##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




Form 10-Q





xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2002





OR





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





For the transition period from  to





Commission File Number 000-27287





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INTERTRUST TECHNOLOGIES CORPORATION


(Exact name of registrant as specified in its charter)





Delaware

52-1672106(State of incorporation)

(IRS Employer Identification No.)





4800 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 June 30, 2002 was 96,885,666.





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##### Table of Contents

INTERTRUST TECHNOLOGIES CORPORATION





INDEX





Page No.Part I.    Financial InformationItem 1.

Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

1Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001

2Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001

3Notes to Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Qualitative and Quantitative Disclosures About Market Risk

25Part II.    Other InformationItem 1.

Legal Proceedings

26Item 2.

Changes in Securities and Use of Proceeds

27Item 3.

Defaults Upon Senior Securities

27Item 4.

Submission of Matters to a Vote of Security Holders

27Item 5.

Other Information

27Item 6.

Exhibits and Reports on Form 8-K

27Signature

30






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##### Table of Contents

PART I    
FINANCIAL INFORMATION





Item 1.    
Condensed Consolidated Financial Statements





INTERTRUST TECHNOLOGIES CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)





June 30, 2002


December 31, 2001(unaudited)


(Note 1)ASSETSCurrent assets:Cash and cash equivalents

$
53,406


$
56,643Short-term investments


72,856



70,058Accounts receivable, net of allowance of $0 and $186 at June 30, 2002 and December 31, 2001,
respectively






353Other current assets


950



1,702Total current assets


127,212



128,756Property and equipment, net


4,634



8,071Restricted long-term investment






945Goodwill and other intangible assets, net


2,096



4,849Other assets


642



1,972$
134,584


$
144,593LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
244


$
783Accrued compensation


772



1,556Accrued professional fees


314



1,355Accrued restructuringcurrent portion


220



2,259Other accrued liabilities


2,791



3,797Deferred revenue


29,733



1,615Total current liabilities


34,074



11,365Deferred revenuelong-term portion


2,488



5,779Accrued restructuring costslong-term portion






2,83836,562



19,982CommitmentsStockholders equity:Common stock, $0.001 par value, 120,000,000 authorized
96,885,666 and 95,289,605 issued and outstanding at June 30, 2002 and December 31, 2001


97



95Additional paid-in capital


371,461



370,118Deferred stock compensation


(228
)


(846
)Accumulated other comprehensive income


(45
)


408Accumulated deficit


(273,263
)


(245,164
)Total stockholders equity


98,022



124,611$
134,584


$
144,593





See accompanying notes.




1




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INTERTRUST TECHNOLOGIES CORPORATION





CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


(in thousands, except share and per share amounts)


(unaudited)





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Revenues:Licenses

$
308


$
1,562


$
895


$
2,949Software support and training


10



428



105



1,158Services


9



239



33



515Hardware














12Total revenues


327



2,229



1,033



4,634Cost of revenues:Licenses


10



90



21



227Software support and training






480







926Services


251



1,564



819



3,479Hardware






423







840Total cost of revenues


261



2,557



840



5,472Gross profit (loss)


66



(328
)


193



(838
)Operating costs and expenses:Research and development


3,229



9,111



8,225



18,765Sales and marketing


463



5,519



930



13,286General and administrative


3,593



4,737



9,666



8,978Amortization of goodwill and other intangible assets






2,363







4,556Impairment of goodwill and other intangible assets


642



31,086



642



31,086Restructuring


6,247



1,170



8,155



1,170Total operating costs and expenses


14,174



53,986



27,618



77,841Loss from operations


(14,108
)


(54,314
)


(27,425
)


(78,679
)Interest and other income, net


3,346



2,115



4,239



4,885Loss on equity instruments






(2,996
)






(2,996
)Net loss before provision for foreign taxes and cumulative effect of change in accounting principle


(10,762
)


(55,195
)


(23,186
)


(76,790
)Provision for foreign taxes


(2,850
)






(2,850
)


Net loss before cumulative effect of change in accountingprinciple


(13,612
)


(55,195
)


(26,036
)


(76,790
)Cumulative effect of change in accounting principle










(2,064
)


Net loss

$
(13,612
)

$
(55,195
)

$
(28,100
)

$
(76,790
)Basic and diluted net loss per share:Net loss before cumulative effect of change in accounting principle

$
(0.14
)

$
(0.59
)

$
(0.27
)

$
(0.83
)Cumulative effect of change in accounting principle

$



$



$
(0.02
)

$
Net loss

$
(0.14
)

$
(0.59
)

$
(0.29
)

$
(0.83
)Shares used in computing basic and diluted net loss per share


96,248



93,442



95,987



92,388





See accompanying notes.




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INTERTRUST TECHNOLOGIES CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Six Months Ended June 30,2002


2001Operating activitiesNet loss

$
(28,100
)

$
(76,790
)Adjustments to reconcile net loss to net cash used in operating activities:Cumulative effect of change in accounting principle


2,064



Stock based compensation


104



125Depreciation and amortization


1,891



6,512Amortization of deferred stock compensation


488



1,115Impairment of long lived assets


642



31,086Gain from sales of short-  and long-term investments


(191
)


(85
)Loss on equity investments






2,996Non-cash restructuring charge


2,481



Changes in operating assets and liabilities:Accounts receivable


353



2,123Other current assets


711



311Accounts payable


(539
)


(758
)Accrued compensation


(784
)


378Accrued professional fees


(1,041
)


Other accrued liabilities


(1,006
)


(189
)Deferred revenue


24,827



(1,873
)Accrued restructuring


(4,877
)


Net cash used in operating activities


(2,977
)


(35,049
)Investing activitiesCapital expenditures


(586
)


(3,545
)Business acquisition, net of cash acquired






53Purchases of short-term investments


(72,144
)


(34,342
)Sales and maturities of short-term investments


70,378



55,858Purchases of long-term investments






(46,333
)Sales and maturities of long-term investments






24,226Other noncurrent assets, net


721



(289
)Net cash used in investing activities


(1,631
)


(4,372
)Financing activitiesPayments of other long-term liabilities






(800
)Proceeds from issuance of common stock, net






19,963Proceeds from exercise of stock options and warrants


1,341



947Proceeds from purchases under employee stock purchase plan


30



365Net cash provided by financing activities


1,371



20,475Net increase (decrease) in cash and cash equivalents


(3,237
)


(18,946
)Cash and cash equivalents at beginning of period


56,643



23,811Cash and cash equivalents at end of period

$
53,406


$
4,865





See accompanying notes.




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##### Table of Contents




INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





PART I.    FINANCIAL INFORMATION





1.    ACCOUNTING POLICIES





Unaudited Interim Financial
Information





The accompanying condensed consolidated financial statements have been prepared by InterTrust
Technologies Corporation. (InterTrust or the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) for interim financial reporting. These condensed consolidated
financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals and non-recurring adjustments necessary for a fair presentation of the condensed consolidated
balance sheets, operating results, and cash flows for the periods presented. Non-recurring adjustments included $6.2 million and $1.9 million for restructuring charges recorded during the three month periods ended June 30, 2002 and March 31, 2002,
respectively, and $2.1 million for a cumulative effect of change in accounting principle to record the impairment of goodwill during the six months ended June 30, 2002. Operating results for the three and six month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
accompanying notes, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2001.





