents
relating to the downloading of software, which we do not believe are
significant to our business.

9. SUBSEQUENT EVENTS

   On October 31, 2001, we announced that we would reduce our workforce by
approximately 103 employees and would consolidate certain business facilities.
We will record a charge related to the reduction in force and closure of
facilities in the three months ending December 31, 2001.

                                      11

<PAGE>

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                  OPERATIONS

   The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, the words "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. InterTrust's actual results
and the timing of certain events may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
discrepancy include, but are not limited to, those discussed in "Other Factors
Affecting Operating Results, Liquidity and Capital Resources" below. All
forward-looking statements in this document are based on information available
to InterTrust as of the date hereof and InterTrust assumes no obligation to
update any such forward-looking statements.

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, our first generation
DRM product, was delivered to our partners in December 1998, and some partners
began using the technology on a limited commercial basis in January 2000. We
are currently transitioning to our second generation DRM product,
Rights|System, a product designed to be platform-independent, componetized,
efficient and scalable for content, service and technology providers who are
seeking to deliver high-volume, retail-based subscription services for music,
video, and documents. The Rights|System product is designed to allow service
providers to deliver governed content to a very broad range of devices and
operating system platforms, including personal computers, set top boxes, video
recorders, mobile communicators, and consumer electronics components such as
game stations and portable devices. We have targeted Rights|System to be
generally available to customers before the end of 2001. In addition, we have
an extensive patent portfolio of 22 issued and approximately 90 patents pending
worldwide relating to DRM, watermarking, and distributed trust management. We
plan on licensing, as appropriate, our patent rights to customers who wish to
build or operate their own DRM solutions, content distribution system, or other
system that uses trust management technologies.

Discussion of Revenue Sources From Prior Quarters

   We license our DRM platform and software to companies to build digital
commerce services and applications. We intend 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 substantially all our
revenues from license fees for transactions entered into in past quarters that
are related to our Commerce software, associated software support and training
services, and professional services. In addition, our existing Commerce
software license agreements generally required 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. To date, we have not
derived any transaction fees associated with the license of our Commerce
software. While we will continue to support our Commerce software licensees, we
have announced that we will be making no future enhancements to the Commerce
software. As a result, we believe that existing partners will transition to our
Rights|System product and we expect that our Commerce licensees will choose to
not commercially deploy the Commerce software. Therefore, we do not expect that
any transaction fees will be

                                      12

<PAGE>

generated from the use of the Commerce software. Whether our Commerce licensees
transition to our Rights|System product will depend on the outcome of ongoing
negotiations.

   The Commerce software license agreements entered into in past quarters
provide different rights and technology depending on the commercial plans of
our partners. Initial license fees received from these agreements varied 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 Commerce
software license fees were negotiated based on the terms and conditions of each
individual agreement and take into 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. InterTrust is
obligated to provide unspecified upgrades and new releases with respect to
Commerce software, on a when and if available basis, to the licensees over a
one to two year period under the agreements for additional fees. InterTrust is
not obligated to provide any funding to any licensee for the development of the
licensee's software. In the future, we may enter into other equity payment
arrangements.

   Licenses of our Commerce software generally required 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 Commerce license
agreements generally included the right to obtain access to upgrades and new
releases of Commerce software, 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 with
delivery of the licensed product. In addition, under license agreements where
we are obligated to provide a specified custom development deliverable and do
not have vendor specific objective evidence of fair value of the specified
deliverable, all of the license revenue is deferred until the specified upgrade
has been delivered. Upon delivery of the specified deliverable, 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
September 30, 2001, we had approximately $10.1 million of deferred license
revenue.

   Our Commerce license agreements also required 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
Commerce technology. Transactions involving the use of our Commerce technology
to conduct the sale, lease, rental, or licensing of commercial content required
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 required 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 Commerce technology generally
required 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 September 30, 2001. Prepaid
transaction fees may generally be offset against a portion of transaction fee
amounts due in any given quarter. To date, we have not recognized any material
transaction fees from commercial transactions or services, or sales of products
using our Commerce software.

                                      13

<PAGE>

   Software support and training services, which typically include the right to
telephone and online support and customer training, are generally provided for
in the Commerce software license agreements for an agreed-upon amount. Software
support and training service revenue is recognized over the period in which the
services are provided. Because we are not currently providing support for our
Commerce software we do not expect to recognize significant future support fees
in connection with our Commerce software licenses entered into in past quarters.

   TrustNet clearinghouse service revenues represent service fees for the use
of our TrustNet clearinghouse infrastructure to pilot and test applications and
services using our Commerce software. Service revenues 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, system integration fees,
and monthly service fees are recognized over the term of the service period.

   Professional services represent fees for consulting services provided to our
customers for development and system integration not essential to the
functionality of the software licensed. The revenue from these services is
recognized as services are performed.

   National Computer Systems of Singapore, PricewaterhouseCoopers and Nippon
Telegraph and Telephone accounted for 21%, 20% and 17% of total revenues
respectively, in the three months ended September 30, 2001. National Computer
Systems of Singapore, PricewaterhouseCoopers, and Nippon Telegraph and
Telephone accounted for 22%, 23%, and 0% of total revenues, respectively, in
the comparable period for 2000. 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. As we are transitioning to
our Rights|System product, we cannot make any predictions as to the demand for
this product. Our business model has not succeeded in generating sufficient
revenue to sustain 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. As a result, we will need to generate significant
additional revenue to achieve and maintain profitability. In addition, current
economic conditions and limited visibility into customer demand makes
prediction of our future revenues difficult. We expect to incur additional
losses for at least the next several years.

Discussion of Future Revenue Sources

   In July 2001, we announced the development of Rights|System, our next
generation DRM platform for content protection and management. The new platform
is designed to be a lightweight, flexible, multi-platform environment that
easily integrates with existing systems. It is also designed to provide the
enterprise and business information sector with a platform to automate policies
and protect documents beyond simple secure delivery and firewalls.