The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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):





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Basic and diluted net loss per share:NumeratorNet loss before cumulative effect of change in accounting principle

$
(13,612
)

$
(55,195
)

$
(26,036
)

$
(76,790
)Cumulative effect of change in accounting principle










(2,064
)


Net loss

$
(13,612
)

$
(55,195
)

$
(28,100
)

$
(76,790
)DenominatorWeighted average shares of common stock outstanding


96,301



93,877



96,040



92,755Less weighted average shares subject to repurchase


(53
)


(435
)


(53
)


(367
)Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share


96,248



93,442



95,987



92,388Basic and diluted net loss per share:Net loss before cumulative effect of change in accounting principle

$
(0.14
)

$
(0.59
)

$
(0.27
)

$
(0.83
)Cumulative effect of change in accounting principle










(0.02
)


Net loss

$
(0.14
)

$
(0.59
)

$
(0.29
)

$
(0.83
)





InterTrust 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 14,314,000 and
16,269,000 for the three months ended June 30, 2002 and 2001, respectively, and 14,439,000 and 16,201,000 for the six months ended June 30, 2002 and 2001, 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.





Goodwill and Certain Other Intangible
Assets





Effective July 1, 2001 the Company adopted the provisions of Statement of Financial Accounting
Standard SFAS No. 141, Accounting for Business Combinations (SFAS No. 141). 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 apart from goodwill. The Company evaluated its goodwill and intangible assets acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $834,000 of other intangible assets being subsumed
into goodwill at January 1, 2002.




5




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







On January 1, 2002, the Company adopted the provisions of Statement
Financial Accounting Standards SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), and as a result, InterTrust ceased to amortize goodwill. In lieu of amortization, InterTrust is required to perform an initial
impairment review of goodwill in 2002 and at least an annual impairment review thereafter.





SFAS No. 142
prescribes a two-step process for transitional impairment testing of goodwill. The Company completed both steps of the transitional impairment test during the quarter ended June 30, 2002. The first step, required to be completed by June 30, 2002,
screens for impairment. The Company determined that on January 1, 2000 the net book value of the Company was greater than the fair value of the Company, based on the Companys quoted market value on January 1, 2002. As a result, the Company was
required to complete the second step of the process, which measures the amount of the impairment.





The Company
calculated the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including unrecognized intangible assets, of the entity from the fair value of the Company, based on the Companys quoted
market value on January 1, 2002. Based on this analysis, the goodwill had no implied fair value, and the Company recorded an impairment loss of $2.1 million as of January 1, 2002. The Company recorded the loss as a cumulative effect of a change in
accounting principle.





InterTrusts management believes that on January 1, 2002, the Company had one
operating segment that is its sole reporting unit; therefore, goodwill was tested for impairment at the entity level.





Because the cumulative effect of a change in accounting principle was recorded as of January 1, 2002, the Companys results of operations for the three months ended March 31, 2002 have been restated as follows:





Three Months Ended March 31, 2002Net loss as reported

$
(13,444
)Cumulative effect of change in accounting principle


(2,064
)Net lossrestated

$
(15,508
)Basic and diluted net loss per share as reported

$
(0.13
)Cumulative effect of change in accounting principle


(0.02
)Basic and diluted net loss per sharerestated

$
(0.15
)





In accordance with SFAS No. 142, the effect of this accounting
change is reflected prospectively. Supplemental comparative disclosure as if the change had been retroactively applied to prior periods is as follows (in thousands, except per share amounts):





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Net loss:Reported net loss

$
(13,612
)

$
(55,195
)

$
(28,100
)

$
(76,790
)Goodwill amortization






2,363







4,556Adjusted net loss

$
(13,612
)

$
(52,832
)

$
(28,100
)

$
(72,234
)Basic and diluted loss per share:Reported loss per share

$
(0.14
)

$
(0.59
)

$
(0.29
)

$
(0.83
)Goodwill amortization





$
0.03







0.05Adjusted basic and diluted loss per share

$
(0.14
)

$
(0.56
)

$
(0.29
)

$
(0.78
)




6




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Year Ended December 31,2001


2000


1999Net loss as reported

$
(115,458
)

$
(55,641
)

$
(28,605
)Amortization of indefinite lived intangible assets


(5,389
)


(3,004
)


Adjusted net loss

$
(110,069
)

$
(52,637
)

$
(28,605
)Adjusted net loss per share

$
(1.18
)

$
(0.63
)

$
(0.71
)





As of June 30, 2002, the Companys intangible assets consist
entirely of outside patent costs, which are being amortized over the life of the patents, generally seventeen years.





2.    RESTRUCTURING AND OTHER





Fourth Quarter 2001 Restructuring
Program





On October 29, 2001, InterTrust approved a plan to reduce its worldwide workforce. The reduction
resulted in the decrease of 103 regular employees across all business functions, operating units, and geographic regions. During the fourth quarter of 2001, InterTrust recorded a restructuring charge of approximately $2.4 million relating to
severance payments and fringe benefit expenses associated with the reduction. During the fourth quarter of 2001, 98 of the employees left the Company and were paid severance and fringe benefits, and the remaining five employees left InterTrust in
January 2002.





Due to this workforce reduction and in an effort to reduce its operating expenses, InterTrust
approved a plan to reduce its facilities. The plan included vacating five facilities, four of which were vacated by December 31, 2001. The remaining facility was vacated in April 2002. InterTrust recorded a restructuring charge for excess
facilities of $5.0 million in the quarter ended December 31, 2001, which represents the remaining lease obligations for these facilities, net of anticipated sublease income. During the first quarter of 2002, InterTrust agreed to buyout the
remaining lease obligation related to one of the Companys Santa Clara facilities for $2.4 million, which was paid in March 2002. The leases related to the remaining facilities included in the Q4 2001 restructuring plan were bought
out during June 2002. During the quarter ended June 30, 2002 InterTrust recorded an additional charge of $594,000 as an adjustment to the restructuring charge related to these leases.





Due to the workforce reduction and the vacated facilities, InterTrust also identified excess assets that had no future alternative use. These excess assets are computer
equipment, furniture and fixtures, and leasehold improvements related to the vacated facilities. Any excess assets that are not included in sublease contracts will be sold to secondary market buyers or scrapped. InterTrust recorded a non-recurring
charge for excess assets of $2.1 million in the quarter ended December 31, 2001 and recorded a $110,000 adjustment to this charge during the quarter ended March 31, 2002.





First Quarter 2002 Restructuring Program





On January 31, 2002, InterTrust approved a plan to further reduce its worldwide workforce. The reduction resulted in the decrease of 75 regular employees across all business functions and locations. All employees were notified prior
to March 31, 2002. Of the 75 terminated employees, 64 left InterTrust by March 31, 2002 and the remaining 11 employees left at different dates during the second quarter of 2002. During the first quarter of 2002, InterTrust recorded a
restructuring charge of approximately $1.8 million relating to severance payments and fringe benefit expenses and recorded a $198,000 adjustment to increase the total charge during the quarter ended June 30, 2002.




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Due to this workforce reduction and in a further effort to reduce its
operating expenses, InterTrust approved a plan to vacate the 11th floor of the Portland, Oregon office. InterTrust negotiated a buyout of the remaining lease obligation in April 2002 of the 11th and the 12th floors for $350,000 plus broker costs.
The 12th floor, the only other floor occupied, was vacated in September 2001 and included in the December 31, 2001 restructuring accrual.





Second Quarter 2002 Restructuring Program





On May 9, 2002, InterTrust announced it
had approved a plan to further reduce its worldwide workforce and narrow the focus of the Company to developing and licensing intellectual property (consisting of patents and reference technology) for DRM and trusted computing. In connection with
this shift in business focus the Company ceased marketing and development of software and associated services. The plan resulted in the decrease of 71 regular employees across all business functions and locations. All these employees were
terminated prior to June 30, 2002. During the second quarter of 2002, InterTrust recorded a restructuring charge of approximately $2.9 million relating to severance payments and fringe benefit expenses.





Due to the employee terminations and the shift in the focus of the Company, InterTrust also identified excess assets that had no future
alternative use. These excess assets include computer equipment, furniture and fixtures, software, and prepaid licenses related to the old software products, which we have no requirement to support and are not being deployed commercially. Excess
tangible assets will be sold to secondary market buyers or scrapped. InterTrust recorded a non-recurring charge for excess assets of $2.6 million in the quarter ended June 30, 2002.





A summary of restructuring and other charges during the quarters ended June 30, 2002 and March 31, 2002 are outlined as follows (in thousands):





Fourth Quarter 2001 Restructuring Program

Accrued Balance at December 31, 2001

Additions/ Adjustments


Expenditures

Accrued Balance at March 31, 2002

Additions/ Adjustments

Expenditures


Accrued Balance at June 30, 2002Cash


Non-Cash



Cash


Non-CashSeverance

168




(168
)













Vacated Facilities Costs

4,929




(2,895
)



2,034

594

(2,618
)




10Asset Impairment



(110
)




110











Total

5,097

(110
)

(3,063
)

110

2,034

594

(2,618
)




10First Quarter 2002 Restructuring Program

Accrued Balance at December 31, 2001

Additions/ Adjustments


Expenditures

Accrued Balance at March 31, 2002

Additions/ Adjustments

Expenditures


Accrued Balance at June 30, 2002Cash


Non-Cash



Cash


Non-CashSeverance



1,815


(1,018
)



797

198

(995
)




Vacated Facilities Costs



203


(28
)



175



(175
)




Total



2,018


(1,046
)



972

198

(1,170
)




Second Quarter 2002 Restructuring Program

Accrued Balance at December 31, 2001

Additions/ Adjustments


Expenditures

Accrued Balance at March
31, 2002

Additions/ Adjustments

Expenditures


Accrued Balance at June 30, 2002Cash


Non-Cash



Cash


Non-CashSeverance













2,864

(2,654
)




210Asset Impairment













2,591




(2,591
)

Total













5,455

(2,654
)

(2,591
)

210




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







3.    IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS





In October 1999 InterTrust acquired audio decoding and rendering technology, related assets, and received a
license to video technology in exchange for 170,000 shares of InterTrusts common stock and $100,000 in cash. The purchase price was valued at $1.4 million and was capitalized as purchased technology. InterTrust has been amortizing the
value of the technology acquired over its estimated useful life of four years on a straight-line basis.





During
the quarter ended June 30, 2002, due to the Companys decision to shift its focus toward developing and licensing intellectual property, the Company determined that such technology would not be utilized or marketed and that the asset value had
been impaired. Therefore, the Company recorded an impairment charge of $642,000 during the quarter ended June 30, 2002.





4.    DEFERRED REVENUE





The Company completed its first patent license
under its narrowed business focus with Sony Corporation in May 2002 and received an upfront license fee of $28.5 million, less Japanese withholding taxes of 10%, in June 2002. The license agreement provides that if Sony, or a company with which
Sony has a patent cross-license agreement of a scope specified in the Sony agreement, acquires InterTrust in a manner set forth in the Sony agreement within six months from the license date, the agreement will terminate and $20 million of the
upfront fee will be refunded. As a result InterTrust determined that $20 million of the license fee should be deferred until November 20, 2002, the date that the six-month period lapses. Subsequent to the execution of the patent license agreement,
InterTrust began discussions with Sony regarding an additional license of its software. As these two agreements are being negotiated within a short period of time, InterTrust concluded that until it either executes the additional software license
agreement or terminates its discussions with Sony regarding a software license agreement, the fees received from Sony under the patent license agreement do not meet the fixed or determinable fee criteria required for revenue recognition.
Accordingly, the $8.5 million of revenue received from Sony that is not subject to any refund has also been recorded to deferred revenue as of June 30, 2002.





Withholding taxes of $2.9 million were paid in full to the Japanese government as a result of the upfront license payment from Sony in the quarter ended June 30, 2002. If InterTrust is required to
repay a portion of the upfront license payment to Sony, it is unlikely that the Japanese government will refund any of the taxes withheld. Therefore, the full amount of the taxes paid has been expensed in the quarter. The charge was recorded as a
provision for foreign taxes.





The remaining $3.7 million balance in deferred revenue relates to previous
Rights|System and Commerce licenses. InterTrust is amortizing the revenue based on the terms of the license agreements. If the licenses are terminated, the deferred revenue may be recognized as other income depending on the terms of the termination
agreement.





5.    OTHER COMPREHENSIVE (LOSS) INCOME





Total other comprehensive (loss) income was $97,000 and $269,000 for the three months ended June 30, 2002 and 2001, respectively, and $(453,000) and $437,000 for the six
months ended June 30, 2002 and 2001, respectively, and is comprised entirely of unrealized (losses) gains from marketable securities.





6.    STOCK OPTION EXCHANGE PROGRAM





On May 24, 2001, InterTrust
announced a voluntary stock option exchange program for its employees. Under the program, the employees were given the opportunity to cancel outstanding stock options previously




9




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##### Table of Contents



INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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. On January 2, 2002 InterTrust granted 2,229,214 shares to participating employees still employed by InterTrust at an exercise price of $1.22 per share. The exercise price of these new options
was equal to the fair market value of InterTrusts common stock on the date of grant. Such new options have terms and conditions that are substantially the same as those of the canceled options. The exchange program did not result in any
additional compensation charges or variable plan accounting. Members of the board of directors, officers and senior executives were not eligible to participate in this program.





7.    LEGAL PROCEEDINGS





Microsoft





On April 26, 2001, InterTrust filed a lawsuit against Microsoft Corporation in the United States District Court for the
Northern District of California alleging that certain Microsoft technology infringes one of its United States patents. Through subsequent motions and additional complaints, the lawsuit now encompasses numerous additional InterTrust United States
patents. Microsoft has denied all the allegations asserted in the proceedings. In addition, Microsoft has asserted a counterclaim that InterTrust infringes certain Microsoft United States Patents. These Microsoft patents relate to the downloading of
software and InterTrust does not believe that these patents are significant to InterTrusts business.