   The Rights|System product suite consists of three components: packagers,
rights servers and clients. We believe we have optimized Rights|System for
content, service and technology providers seeking to deliver high-volume
retail-based and subscription services for music, video and documents.
Rights|System is designed to be efficient, scalable, and delivers transparent
content management and protection. Using a single server architecture,
Rights|System is designed to allow service providers to deliver secure content
to a broad range of devices including personal computers, set top boxes, video
recorders, mobile communicators and consumer electronics devices such as game
stations and portable devices. In turn, consumers should be able to easily
access any type of content with any device.

   While we have only recently announced the Rights|System product suite,
several Rights|System components have previously been licensed to customers.

                                      14

<PAGE>

licenses of the new product suite, which is expected to be available for
shipment to customers during the three months ended December 31, 2001. We have
not completed any licenses and cannot predict the market response to and
success of the Rights/System products. Our business development and sales
efforts are focused on licensing the three basic components of the product
suite under terms that would require the payment of annual license fees for
each component and an annual support contract that is a percentage of the
listed annual license fee. The most material license revenue may come from the
licensing of server components, which are currently being offered on a per
central processing unit or CPU, basis. The initial product release will have
two server components, the rights fulfillment server and the retail services
server. Customers will be able to license an initial number of CPU licenses
suitable for their anticipated service capacity requirements and then can
purchase additional CPU licenses as their demand increases. We also offer
professional services to our customers and partners to aid in implementation
and integration of our Rights|System products into their environments. We also
expect that the Rights|System licenses may require the payment of transaction
fees, relating to the sale, lease, rental, or licensing of commercial content
using the Rights|System products. Currently, the TrustNet clearinghouse does
not support Rights|System customers and we do not currently expect to derive
any revenue from Rights|System-related TrustNet clearinghouse services.

   In addition to our recent announcements concerning Rights|System, on October
31, 2001, we announced that we are commencing the licensing our patent
portfolio of 22 issued and approximately 90 patents pending in the field of
DRM, watermarking, and distributed trust management to third parties. While we
are currently engaged in discussions concerning licensing our patents, to date,
we have not completed any patent license agreements and cannot predict if, when
and under what terms licensing may occur.

Acquisitions

   On January 30, 2001, we acquired the remaining 92.1% of the outstanding
shares and all of the outstanding options of PublishOne Inc. ("PublishOne"), a
privately-held company that develops online publishing software solutions and
distribution services for business information publishers. Prior to the
acquisition date, we owned approximately 7.9% of PublishOne's outstanding
stock. The transaction was accounted for as a purchase and the results of
PublishOne's operations have been included in the condensed consolidated
financial statements from the date of acquisition. The purchase price was $16.9
million and consisted of 1,130,000 shares of InterTrust common stock at a fair
value of $5.31 per share, the assumption of options to purchase 1,155,221
shares of InterTrust common stock at a fair value of $4.84 per share, assumed
liabilities of $5.2 million, and acquisition costs of approximately $250,000.
The InterTrust options issued in connection with the assumption of the
PublishOne options were valued using the Black-Scholes option pricing model
assuming a volatility of 1.6, expected life of 4 years, risk-free interest rate
of 7%, expected dividend yield of 0% and stock price of $5.31. Additionally,
the agreement includes contingent consideration of 320,000 shares of InterTrust
common stock to be issued upon the achievement of certain milestones. As of
September 30, 2001, no milestones have been met.

   We allocated PublishOne's purchase price based on the relative fair value of
the net tangible and intangible assets acquired. No amount was allocated to
in-process research and development. The purchase price was allocated based on
an independent valuation to tangible and intangible assets as follows (in
thousands):

<TABLE>
<S>                     <C>
Tangible Assets........ $ 1,581
Purchased Technology...   1,671
Acquired Workforce.....   1,452
Other Intangible Assets     610
Deferred Compensation..   3,323
Goodwill...............   8,255
                        -------
                        $16,892
                        =======
</TABLE>

   Goodwill, purchased technology and other intangibles are being amortized on
a straight-line basis over four years. The acquired workforce is being
amortized on a straight-line basis over two years.

                                      15

<PAGE>

   The fair value of the unvested common stock subject to restricted stock
agreements and the intrinsic value of the unvested options held by employees
was allocated to deferred stock compensation. The deferred stock compensation
will be amortized to compensation expense over the remaining vesting term using
a graded method.

   On August 8, 2001, we acquired the remaining 81.1% of Zero Gravity
Technologies Corporation ("Zero Gravity"), a developer of a policy-based secure
email product. Prior to the acquisition date, we owned approximately 18.9% of
Zero Gravity's outstanding stock. The transaction was accounted for as a
purchase and the results of Zero Gravity's operations have been included in the
condensed consolidated financial statements from the date of acquisition.
InterTrust paid $510,000 (net of cash received), issued 500,000 new shares of
InterTrust common stock at a fair value of $0.98, assumed liabilities of
$198,000, and paid $2,000 in acquisition costs to acquire all of the shares of
Zero Gravity that we did not already own. In addition, InterTrust assumed
outstanding Zero Gravity employee stock options equivalent to approximately
60,000 shares of InterTrust common stock at a fair value of $0.98 per share.
The InterTrust options issued in connection with the assumption of the Zero
Gravity options were valued using the Black-Scholes option pricing model
assuming a volatility of 2.2, expected life of 9.3 years, risk-free interest
rate of 6%, expected dividend yield of 0% and stock price of $0.98. The
purchase price of $1,509,000 was allocated based on an internal valuation as
follows (in thousands):

<TABLE>
<S>                                 <C>
Tangible Assets.................... $  111
In-Process Research and Development    567
Goodwill...........................    831
                                    ------
                                    $1,509
                                    ======
</TABLE>

Stock Option Exchange Program

   On May 24, 2001, we announced a voluntary stock option exchange program for
our employees. Under the program, our employees were given the opportunity to
cancel outstanding stock options previously granted to them in exchange for an
equal number of new options to be granted at a future date which will be at
least six months and a day from the cancellation date, which was June 22, 2001.
The exercise price of these new options will be equal to the fair market value
of InterTrust's common stock on the date of grant, which is not expected to be
later than January 31, 2002. Such new options will have terms and conditions
that are substantially the same as those of the canceled options. The exchange
program is not expected to result in any additional compensation charges or
variable plan accounting. Members of our board of directors, our officers and
our senior executives were not eligible to participate in this program.

Results of Operations

   Total revenues decreased to approximately $1.9 million in the three months
ended September 30, 2001 from approximately $2.1 million in the comparable
period of 2000. For the nine months ended September 30, 2001, total revenues
increased to approximately $6.6 million from approximately $5.1 million in the
comparable period of 2000.

   License revenues were approximately $1.5 million, or 80% of total revenues,
for the three months ended September 30, 2001, as compared to $1.2 million or
57% of total revenues in the three months ended September 30, 2000, and
primarily represent the amortization of deferred license fees. For the nine
months ended September 30, 2001, license revenue increased to $4.5 million or
69% of total revenues, from $2.8 million, or 54% of total revenues, in the same
nine month period in 2000. These increases were due to the growth in the number
of licensing agreements over the prior year. No significant new license
agreements were entered into during the quarter ended September 30, 2001 due to
the transition to our new software platform, Rights|System.

   Revenue from software support and training decreased to $185,000 in the
three months ended September 30, 2001 from approximately $861,000 in the three
months ended September 30, 2000 and decreased to

                                      16

<PAGE>

approximately $1.3 million for the nine months ended September 30, 2001 from
approximately $2.2 million for the comparable period in 2000. These decreases
were due to the expiration of a number of partner support agreements in the
three months ended September 30, 2001 and the inability of many of our smaller
licensees to pay amounts due under support agreements due to current economic
conditions. As the majority of our support revenue relates to the Commerce
Products, the transition to Rights|System has also negatively impacted support
revenue. Software support and training services accounted for 10% and 41% of
total revenues in the three month periods ended September 30, 2001 and 2000,
respectively, and 21% and 43% for the nine month periods ended September 30,
2001 and 2000, respectively. We anticipate deriving support revenue in the
future from our Rights|System product licenses.

   Services revenue increased to approximately $205,000 for the three months
ended September 30, 2001 from $48,000 in the three months ended September 30,
2000 and increased to approximately $720,000 for the nine months ended
September 30, 2001 from approximately $194,000 for the comparable period in
2000. Services revenue represents monthly service fees for TrustNet
clearinghouse services, transaction royalties, consulting and system
integration services. The increase in services revenue was due to a greater
number of consulting services performed during the nine months ended September
30, 2001. Services revenue accounted for 11% and 3% of total revenues in the
three months ended September 30, 2001 and 2000, respectively, and accounted for
11% and 4% of total revenues in the nine months ended September 30, 2001 and
2000, respectively. We anticipate deriving service revenue in the future
relating to the Rights|System product.

   There was no hardware revenue for the three months ended September 30, 2001.
Hardware revenue recognized in the nine months ended September 30, 2001 was
$12,000. This revenue was the result of chips sold to one customer under the
terms of a short-term purchase agreement to provide chips for testing and trial
production. No hardware revenue was recognized in the comparable periods in
2000. We do not expect to derive any significant revenue from hardware sales in
future periods.

Cost of Revenues

   Cost of license revenue consists primarily of the costs incurred to
manufacture, package, and distribute our products, related documentation and
the amortization of purchased technology. Cost of license revenue was
approximately $112,000 during the three months ended September 30, 2001 and
approximately $133,000 in the three months ended September 30, 2000. Cost of
license revenue was approximately $339,000 during the nine months ended
September 30, 2001 and approximately $346,000 in the comparable period in 2000.
Cost of license revenue is expected to 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 consists primarily of the cost of
personnel, travel related expenditures, and training materials. Cost of
software support and training revenue decreased to approximately $161,000 for
the three months ended September 30, 2001 from approximately $236,000 for the
three months ended September 30, 2000. In the first nine months of 2001, the
cost of software support and training was approximately $1.1 million as
compared to approximately $565,000 in the comparable period for 2000. The
increase in cost of software support and training for the nine months ended
September 30, 2001 represents the increase in support personnel required to
provide technical assistance and training to our partners. Software support and
training services costs are expected to fluctuate from period to period
depending on the support requirements of our partners.

   Cost of services consists primarily of the outside services, personnel, and
equipment to operate our clearinghouse, as well as personnel costs to provide
professional and consulting services. Costs of services were approximately
$954,000 during the three months ended September 30, 2001 and approximately
$934,000 during the three months ended September 30, 2000. Cost of services was
approximately $4.4 million during the nine months ended September 30, 2001 and
approximately $2.3 million in the comparable period in 2000. These increases
are primarily attributable to investment in clearinghouse infrastructure,
personnel and the costs of performing consulting engagements.

                                      17

<PAGE>

   Cost of hardware was zero for the three months ended September 30, 2001. The
cost of hardware for the nine months ended September 30, 2001 was approximately
$840,000. These costs are related to the purchase of chips from a third party,
and the customization and transport of the chips. The costs include a reserve
for inventory in the amount of $823,000 due to cancellation of the supply
agreement with our customer. There were no hardware costs for the comparable
periods in 2000.

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 approximately
$9.8 million for the three months ended September 30, 2001 and approximately
$6.5 million for the three months ended September 30, 2000. In the first nine
months of 2001, research and development spending was approximately $28.2
million as compared to approximately $17.5 million in the comparable period of
2000. These increases were primarily attributable to increases in personnel
costs, recent business acquisitions, and consultant services associated with
both product research and development. We anticipate research and development
expenses will decrease significantly in the future due to the workforce
reductions.