The
legal proceedings are in the early stages and while the litigation is pending, significant financial resources and management attention will be diverted for this purpose. Discovery has started in the case and the parties have exchanged documents and
infringement contentions. InterTrust believes there will likely be a Markman hearing on at least a portion of the patents in dispute in the first two quarters of 2003, but this timing may be delayed.





Litigation is subject to inherent uncertainties. In addition, cases such as this are likely to involve issues of law that are evolving,
presenting future uncertainty. There is no assurance that InterTrust will be successful in this lawsuit against Microsoft. The claims under one or more of InterTrusts patents might be narrowed or one or more of the patents might by found to be
invalid. An unfavorable result, whether interim or final, would have a significant adverse affect on InterTrusts results of operations by reducing the value of InterTrusts intellectual property.





Class Action Litigation





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. InterTrust believes that the allegations against it are wholly without merit. However, there is no assurance that InterTrust will be successful in the defense of
this lawsuit, and an unfavorable result could have an adverse affect on InterTrusts financial position, results of operations, or cash flows.




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INTERTRUST TECHNOLOGIES CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







EquiServe





On December 17, 2001 and July 25, 2002 respectively, Equiserve Limited Partnership (Equiserve) and Citibank, N.A. (Citibank) sued InterTrust in the
United States District Court for the Southern District of New York, thus bringing InterTrust (as a third-party defendant) into a pending case between plaintiff Fabrizio Caffarelli et al. and defendants Citibank and Equiserve. In the original case,
the Caffarelli plaintiffs are seeking approximately $13 million in damages arising out of Citibanks and Equiserves alleged two month delay in removing the restrictive legends from the Caffarelli plaintiffs stock certificates. In
the new case, Equiserve and Citibank have alleged that InterTrust negligently failed to timely deliver an opinion of counsel letter to Equiserve that was necessary for Equiserve to remove the restrictive legends from the Caffarelli plaintiffs
stock certificates. As a result, Equiserve and Citibank have alleged that, to the extent Equiserve and Citibank are held liable for any damages to the Caffarelli plaintiffs in the original case, InterTrust is liable to Equiserve and Citibank for
such damages. InterTrust has reviewed copies of the complaints and has conducted a preliminary factual analysis. Based on this review and analysis, InterTrust believes that there was no delay on InterTrusts part in rendering the opinion of
counsel letters. Accordingly, the Company believes that the allegations against it are wholly without merit. However, there is no assurance that InterTrust will be successful in the defense of this lawsuit, and an unfavorable result could have an
adverse affect on InterTrusts financial position, results of operations, or cash flows.




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Item 2.





MANAGEMENTS DISCUSSION AND ANALYSIS


OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The information in this quarterly report 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 Risk Factors and elsewhere 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 develop and license intellectual property consisting of patents and reference
technology for Digital Rights Management, or DRM, and trusted computing. We hold 25 United States patents and have approximately 90 patent applications pending worldwide. We believe our patent portfolio covers software and hardware techniques that
can be implemented in a broad range of products that use DRM and trusted computing technology, including computer operating systems, digital media platforms, web services, and enterprise infrastructure. As of June 30, 2002 we had 39 employees
focusing on developing, protecting, and licensing our intellectual property.





Since our founding in 1990, we have
invented and defined technologies for DRM and trusted computing that enable secure management of digital processes and information. 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. In July 2001, we announced a transition from our Commerce software product to our second-generation DRM product,
Rights|System.





On May 9, 2002, we announced that we would narrow our business focus to licensing intellectual
property. On May 23, 2002 we announced the completion of our first patent license under our narrowed focus, a global agreement with Sony Corporation. The agreement will allow Sony to use our patents in products and services that distribute consumer
media content. Under the agreement, Sony paid us an initial licensing fee of $28.5 million, less 10% Japanese withholding tax, in June 2002. In addition, we are also entitled, under the agreement, to receive ongoing royalty fees with respect to
future product-related services and content sales in the consumer media market that involve our patents related to DRM. We intend to license, as appropriate, our patent rights and technology to other customers who wish to develop products and
services that employ DRM and trusted computing technologies.





Critical Accounting Policies and Estimates





Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived
assets and contingencies. We




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base our estimates on historical experience and on various other market specific assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated
financial statements:





Revenue Recognition





Most of our revenue to date have been generated from complex software licensing arrangements, which include elements such as software support, consulting services,
clearinghouse services, rights to new releases and upgrades and other future obligations. These arrangements often require revenue recognition judgments particularly in the areas of delivery of specific product functionality and collectibility of
license and other fees. The assessment of collectibility is particularly critical in determining whether or not revenue should be recognized in the current market environment. The accounting for terminated license agreements also requires judgment
to determine whether the deferred revenue balance as of the date of termination should be recorded to other income or recognized as revenue.





We completed our first patent license under our narrowed business focus with Sony Corporation in May 2002 and received an upfront license fee of $28.5 million, less foreign withholding taxes of 10%, in
June 2002. The license agreement provides that if Sony, or a company with which Sony has a patent cross-license agreement of a scope specified in the Sony agreement, acquires InterTrust in a manner set forth in the agreement within six months from
the license date, the agreement will terminate and $20 million of the upfront fee will be refunded. As a result we determined that $20 million of the license fee should be deferred until November 20, 2002, the date that the six-month
period lapses. Subsequent to the execution of the patent license agreement, we began discussions with Sony regarding the potential additional license of our software. As these two agreements are being negotiated within a short period of time, we
concluded that until we either execute the additional software license agreement or terminate our discussions with Sony regarding such an agreement, the fees received from Sony under the patent license agreement do not meet the fixed or determinable
fee criteria required for revenue recognition. Accordingly, the $8.5 million of revenue received from Sony that is not subject to any refund has also been recorded to deferred revenue as of June 30, 2002.





Estimating Allowance for Doubtful Accounts





We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Estimated reserves are determined based upon historical loss patterns, the number of
days that billings are past due and an evaluation of the potential risk of loss associated with specific problem accounts. At June 30, 2002, we had no accounts receivable and therefore no reserves.





Impairment of Goodwill and Other Intangible Assets





We periodically review long-lived assets, certain identifiable intangible assets and goodwill related to these assets for impairment in accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long Lived Assets (SFAS 144). The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS 121.





For assets to be held and used, including acquired intangible assets, we initiate our review whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that
the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant




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management judgment is required in the forecasting of future operating results which are used in the preparation of projected discounted cash flows to determine fair value and should different
conditions prevail, material write downs of net intangible assets and/or goodwill could occur.





It is reasonably
possible that the estimates of anticipated future gross revenue, the remaining estimated economic life of the products and technology assets, or both, could differ from those used to assess the recoverability of these costs and result in a
write-down of the carrying amount or a shortened life of acquired intangibles in the future.





On January 1, 2002,
the Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) became effective. In compliance with this new standard, pursuant to the transitional impairment test, we completed adoption of
SFAS 142 during the quarter ended June 30, 2002. As a result, we recorded an impairment charge of $2.1 million as of January 1, 2002. This charge is shown as a cumulative effect of change in accounting principle on the statement of operations for
the six months ended June 30, 2002.