Sales and Marketing

   Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct sales, partner development and marketing, public
relations, and other marketing expenses. Sales and marketing expenses decreased
to approximately $3.6 million for the three months ended September 30, 2001
from $4.5 million for the three months ended September 30, 2000 due to
compensation cost reductions related to our headcount reductions in April 2001
and August 2001. In the first nine months of 2001, sales and marketing expenses
were approximately $16.6 million as compared to approximately $12.5 million in
the comparable period of 2000. Increases in sales and marketing expenses were
due primarily to an increase in sales and marketing personnel, consulting
expenses, and to a lesser extent, public relations, promotional costs, and
travel costs. We expect sales and marketing expense to vary in future periods
based upon the implementation of marketing and promotional programs related to
the release of new products. We anticipate sales and marketing expenses will
decrease significantly in the future due to the workforce reductions.

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 to approximately $4.1 million for the three
months ended September 30, 2001 from approximately $2.5 million for the three
months ended September 30, 2000. General and administrative expenses were
approximately $12.5 million for the nine months ended September 30, 2001 and
$7.0 million for the comparable period in 2000. The increase was primarily
attributed to increases in legal expenses, consulting expenses, insurance
expenses, and bad debt expense. We expect general and administrative expenses
to continue to increase as a result of litigation costs related to a claim of
patent infringement we filed against Microsoft in April 2001. See further
discussion in Other Factors Affecting Operating Results, Liquidity, and Capital
Resources.

Amortization of Goodwill and Other Intangible Assets

   Amortization of goodwill and other intangible assets was $259,000 for the
three months ended September 30, 2001 and $923,000 for the three months ended
September 30, 2000. We recognized approximately $4.8 million of amortization
expense during the nine months ended September 30, 2001 as compared to $1.8
million in the nine months ended September 30, 2000. Amortization of goodwill
and intangible assets is related to business acquisitions in 2000 and 2001 and
the amortization of capitalized patent costs. See further discussion in
subsection Impairment of Goodwill and Other Intangible Assets.

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Deferred Stock Compensation

   Deferred compensation represents the difference between the exercise price
of options granted to employees and the deemed fair value of our common stock
for financial reporting purposes. Additionally, in conjunction with the
acquisition of PublishOne, the fair value of the unvested common stock subject
to restricted stock agreements, and the intrinsic value of the unvested options
held by PublishOne employees was allocated to deferred stock compensation.
Deferred compensation is being amortized over the vesting periods of the
options on a graded vesting method. This compensation expense relates to
options awarded to individuals in all operating expense categories. In the
quarters ended September 30, 2001 and June 30, 2001 we recorded an adjustment
to the deferred compensation balance in order to reflect a reduction in
deferred compensation associated with employees who have left InterTrust. These
adjustments resulted in decreases in deferred compensation of $88,000 and
$481,000, respectively. We recognized approximately $843,000 of deferred
compensation expense during the three months ended September 30, 2001 and
$746,000 in the comparable period of 2000. We recognized approximately $2.0
million of related compensation expense during the nine months ended September
30, 2001 as compared to $2.7 million in the nine months ended September 30,
2000.

Restructuring Costs

   On April 30, 2001, we announced and formally adopted a program to reduce our
worldwide workforce. The reduction resulted in the decrease of 43 regular
employees across all business functions, operating units, and geographic
regions. The worldwide workforce reductions were substantially completed in the
second quarter of 2001. We recorded a non-recurring charge of approximately
$1.2 million relating primarily to severance and fringe benefits.

   On August 2, 2001, we further reduced our worldwide workforce. The reduction
resulted in the decrease of 33 regular employees across all business functions,
operating units, and geographic regions. All 33 terminated employees left
InterTrust, and all cash payments were made by September 30, 2001. We recorded
a non-recurring charge of approximately $540,000 relating to severance and
fringe benefits, and the charge is included in non-recurring charges in the
statement of operations. See Note 7 to the Condensed Consolidated Financial
Statements for further information.

   On October 31, 2001, we announced that we would reduce our workforce by
approximately 103 employees and would consolidate certain business facilities.
We will record a charge related to the reduction in force and closure of
facilities in the three months ending December 31, 2001.

   Due to these reductions, we will save approximately $23.0 million annually
in salary related expenses. In addition, we are consolidating facilities, and
there will be further savings due to the reduction in workforce and fewer
facilities. Such additional savings have not been quantified at this time.

Interest and Other Income, net

   Interest and other income consists primarily of interest earned on cash and
cash equivalents, and short and long-term investments. Interest and other
income decreased to $2.0 million during the three months ended September 30,
2001 from $3.3 million in the comparable period in 2000. We recognized
approximately $3.9 million of interest and other income in the nine months
ended September 30, 2001 and $8.2 million in the comparable period of 2000. The
decrease in interest income is due to lower cash and investment balances in the
current period.

Impairment of Investments in Privately-held Companies

   Investments in privately-held companies primarily consist of equity and debt
securities in which we own less than a 20% interest. We invest in entities
based upon the size of the market opportunity, the entity's product

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<PAGE>

or service's ability to meet market demands, the barriers to entry that are
established by the entity's product or service offering, the long-term
defensibility of product leadership in a defined marketplace, the previous
experience of the management team and its ability to execute on its business
plan, and the financial projections of the prospect. Additionally, we also
consider the strategic importance of the entity's technology in furthering the
adoption of digital rights management technologies.

   We do not have the ability to exercise significant influence over any of the
companies in which we invest and accordingly account for such investments using
the cost method. These investments are assessed for impairment periodically
through review of operations and indications of continued viability, such as
subsequent rounds of financing. As a result of the deterioration of financial
markets and the corresponding effect on private company valuations and
financing prospects, during the second quarter of 2001, we recorded $3.0
million in losses as a result of other than temporary declines in the value of
investments in privately held companies. The remaining investment in
privately-held companies of $250,000 at September 30, 2001 is included in other
assets in the consolidated balance sheet. We have not participated in
subsequent financings for any of the companies in which we are invested, and we
are not obligated or committed in any way to participate in any future
financings of any of our investments.

Impairment of Goodwill and Purchased Intangible Assets

   As part of our review of our second quarter financial results, we performed
an impairment assessment of identifiable intangible assets and goodwill
recorded in connection with various acquisitions, with the assistance of third
party valuation experts. The assessment was performed primarily due to the
significant decline in our stock price, the net book value of assets
significantly exceeding their market capitalization, and the overall decline in
industry growth rates, which indicate that this trend may continue for an
indefinite period. As a result, we recorded a $31.1 million impairment charge
in the second quarter of 2001 to reduce goodwill and other intangible assets
associated with three acquisitions and their estimated fair values. The
estimates of fair value were based upon the discounted estimated cash flows for
the succeeding three years using a discount rate of 18% and an estimated
terminal value. The assumptions supporting the estimated cash flows, including
the discount rate and an estimated terminal value, reflect management's best
estimates. The discount rate was based upon the weighted average cost of
capital for comparable companies. The remaining goodwill and other intangible
assets will be amortized using the straight-line method using a three year
amortization rate thru December 31, 2001, resulting in an aggregate quarterly
charge of $348,000 for the three months ending December 31, 2001. On January 1,
2002 we will no longer amortize the remaining goodwill, but we will review it
for impairment annually (or more frequently if impairment indicators arise), in
accordance with the provisions of FASB Statement No. 142, Goodwill and Other
Intangible Assets.

Liquidity and Capital Resources

   Cash, cash equivalents and marketable and restricted investments totaled
$142.6 million at September 30, 2001, a decrease of $33.6 million from December
31, 2000. The change during the nine months ended September 30, 2001 is
primarily attributable to $20.0 million of cash generated from the sale of 4.0
million shares of our common stock to Nokia Finance International B.V., a
subsidiary of Nokia Corporation, in January 2001 and from proceeds from the
exercise of employee stock options and employee stock purchases, offset by our
net loss for the nine months ended September 30, 2001 of $93.7 million.

   Net cash used in operating activities totaled $51.1 million in the nine
months ended September 30, 2001. The cash used in the period is primarily
attributable to the net loss of $93.7 million, partially offset by various
non-cash charges such as depreciation and amortization of $2.9 million,
amortization of goodwill and other intangible assets of $5.2 million, stock
related compensation of $1.8 million, impairment of long-lived assets of $31.1
million, and loss on equity investments of $3.0 million.

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<PAGE>

   Net cash provided by investing activities totaled $26.0 million in the nine
months ended September 30, 2001. The cash generated in the period is primarily
attributable to net investment activity of $30.8 million offset by capital
expenditures totaling $4.2 million principally comprised of computer equipment
and software used to support our product development.

   Net cash provided by financing activities was $21.5 million in the nine
months ended September 30, 2001, due to cash generated from issuing common
stock to Nokia Corporation and, to a lesser extent, from the exercise of
employee stock options.

   At September 30, 2001, our principal source of liquidity was $142.6 million
in cash and cash equivalents and marketable and restricted investments. We
believe that our cash and cash equivalents will be sufficient to meet our
working capital needs for at least the next 12 months. In the future, 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, meet anticipated capital
requirements, or take advantage of future business opportunities.

Other Factors Affecting Operating Results, Liquidity and Capital Resources

   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, in transition, 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 market for digital commerce services and
applications has not developed as quickly as anticipated and, as a result, we
might not meet analysts' expectations of our future operating results. The
success of our business now depends largely upon our ability to develop and
license our new Rights|System product suite and our patents. Because we have
not yet completed any Rights|System product or patent licenses, we may not
generate sufficient revenue to support and grow our business. The volume of
products and services distributed using our technology has been and may
continue to be too small to support or grow our business. The success of our
business in the past has depended partly upon our ability to generate license
and support fees, and transaction fees in the form of a percentage of fees
charged by our licensees in commercial transactions using our Commerce
software. With the announcement of our Rights|System software platform in July
2001, we announced that we would continue to support the Commerce products, but
we would make no further enhancements to such products. As a result, licensees
of our Commerce products may choose not to continue using our Commerce products
and we do not expect any material future revenue from existing Commerce
software licensees.

Our future revenue is significantly dependent on market acceptance of
Rights|System software products.

   Our future revenue depends significantly on market acceptance and continued
enhancements of the Rights|System products that we announced in July 2001. We
have not completed any licenses of the Rights|System products, making it
difficult to predict both the amount of revenue we will generate and when we
will be able to recognize revenue from these products. In addition, the
Rights|System products may not meet the requirements of the market and we may
not be able to license the Rights|System products under desirable terms and
conditions. Failure to complete or license the Rights|System products may
negatively impact our future revenue.

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<PAGE>

Our future revenue is significantly dependent on our ability to license our
patents.

   Our future revenue depends significantly on our ability to license our
patents. We have not completed any licenses of our patents, making it difficult
to predict both the amount of revenue we will generate and when we will be able
to recognize revenue from these licenses. In addition, the validity of our
patents may be challenged by third parties. If challenged, our patents might
not be upheld or their claims could be narrowed which could negatively impact
our ability to, and terms under which we could, license our patents.

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 lack of demand for, or slow customer adoption of, our Rights|System
   software products;

 .  a lack of demand for licenses to our patent portfolio;

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

 .  the inability of our licensees to pay our license and other fees;

 .  our inability to develop or commercialize our technology to meet our
   customers' requirements on a timely basis;

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

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

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

 .  higher than expected operating expenses, including expenses related to the
   patent infringement litigation we initiated against Microsoft;

 .  customer budget cycles and changes in these budget cycles; and

 .  impairment charges recorded to reduce goodwill and other intangible assets
   associated with our acquisitions to their estimated fair values.

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

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

 .  deploy our technology or employ our patented inventions;

 .  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.