Results of Operations





Revenues





Total revenues decreased to $327,000 in the three
months ended June 30, 2002 from approximately $2.2 million in the comparable period of 2001, and decreased to approximately $1.0 million in the six months ended June 30, 2002 from approximately $2.9 million in the comparable period of 2001.





License revenues were $308,000, or 94% of total revenues, for the three months ended June 30, 2002, as compared
to $1.6 million, or 70% or total revenues, in the three months ended June 30, 2001, and primarily represent the amortization of deferred license fees. License revenues for the six months ended June 30, 2002 were $895,000, down from $2.9 million
for the six months ended June 30, 2001. The decrease for both the three and six month periods was due to the expiration or termination of several agreements during 2001 and 2002, while revenue from new license agreements decreased as we transitioned
from our Commerce product suite to the Rights|System product suite. We signed only one Rights|System license during the first half of 2002, and on May 9, 2002 we announced that we were shifting our strategic focus from selling software products
to licensing our intellectual property. Licenses of our Commerce software generally required a payment of an initial license fee, and the fee was recognized on a subscription basis over the period of obligation if future upgrades and new releases
were included in the license agreement. Upon termination of licenses, we cease amortization of the deferred revenue related to the license and recognize the remaining deferred revenue as revenue or other income depending upon the terms of the
termination agreement.





Revenue from software support and training decreased to $10,000 in the three months ended
June 30, 2002 from $428,000 in the three months ended June 30, 2001. For the six months ended June 30, 2002, support and training revenues were $105,000, down from $1.2 million in the six months ended June 30, 2001. The decrease for both the three
and six month periods was due to the expiration of a number of customer support agreements during 2001 and 2002. As the majority of our support revenue related to the Commerce Products, the transition to Rights|System also negatively impacted
support revenue. We do not expect material software support and training revenue in the future due to our shift in strategic focus announced in May 2002.





Services revenues decreased to $9,000 for the three months ended June 30, 2002 from $239,000 in the three months ended June 30, 2001. For the six months ended June 30, 2002, services revenues were
$33,000, down from $515,000 in the six months ended June 30, 2001. Services revenue represents monthly service fees for TrustNet clearinghouse services, transaction royalties, consulting and system integration services. The decrease in services
revenue was due to the discontinuation of TrustNet clearinghouse services, a decrease in the number of consulting projects, and our move away from software licensing. Due to our shift in focus announced in May 2002, we do not expect material
services revenue in the near future.




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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 $10,000 during the three months ended June 30, 2002 and approximately $90,000 in the three months ended June 30, 2001. For the six months ended June 30, 2002, cost of license
revenue was $21,000, down from $227,000 in the six months ended June 30, 2001. Due to our announced focus toward licensing of patents, we expect to record only the amortization of outside patent costs as cost of revenues in future
statements of operations.





Cost of software support and training consists primarily of the cost of personnel,
travel related expenditures, and training materials. There were no software support and training costs for the three months ended June 30, 2002 compared to $480,000 for the three ended June 30, 2001, and there were no software support and training
costs for the six months ended June 30, 2002 compared to $926,000 for the six ended June 30, 2001. The decrease in the cost of software support and training is due to significantly lower software support revenue and because we do not have a need for
full-time support personnel, but use research and development resources on an as-needed basis.





Cost of services
consists primarily of the outside services, personnel as needed, and equipment to operate our clearinghouse, as well as personnel costs to provide professional and consulting services. Costs of services were approximately $251,000 for the three
months ended June 30, 2002, and approximately $1.6 million for the three months ended June 30, 2001, costs of services were approximately $819,000 for the six months ended June 30, 2002, and approximately $3.5 million for the six months ended
June 30, 2001. This decrease is primarily attributable to the termination of our TrustNet Clearinghouse and consulting services and related decreases in headcount. We do not expect any costs of services in the near future.





Cost of hardware was zero for the three months ended June 30, 2002 and $423,000 for the three months ended June 30, 2001, and cost of
hardware was zero for the six months ended June 30, 2002 and $840,000 for the six months ended June 30, 2001. The costs in 2001 were related to the purchase of chips from a third party and the cost of customization of and transport of such chips. We
ceased customizing and selling chips during 2001, and do not expect to incur costs related to chips in future periods.





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 expenses were approximately $3.2 million for the three months ended June 30,
2002 and approximately $9.1 million for the three months ended June 30, 2001. For the six months ended June 30, 2002, research and development expenses were $8.2 million, compared with $18.8 million for the six months ended June 30, 2001. The
decrease was primarily attributable to decreases in personnel costs, facilities costs, and consultant services in both product research and development. We anticipate research and development expenses will decrease in the future due to our shift in
focus and related workforce reductions.





Sales and Marketing





Sales and marketing expenses consist of salaries and related expenses for personnel engaged in sales and marketing, public relations expenses, and other marketing expenses.
Sales and marketing expenses decreased to $463,000 from $5.5 million for the three months ended June 30, 2002 and 2001, respectively and to $930,000 from $13.3 million for the six months ended June 30, 2002 and 2001, respectively. The decrease is
due to compensation cost reductions related to our headcount reductions, and also due to lower consulting expenses, facilities costs, promotional costs, and travel costs. We anticipate sales and marketing expenses will decrease further in the future
due to work force reductions consummated in the six months ended June 30, 2002.




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General and Administrative





General and administrative expenses consist primarily of salaries and related expenses for executive, legal, accounting, administrative personnel, professional service
fees, and general corporate expenses. General and administrative expenses decreased to approximately $3.6 million for the three months ended June 30, 2002 from approximately $4.7 million for the three months ended June 30, 2001. The decrease for the
three-month period is due primarily to lower administrative personnel costs and decreased facility costs due to previous restructurings and a decrease in bad debt expense of $1.5 million. During the three months ended June 30, 2002, we recorded a
credit to general and administrative expenses totalling $657,000 to reflect the collection of previously written-off accounts receivable. We also incurred approximately $1.0 million in litigation costs related to the Microsoft lawsuit during the
three months ended June 30, 2002. For the six months ended June 30, 2002, general and administrative expenses were $9.7 million compared with $9.0 million for the six months ended June 30, 2001. The increase is primarily related to higher costs in
connection with our litigation with Microsoft, which were approximately $3.0 million in the six months ended June 30, 2002, and included a decrease in bad debt expense of $2.3 million. We expect general and administrative expenses to decrease
in the future due to workforce reductions consummated in the six months ended June 30, 2002.





Amortization of Goodwill and Other
Intangible Assets





There was no amortization of goodwill and other intangible assets for the three and six
months ended June 30, 2002 compared to $2.4 million and $4.6 million for the three and six months ended June 30, 2001, respectively. The amortization of goodwill and other intangible assets in 2001 was related to business acquisitions in 2000
and 2001 and the amortization of capitalized patent costs. Beginning January 1, 2002, in accordance with SFAS 142, we no longer amortize purchased goodwill and indefinite-lived intangibles, but instead we will test for impairment at least annually.
During the quarter ended June 30, 2002, we completed the adoption of SFAS 142. In compliance with the new standard pursuant to the transitional impairment test, we recorded a goodwill impairment charge of $2.1 million as of January 1, 2002. This
charge is shown as a cumulative effect of change in accounting principle on the statement of operations for the six months ended June 30, 2002.