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

   Our failure to increase our revenues significantly would seriously harm our
business. We derive most of our revenues from the sale of a small number of
licenses. As a result, any delay in the recognition of revenue from a

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<PAGE>

license would have a material adverse effect on our results of operations for
subsequent accounting periods. 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 $93.7 million
for the nine months ended September 30, 2001, $55.6 million for the year ended
December 31, 2000 and $28.6 million for the year-ended December 31, 1999. We
expect to continue to have significant research and development, sales and
marketing, and general and administrative expenses. In addition, we expect to
incur significant expenses related to the patent litigation we initiated
against Microsoft. As a result of these expenses, we must significantly
increase our revenues to become profitable. We expect to incur significant
losses for at least the foreseeable future.

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

   We may not generate sufficient product revenue to grow our business unless
we maintain relationships with existing Commerce software licensees by
transitioning them to our Rights|System product suite and begin licensing our
Rights|System product suite to a significant number of new partners and
customers.

   We have not yet attracted, and may not in the future be able to attract, a
sufficient number of these companies. As of September 30, 2001, only 62
companies have licensed our Commerce software and certain Rights|System
components for commercial use. As of September 30, 2001, approximately eight
companies have been involved in the limited commercial deployment of our
Commerce software and certain Rights|System components. Our ability to attract
new licensees will depend on a variety of factors, including the following:

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

 .  the scalability of our Rights|System 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 Rights|System products and services; and

 .  our ability to market our Rights|System products and services effectively.

   Our ability to attract new product licensees will also depend on the
performance of our initial licensees. Many potential licensees may resist
working with us until our and our initial 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 services, and our licensees may not achieve the
widespread deployment of users we believe is necessary for a commercially
successful product line. 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.

Our operating results have been and may continue to be harmed if our licensees
or potential licensees suffer from downward economic cycles.

   Our ability to license our technology depends on the economic strength and
budgetary cycles of potential licensees. Many of our licensees are
Internet-related and start-up companies that currently face unfavorable market
conditions and budgetary pressures. Recently, some of our licensees have
defaulted on their payment obligations to us and others might default in the
future. This may be disruptive to our business and may adversely affect our
business, financial condition and results of operations.

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

   As Rights|System is a newly announced DRM platform and product suite, the
process of licensing our Rights|System products may be long and complex,
initial license fees could be delayed or reduced as a result of

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<PAGE>

this process, and our future revenue and operating results could be impaired.
Before committing to license our products, our licensees must generally
consider a wide range of issues including product benefits, 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 has typically
involved lengthy negotiations, but we do not know the length of the sales cycle
relating to our new products as we have not completed any Rights|System
licenses. As a result it is difficult for us to predict the quarter in which a
particular prospect might sign a license agreement. In addition, in some cases
we develop specific software applications for our licensees. We cannot predict
if we will deliver these applications in a timely manner or at all.

We are dependent on international sales which subject us to a variety of risks.

   We received approximately 56% of our total revenues in the nine months ended
September 30, 2001, 51% of our total revenues in 2000 and 67% of our total
revenues in 1999 from sales to customers located outside the United States. Our
international business activities are subject to a variety of risks, including
the adoption and changes of laws, actions by third parties and political and
economic conditions that could restrict or eliminate our ability to do business
in certain jurisdictions. Although we currently transact business in U.S
dollars, if we transact business in foreign currencies in the future, we will
become subject to the risks associated with transacting in foreign currencies,
including potential negative effects of exchange rate fluctuations. To date, we
have not adopted a hedging program to protect from risks associated with
foreign currency fluctuations.

Government regulation and requirements influence our sales internationally.

   Current or new government laws and regulations, or the application of
existing laws and regulations including those related to property ownership,
content and taxation, could expose us to significant liabilities, significantly
slow our growth or otherwise seriously harm our business and results of
operations.

Because our technology must be integrated into the products and services of our
licensees, there could be significant delay between our licensing the software
and our licensees' commercial deployment of their products and services, which
in part 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 may undertake a
lengthy process of integrating our technology into their existing systems or a
new system. The integration often requires re-engineering of these business
processes, which may delay the deployment of our technology. 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 software
could be lengthy and will vary, which makes it difficult for us to predict when
transaction revenue will be recognized.

Our Commerce product has only recently been used by our licensees in limited
commercial deployment, and our Rights|System product has not been released.
Therefore, evaluation of our business and prospects is difficult.

   We began offering the general availability release of our Commerce software
in December 1998, and released version 1.5 in April 2001. Our and our
licensees' applications and services based on our Commerce and other software
and hardware products are in development or have only been released for
evaluation in very limited commercial launches. It is still possible that we or
our licensees may uncover serious technical and other problems resulting in the
delay or failure of the 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. Our new Rights|System
product has not been released to any customers. As we continue to develop the
Rights|System

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<PAGE>

products it is possible that we or one of our partners or customers may uncover
serious technical and other problems with those products. We may not
successfully address any of these problems and the failure to do so would
seriously harm our business and operating results.

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 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.

   In April 2001, we filed a lawsuit against Microsoft Corporation alleging
that certain of their technology infringes our United Stated Patent No.
6,185,683. We have subsequently amended our claim to also allege infringement
by Microsoft Corporation of our United States Patent No. 6,253,193, United
States Patent No. 5,920,861, United States Patent No. 5,940,504, United States
Patent No. 5,892,900, United States Patent No. 5,982,891, and United States
Patent No. 5,917,912. The claim is in the early stages and while the litigation
is pending, significant financial resources and management attention will be
diverted for that purpose. Microsoft has filed an answer which denied all the
allegations as to the previously filed patents, and which asserted infringement
of two patents relating to the downloading of software, which we do not believe
are significant to our business. Discovery has started in the case and the
parties have exchanged initial document production and infringement
contentions. There is no assurance that we will be successful in this lawsuit,
and an unfavorable result would have a significant adverse affect on our
results of operations by reducing the value of our proprietary technology and
reducing demand for our products.

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 and Rights|System products, and other
software and hardware, 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.

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<PAGE>

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

   If our or 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, 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 software and other products 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.

   In particular, a large portion of our resources is focused on our new
Rights|System platform, which we believe is important to meeting our customer
and market demands. Delays in our ability to enhance and release the
Rights|System software could seriously harm our operating results.

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<PAGE>

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, IBM,
   Microsoft, and Real Networks;

 .  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.

   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, Microsoft's Windows operating
system, which manages the programs on a computer, includes 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.

Any acquisitions that we make could disrupt our business and harm our operating
results.

   We have made acquisitions of and investments in other companies in the past,
and we may continue to acquire or make investments in complementary companies,
products or technologies. In the event of any such investments, acquisitions or
joint ventures, we could:

 .  issue stock that would dilute our current stockholders' percentage ownership;

 .  incur debt;

 .  assume liabilities; or

 .  incur large and immediate write-offs.

   These investments, acquisitions or joint ventures also involve numerous
risks, including:

 .  problems combining the purchased operations, technologies or products with
   ours;

 .  unanticipated costs;

 .  division of management's attention from our core business;

 .  adverse effects on existing business relationships with suppliers and
   customers;

 .  potential loss of key employees, particularly those of the acquired
   organizations; and

 .  reliance to our disadvantage on the judgment and decisions of third parties
   and lack of control over the operations of a joint venture partner.

   Any acquisition or joint venture may cause our financial results to suffer
as a result of these risks.

                                      27

<PAGE>

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 or 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.

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. Further, 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 stock
may make it difficult for us to attract, assimilate, and retain highly
qualified employees. For example, due to the current volatility of our stock
price, many of our employees hold options with exercise prices well above the
current fair market value of our stock.

Failure to appropriately manage our growth 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 approximately 282
employees at September 30,

                                      28

<PAGE>

2001. On October 30, 2001, we announced plans to reduce our workforce by
approximately 40% in order to reduce costs and increase efficiency. Our
headcount has been reduced from a high of 358 in February 2001 to approximately
282 as of September 30, 2001. These reductions in our workforce may negatively
affect moral and result in qualified employees leaving InterTrust. 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.

Our stock price has been volatile in the past and is likely to continue to be
volatile.

   The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility, and accordingly the trading price of our common stock is likely to
be affected by this activity.

We are subject to securities class action litigation which may harm our
business and results of operations.

   In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We are a party to the securities class action litigation described
in Part II, Item 1--"Legal Proceedings" of our Report on Form 10-Q for the
quarter ended September 30, 2001. The defense of such litigation may increase
our expenses and divert our management's attention and resources, and an
adverse outcome in this litigation could seriously harm our business and
results of operations. In addition, we may in the future be the target of other
securities class action or similar litigation.

We have implemented anti-takeover provisions that could make it more difficult
to acquire us.

   Our sixth amended and restated certificate of incorporation, our amended and
restated bylaws, and Delaware law contain provisions that could make it more
difficult for a third party to acquire us, even if its doing so would be
beneficial to our stockholders. These provisions include:

 .  authorizing the issuance of shares of undesignated preferred stock without a
   vote of stockholders;

 .  prohibiting stockholder action by written consent; and

 .  limitations on stockholders' ability to call special stockholder meetings.

   In addition, on June 8, 2001, our board of directors approved a
stockholders' rights plan. Under the plan, rights were distributed as a
dividend at the rate of one right for each share of InterTrust common stock
held by stockholders of record as of the close of business on June 28, 2001.
The plan is designed to protect stockholders in the event of an unsolicited
attempt to acquire InterTrust and could make it more difficult for a third
party to acquire us, even if its doing so would be beneficial to our
stockholders.

Stockholders may incur dilution as a result of future equity issuances.

   We have in the past and may in the future issue equity securities to our
partners. If we issue additional equity securities, stockholders may experience
dilution, and the new equity securities could have rights senior to those of
existing holders of our common stock.

Industry-Related Risks

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

                                      29

<PAGE>

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 wireless and cable networks, 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. For example, there are a number 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 get
our transaction fees.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

   We develop products in the United States and intend to license our products
to partners throughout the world. 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.

                                      30

<PAGE>

   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 investments in marketable
securities, we have concluded that there is no material market risk exposure.
Therefore, no quantitative tabular disclosures are required. At September 30,
2001 and December 31, 2000, our cash and cash equivalents consisted primarily
of demand deposits and money market funds held by two large institutions in the
United States.


                                      31

<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

   On April 26, 2001, we filed a patent infringement complaint against
Microsoft Corporation in the United States District Court for the Northern
District of California. In the complaint, we have alleged that certain of
Microsoft's products infringe our United States Patent No. 6,185,683 and we are
seeking an injunction in addition to monetary damages. We have subsequently
amended our complaint to also allege infringement by Microsoft Corporation of
our United States Patent No. 6,253,193, United States Patent No. 5,920,861,
United States Patent No. 5,940,504, United States Patent No. 5, 892,900, United
States Patent No. 5,982,891, and United States Patent No. 5, 917, 912.
Microsoft filed an answer which denied all the allegations as to the previously
filed patents, and which asserted infringement of two patents relating to the
downloading of software, which we do not believe are significant to our
business. Discovery has started in the case and the parties have exchanged
initial document production and infringement contentions.

   Between May 17, 2001 and June 7, 2001, ten complaints were filed in the
United States District Court for the Southern District of New York naming
InterTrust, certain of its current and former directors and officers, and the
members of the underwriting syndicate involved in InterTrust's initial public
offering and/or secondary public offering as defendants in multiple class
action lawsuits. The lawsuits seek unspecified monetary damages and
certification of a plaintiff class consisting of all persons who acquired
shares of InterTrust between October 26, 1999 through May 16, 2001. The
complaints allege, among other things, that InterTrust and the other defendants
named in the complaints violated the federal securities laws by issuing and
selling InterTrust common stock in our initial public offering in October 1999
and our secondary public offering in April 2000 without disclosing to investors
that certain of the underwriters in the offering allegedly solicited and
received excessive and undisclosed commissions from certain investors.