Impairment of Goodwill and Other Intangible Assets





In October 1999 we acquired audio
decoding and rendering technology, related assets, and received a license to video technology in exchange for 170,000 shares of our common stock and $100,000 in cash. The purchase price was valued at $1.4 million and was capitalized as purchased
technology. We have been amortizing the value of the technology acquired over its estimated useful life of four years on a straight-line basis.





During the quarter ended June 30, 2002, due to our decision to narrow our focus toward developing and licensing intellectual property, we determined that such technology value had been impaired.
Therefore, the Company recorded an impairment charge of $642,000 during the quarter ended June 30, 2002.





Restructuring Costs





First Quarter 2002 Restructuring Program





On January 31, 2002, we approved a plan to further reduce our worldwide workforce. The reduction resulted in the decrease of 75 regular employees across all business
functions and operating units. All employees were notified prior to March 31, 2002, and all employees have left InterTrust by June 30, 2002. During the first quarter of 2002, we recorded a restructuring charge of approximately $1.8 million relating
to severance payments and fringe benefit expenses and recorded a $198,000 adjustment to increase the total charge during the second quarter of 2002.







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Due to this workforce reduction and in an effort to further reduce its operating expenses, we approved a plan to vacate
the 11th floor of the Portland, Oregon office. We negotiated a buyout of the remaining lease obligation in April 2002 of the 11th and the 12th floors for $350,000 plus broker costs, and recorded a $175,000 charge during the first quarter of 2002.





Due to these reductions, we expect to save approximately $9.0 million annually in salary and facility related
expenses pursuant to our first quarter restructuring program.





Second Quarter 2002 Restructuring Program





On May 9, 2002 we announced we had approved a plan to further reduce our worldwide workforce and shift our
focus to developing and licensing intellectual property for DRM and trusted computing. In connection with this shift in business focus the Company ceased marketing and development of software and associated services. The plan resulted in the
decrease of 71 regular employees across all business functions and locations. All employees were terminated prior to June 30, 2002. During the second quarter of 2002, we recorded a restructuring charge of approximately $2.9 million relating to
severance payments and fringe benefit expenses.





Due to the employee terminations and the change in our focus, we
also identified excess assets that had no future alternative use. These excess assets include computer equipment, furniture and fixtures, software, and prepaid licenses related to the old software products, which we no longer support and are not
being deployed commercially. Excess tangible assets will be sold to secondary market buyers or scrapped. We recorded a non-recurring charge for excess assets of $2.6 million in the quarter ended June 30, 2002.





Due to these reductions, we expect to save approximately $10.0 million annually in salary and asset related expenses pursuant to our
second quarter restructuring program.





Interest and Other Income, net





Interest and other income consists of interest earned on cash and cash equivalents, and short-term investments and cancellation fees resulting from terminated licenses.
Interest and other income increased to $3.3 million during the three months ended June 30, 2002 from $2.1 million in the comparable period in 2001, and decreased to $4.2 million during the three months ended June 30, 2002 from $4.9 million in
the comparable period in 2001. During the three months ended June 30, 2002 we recognized $2.7 million of other income related to the termination of the Mitsubishi Commerce license. This balance was previously recorded as deferred revenue. This
increase was offset by a decrease in interest income, which is due to lower cash and investment balances in the current period and lower interest rates on securities.





Provision for Foreign Taxes





Withholding taxes of $2.9
million were paid in full to the Japanese government as a result of the upfront license payment from Sony in the quarter ended June 30, 2002. If we are required to repay a portion of the upfront license payment to Sony, it is unlikely that the
Japanese government will refund any of the taxes withheld. Therefore, the full amount of the taxes paid has been expensed in the quarter.





Liquidity and Capital Resources





Cash, cash equivalents and marketable and restricted
investments totaled $126.3 million at June 30, 2002, a decrease of $1.3 million from December 31, 2001.





Net cash
used in operating activities totaled $3.0 million in the six months ended March 31, 2002. The cash used in the period is largely attributable to the net loss of $28.1 million, which included an increase in deferred revenue of $24.8 million due to
the receipt of the upfront license fee of $25.6 million from Sony Corporation.




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The net loss was partially offset by various non-cash charges such as depreciation and amortization of property and equipment of $1.9 million, stock related compensation of $488,000, non-cash
restructuring charges of $2.5 million and the cumulative effect of change in accounting principle of $2.1 million. Cash used in operating activities also reflects the payment of restructuring liabilities of $4.9 million and accrued liabilities
of $2.8 million.





Net cash used in investing activities totaled $1.6 million in the six months ended June 30,
2002. The primary uses were net investment activity of $1.7 million and capital expenditures totaling $586,000 principally comprised of computer equipment, offset by a reduction is other non-current assets of $721,000. The reduction in non-current
assets is mainly the result of returned deposits from lease terminations and other settled obligations.





Net cash
provided by financing activities was $1.4 million in the six months ended June 30, 2002, primarily due to cash generated from the exercise of employee stock options.





At June 30, 2002, our principal source of liquidity was $126.3 million in cash and cash equivalents and marketable investments. Our existing cash and cash equivalents and
marketable and restricted investments may decline during the remainder of 2002 due to further weakening of the economy and net losses. However, 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 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





On May
9, 2002, we announced that due to lack of demand for our Rights|System product, we were narrowing our business focus to developing and licensing intellectual property consisting of patents and reference technology. This narrowed business focus is in
transition and unproven and we may not succeed in generating sufficient revenue to sustain or grow our business.





Our narrowed business focus is unproven and evolving and may not generate sufficient revenue for us to be successful. The volume of products and services distributed using DRM and trusted computing technology has been and may
continue to be small, which may affect our ability to license our intellectual property. We discontinued marketing our Commerce and, more recently, Right|System product suites due to lack of demand. Therefore, our future revenue and the success of
our business depends entirely upon our ability to license our intellectual property consisting of patents and reference technology.





On May 23, 2002, we announced completion of our first license under our narrowed business focusa global patent licensing agreement with Sony Corporation. We have not completed any other licenses under our narrowed
business focus, making it difficult to predict whether we will succeed in completing any further patent licenses, and if we are successful, the amount of revenue we will generate and when we will be able to recognize revenue from these licenses.




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We need to license our intellectual property to a sufficient number of companies to sustain and grow
our business.





We will not generate sufficient revenue to grow our business unless we license our intellectual
property to a sufficient number of companies. At June 30, 2002 we had completed only one patent license, and may not in the future be able to attract a sufficient number of additional companies to license our intellectual property. Our ability to
attract new licensees will depend on a variety of factors, including the following:





| |  | the growth in demand for DRM and trusted computing technologies;
| | - | ----------------------------------------------------------------




| |  | third party deployment of products and services incorporating DRM or other trusted computing technologies;
| | - | ----------------------------------------------------------------------------------------------------------




| |  | the utility of our reference technology;
| | - | ----------------------------------------




| |  | our ability to identify how our patents apply to specific DRM and trusted computing products and services;
| | - | ----------------------------------------------------------------------------------------------------------




| |  | our ability to market our intellectual property to potential customers;
| | - | -----------------------------------------------------------------------




| |  | the outcome of our litigation against Microsoft and any other litigation or other proceeding that could affect our intellectual property; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------




| |  | the outcome of our on-going patent prosecution efforts as well as our successful prosecution of new patents based both on existing and future specifications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------




For the foreseeable future, we may not enter into transactions resulting in sufficient upfront licensing fees or
royalties to sustain and grow our business.