Item 2. Changes in Securities and Use of Proceeds.

   (a) Changes in Securities.

   None.

   (b) Use of Proceeds.

   On April 12, 2000 we completed a public offering in which we sold 2,820,244
shares of common stock at $35 per share pursuant to a Registration Statement on
Form S-1 (File No. 333-32484) that was declared effective on April 6, 2000. The
total aggregate proceeds from these transactions were $98.7 million.
Underwriters' discounts and other related costs were approximately $6.5 million
resulting in net proceeds of $92.2 million.

   On November 1, 1999, we completed our initial public offering in which we
sold 13,000,000 shares of common stock at $9 per share pursuant to a
Registration Statement on Form S-1 (File No. 333-84033) that was declared
effective on October 26, 1999. Additionally, we sold 1,950,000 shares of common
stock at $9 per share in connection with the exercise of the underwriters'
over-allotment option. The total aggregate proceeds from these transactions
were $134.6 million. Underwriters' discounts and other related costs were
approximately $11.2 resulting in net proceeds of $123.4 million.

   The net proceeds were used for working capital and general corporate
purposes. Remaining proceeds were predominantly held in cash, cash equivalents
and marketable securities at September 30, 2001.

Item 3. Defaults Upon Senior Securities.

   None.

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

   None.

                                      32

<PAGE>

Item 5. Other Information.

   None.

Item 6. Exhibits and Reports on Form 8-K.

   (a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
  No.                                              Description
-------                                            -----------
<C>     <S>

   3.1  Sixth Amended and Restated Certificate of Incorporation filed with the Secretary of State of
        Delaware on November 1, 1999--incorporated herein by reference to Exhibit 3.2 to the Registrant's
        Registration Statement on Form S-1 (File No. 333-84033).

3.2***  Amended and Restated Bylaws of the Registrant.

   4.1  Reference is made to Exhibits 3.1 and 3.2.

  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.

   4.8  Stockholder Rights Agreement, by and between the Registrant and Nokia Finance International
        B.V., dated January 31, 2001--incorporated herein by reference to Exhibit 4.1 to the Registrant's
        Form 8-K filed February 20, 2001.

   4.9  Rights Agreement dated June 8, 2001--incorporated herein by reference to Exhibit 4.1 to the
        Registrant's Form 8-K filed June 27, 2001.

 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.

  10.5  Lease between Mission West Properties, L.P. and the Registrant dated July 21, 1999--incorporated
        herein by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1
        (File No. 333-84033).

 10.6+  Technology Development, Marketing, and License Agreement by and between the Registrant and
        National Westminster Bank PLC dated August 18, 1998--incorporated herein by reference to
        Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.7+  Technology Development and License Agreement by and between the Registrant and Universal
        Music Group, Inc. dated April 13, 1999--incorporated herein by reference to Exhibit 10.13 to the
        Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.8+  Technology Development and License Agreement by and between the Registrant and Upgrade
        Corporation of America dated August 7, 1996--incorporated herein by reference to Exhibit 10.14 to
        the Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.9+  Technology Development and License Agreement by and between the Registrant and Mitsubishi
        Corporation dated October 7, 1996--incorporated herein by reference to Exhibit 10.15 to the
        Registrant's Registration Statement on Form S-1 (File No. 333-84033).
</TABLE>

                                      33

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                               Description
 -------                                             -----------
<C>       <S>

    10.10 Warrant for the purchase of Class A Voting Common Stock made by the Registrant and held by
          Allen & Company Incorporated, dated September 7, 1999--incorporated herein by reference to
          Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (File No. 333-84033).

    10.11 Amendment to Technology, Development, Marketing and License Agreement by and between the
          Registrant and National Westminster Bank dated August 18, 1998--incorporated herein by
          reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (File No. 333-
          84033).

    10.12 Amendment to Technology Development and License Agreement by and between the Registrant
          and Universal Music Group, Inc. dated April 13, 1999--incorporated herein by reference to Exhibit
          10.18 to the Registrant's Registration Statement on Form S-1 (File No. 333-84033).

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

 10.20*** Employment Agreement by and between the Company and David Ludvigson dated August 4, 2000.

10.21**** 2000 Supplemental Option Plan.

10.22**** Full-Recourse Promissory Note dated December 7, 2000 from Bruce Fredrickson to the Company.

    10.23 Acceleration of Stock Option Vesting Agreement by and between the Company and David
          Lockwood dated September 25, 2001.
</TABLE>

*  Incorporated herein by reference to the exhibit of the same number in the
   Registrant's Registration Statement on Form S-1 (File No. 333-84033).
** Incorporated herein by reference to the exhibit of the same number in the
   Registrant's Registration Statement on Form S-1 (File No. 333-32484).
***Incorporated herein by reference to the exhibit of the same number of the
   Registrant's Form 10-Q for the quarter ended September 30, 2001.
****Incorporated herein by reference to the exhibit of the same number of the
    Registrant's Form 10-K for the year ended December 31, 2000.
+  Confidential treatment requested.

   (b) Reports on Form 8-K.

   On July 26, 2001, the Company filed a report on Form 8-K in which it
disclosed that the Company appointed Patrick S. Jones to its Board of Directors.


                                      34

<PAGE>

                     INTERTRUST TECHNOLOGIES CORPORATION

                                   SIGNATURE

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                          INTERTRUST TECHNOLOGIES CORPORATION

                                                      /S/ VICTOR SHEAR
                                          By: _________________________________
                                                        Victor Shear
                                              Chairman of the Board and Chief
                                                     Executive Officer
                                               (Principal Executive Officer)

                                                     /S/ DAVID LOCKWOOD
                                          By: _________________________________
                                                       David Lockwood
                                             Executive Vice Chairman and
                                                         President

                                                    /S/ GREGORY S. WOOD
                                          By: _________________________________
                                                      Gregory S. Wood
                                                  Chief Financial Officer
                                                  (Principal Financial and
                                                    Accounting Officer)

Date: November 14, 2001

                                      35