We may not enter into transactions resulting in sufficient
upfront licensing fees and ongoing royalties to sustain or grow our business. We may not be successful in entering into any further licensing transactions involving upfront license fees. In addition, royalties based on our future licensees
deployment of DRM and trusted computing products and services are difficult to predict because the certainty and timing of that deployment is difficult to predict. For example, under our license agreement with Sony Corporation, our only existing
patent licensee, we will not receive any ongoing royalties if Sony Corporation is not successful in developing DRM products and services that are commercially accepted by consumers.





The long and complex process of licensing intellectual property could delay the deployment of our intellectual property and harm our business.





Our narrowed business focus has only recently been implemented, and we have only completed one patent licensing transaction under this
narrowed focus. The process of licensing our intellectual property, which is essential to our success, could be long and complex. We do not know the length of the future sales cycle relating to licensing our intellectual property. As a result it is
difficult for us to predict when any further intellectual property licenses will be completed, if at all. Initial license fees could be delayed or not realized, and our future revenue and operating results could be impaired. Before committing to
license our patents or technology, our potential licensees are likely to consider a wide range of issues including the strength of our patent portfolio, potential outcomes of the Microsoft litigation and price.





If we are successful in licensing our intellectual property, our licensees may need to develop and distribute products and services that use our intellectual
property. There could be significant delays between licensing and our licensees commercial deployment of products and services, which in part could delay our ability to recognize revenue from our licenses.





Our success depends upon the use of our intellectual property by potential licensees in DRM and trusted computing products and services.
Our current licensee, and any future licensees, may undertake a lengthy process




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of integrating our intellectual property into their existing products and services or developing new products and services that use our intellectual property. This integration could delay the
deployment of DRM or trusted computing products and services. Depending on the terms of any future licenses, we may not be able to recognize revenue based on our future licensees products and services until a future licensee deploys DRM
products or services commercially.





We expect that the period between entering into a licensing arrangement and the time our licensee
commercially deploys DRM and trusted computing products and services could be lengthy and will vary, which may make it difficult for us to predict when revenue based on future products and services will be recognized.





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 could vary significantly from
period to period because of lengthy time periods between licenses of our intellectual property and the possibility that significant portions of revenue associated with any such future licenses may be recognized over relatively short time periods. In
addition, in the past our operating results have varied from period to period and, in some future quarter or quarters, will likely fall below the expectations of 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 licenses to our intellectual property;
| | - | -----------------------------------------------------------




| |  | the inability of licensees to develop complete commercial systems using our intellectual property, or delays or deferrals in commercialization by licensees;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | the failure of licensees to successfully deploy commercial systems using our intellectual property;
| | - | ---------------------------------------------------------------------------------------------------




| |  | our inability to effectively enforce or otherwise protect our patent assets or adverse rulings in litigation relating to our patents;
| | - | -------------------------------------------------------------------------------------------------------------------------------------




| |  | a decline in the demand for digital goods and services or trusted computing infrastructure;
| | - | -------------------------------------------------------------------------------------------




| |  | future restructuring costs;
| | - | ---------------------------




| |  | higher than expected operating expenses, including expenses related to the patent infringement litigation we initiated against Microsoft or additional or higher
than expected operating expenses resulting from patent infringement litigation against one or more other companies;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | customer budget cycles and changes in these budget cycles, including the reduction of spending due to macroeconomic conditions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------




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




We have a history of losses.





Our failure to increase revenues significantly would seriously harm our business. We no longer license our Commerce software or our Rights|System products and our revenues have decreased in each of the
last five quarters. We intend to derive our revenues from licenses of our intellectual property, consisting of patents and reference technology. To date, we have not completed any reference technology licenses and we have only completed one patent
license under our narrowed focus. We have experienced operating losses in each quarterly and annual period since inception. Although, based on our current knowledge, we expect to be profitable in the quarters ending September 30, 2002 and December
31, 2002 based on the Sony transaction, we would incur losses in future periods after these quarters if we do not complete additional licenses of our patents and technology. We incurred net losses of $13.6 million and $12.4 million for the quarters
ended June 30 and March 31, 2002, respectively, $115.5 million for the year ended December 31, 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 incur significant expenses
related to the patent litigation against Microsoft and we may incur significant expenses related to other




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litigation. As a result of these expenses, we must continue to enter into licensing transactions to increase our revenues in order to avoid incurring additional losses in the future.





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





Our success is substantially dependent on our intellectual property, 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 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 position 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
use important financial and other resources. In addition, the laws of many countries do not protect our proprietary rights as well as the laws of the United States.





On April 26, 2001, we filed a lawsuit against Microsoft Corporation in the United States District Court for the Northern District of California alleging that certain
Microsoft technology infringes one of our United States patents. Through subsequent motions and additional complaints, the lawsuit now encompasses numerous additional United States patents. Microsoft has denied all the allegations asserted in the
proceedings. In addition, Microsoft has asserted a counterclaim that we infringe certain Microsoft United States Patents. These Microsoft patents relate to the downloading of software and we do not believe that these patents are significant to our
business.





The legal proceedings are in the early stages and while the litigation is pending, significant
financial resources and our managements attention will be diverted for this purpose. Discovery has started in the case and the parties have exchanged documents and infringement contentions. We believe there will likely be a Markman hearing on
at least a portion of the patents under dispute starting in the first two quarters of 2003, but this timing may be delayed.





Litigation is subject to inherent uncertainties. In addition, cases such as this are likely to involve issues of law that are evolving, presenting further uncertainty. There is no assurance that we will be successful in this lawsuit
against Microsoft. The claims under one or more of our patents might be narrowed or one or more of the patents might be found to be invalid. An overall unfavorable result would have a significant adverse affect on our results of operations by
potentially reducing the value of our intellectual property.





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





Our ability to license our intellectual property
depends on the economic strength and budgetary cycles of potential licensees. Our potential licensees may currently or in the future face unfavorable market conditions and budgetary pressures. In the past, 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.





Government regulation and requirements could influence our sales.





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, slow our growth or otherwise seriously harm our business and results of operations.




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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. Competition is very strong and we expect this competition to persist and intensify in the future. If we fail to build our competitive position, our revenues will grow more slowly than anticipated or not at all, and we may be
unable to build sufficient market share. These competitors could include Microsoft, Real Networks, IBM and Matsushita.





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 customer
relationships that they could leverage, including relationships with many of our potential licensees.





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. For example, in 2001 we incurred an $10.0 million charge for the impairment of goodwill and other intangible assets
derived from the acquisition of PublishOne, Inc.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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





| |  | problems combining the purchased operations, technologies or products with ours;
| | - | --------------------------------------------------------------------------------




| |  | unanticipated costs;
| | - | --------------------




| |  | diversion 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 and other
risks.





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





Digital rights management and trusted computing are emerging fields in which our competitors
and other parties may obtain patents or other proprietary rights that would prevent, limit or interfere with our and our licensees ability to make, use, or sell products. Furthermore, companies are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. Our licensees and we 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, recommending, or using products, technology or services that incorporate the infringed intellectual property;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------




| |  | obtain a license from the holder of the infringed intellectual property right;
| | - | ------------------------------------------------------------------------------



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| |  | redesign products, technology or services to avoid infringement; or
| | - | -------------------------------------------------------------------




| |  | cross-license our patents with the party alleging infringement.
| | - | ---------------------------------------------------------------




In the past, we have received notices alleging potential infringement.





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. TAU Systems has made no further allegations regarding our software, but representatives of TAU Systems have recently contacted us regarding a sale or exclusive license of TAU Systems patents. 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.





To successfully license our intellectual property 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.
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 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, some of our employees hold options with exercise prices well
above the current fair market value of our stock.





Failure to appropriately manage the sizing of our organization could seriously harm
our business and operating results.





Any failure to manage the sizing of our organization effectively could
seriously harm our business and operating results. As of June 30, 2002, our headcount was reduced to 39 full-time employees. Our headcount had been reduced from a high of 358 in February 2001 and from approximately 116 as of March 31, 2002. These
reductions in our workforce may negatively affect morale and result in qualified employees leaving.





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.







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We are subject to 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-K for the year ended December 31, 2001. We are also a third-party defendant to
the pending lawsuit between plaintiff Fabrizio Caffarelli et. al. and defendants Citibank, N.A. and Equiserve Limited Partnership described in Part II, Item 1Legal Proceedings of our Report on Form 10-K for the year ended December
31, 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, we have implemented 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 such an acquisition 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. 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.





Stockholders may also experience dilution due to stock options or other securities granted to employees related to their compensation.





Industry-Related Risks





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





Acceptance and use of DRM and trusted computing technologies for digital commerce may not develop at a rapid rate, and a sufficiently
broad base of customers may not adopt, and continue to use, the Internet and other online services as a medium for digital commerce. Because digital commerce will drive demand for our technology and demand for licensing our patents, 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 digital commerce 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;
| | - | --------------------------------------------------------------------------------------------------------------------



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| |  | 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.
| | - | -------------------------------------------------------------------------------------------------




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





The United States and various foreign governments generally restrict exports of software products utilizing encryption
technology. Although we have obtained approval to export our reference technology, changes in export laws and regulations may impose restrictions that affect our ability to distribute reference technology internationally, limiting our ability to
gain revenue and grow our business.





It is also possible that Congress or individual states could enact laws that
limit or change the protection or enforcement of intellectual property.





Item 3.    Qualitative and Quantitative Disclosures about Market Risk.





We intend to license our intellectual property 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.





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 June 30, 2002 and December 31, 2001, our cash and cash equivalents consisted primarily of demand deposits and money market funds held by two large institutions in the United States.




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PART II.    
OTHER INFORMATION





Item 1.    Legal Proceedings.





Microsoft





On April
26, 2001, InterTrust filed a lawsuit against Microsoft Corporation in the United States District Court for the Northern District of California alleging that certain Microsoft technology infringes one of its United States patents. Through subsequent
motions and additional complaints, the lawsuit now encompasses numerous additional InterTrust United States patents. Microsoft has denied all the allegations asserted in the proceedings. In addition, Microsoft has asserted a counterclaim that
InterTrust infringes certain Microsoft United States Patents. These Microsoft patents relate to the downloading of software and InterTrust does not believe that these patents are significant to InterTrusts business.





The legal proceedings are in the early stages and while the litigation is pending, significant financial resources and management
attention will be diverted for this purpose. Discovery has started in the case and the parties have exchanged documents and infringement contentions. InterTrust believes there will likely be a Markman hearing on at least a portion of the patents
under dispute in the first two quarters of 2003, but this timing may be delayed.





Litigation is subject to
inherent uncertainties. In addition, cases such as this are likely to involve issues of law that are evolving, presenting future uncertainty. There is no assurance that InterTrust will be successful in this lawsuit against Microsoft. The claims
under one or more of InterTrusts patents might be narrowed or one or more of the patents might by found to be invalid. An unfavorable result, whether interim or final, would have a significant adverse affect on InterTrusts results of
operations by potentially reducing the value of our intellectual property.





Class Action Litigation





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. InterTrust believes that the allegations against it are wholly
without merit. However, there is no assurance that InterTrust will be successful in the defense of this lawsuit, and an unfavorable result could have an adverse affect on InterTrusts financial position, results of operations, or cash flows.





Equiserve





On December 17, 2001 and July 25, 2002, respectively, Equiserve Limited Partnership (Equiserve) and Citibank, N.A. (Citibank) sued InterTrust in the United States District Court for the Southern District of
New York, thus bringing InterTrust (as a third-party defendant) into a pending case between plaintiff Fabrizio Caffarelli et al. and defendants Citibank. and Equiserve. In the original case, the Caffarelli plaintiffs are seeking approximately $13
million in damages arising out of Citibanks and Equiserves alleged two month delay in removing the restrictive legends from the Caffarelli plaintiffs stock certificates. In the new case, Equiserve and Citibank have alleged that
InterTrust negligently failed to timely deliver an opinion of counsel letter to Equiserve that was necessary for Equiserve to remove the restrictive legends from the Caffarelli plaintiffs stock certificates. As a result, Equiserve and Citibank
have alleged that, to the extent Equiserve and Citibank are held liable for any damages to the Caffarelli plaintiffs in the original case, InterTrust is liable to Equiserve and




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Citibank for such damages. InterTrust has reviewed copies of the complaints and has conducted a preliminary factual analysis. Based on this review and analysis, InterTrust believes that there was
no delay on InterTrusts part in rendering the opinion of counsel letters. Accordingly, the Company believes that the allegations against it are wholly without merit. However, there is no assurance that InterTrust will be successful in the
defense of this lawsuit, and an unfavorable result could have an adverse affect on InterTrusts financial position, results of operations, or cash flows.





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 2,645,000 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. In addition, we sold 175,244 shares of common
stock at $35 per share in connection with the exercise of the underwriters over-allotment option. The total aggregate proceeds from these transactions were $98.7 million. Underwriters discounts and other related costs were approximately
$6.4 million resulting in net proceeds $92.3 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 million resulting in net proceeds $123.4 million.





The net proceeds were used for working capital and
general corporate purposes. The remaining proceeds were predominantly held in cash, cash equivalents and marketable securities at June 30, 2002.





Item 3.    
Defaults Upon Senior Securities.





None.





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





None.





Item 5.    
Other Information.





None.





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





(a)  Exhibits.





Exhibit No.

Description3.1

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).




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Exhibit No.


Description3.2
***

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, 2000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).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).




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Exhibit No.


Description10.19
**

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Incorporated herein by reference
to Exhibit 10.23 to the Registrants Form 10-Q filed November 14, 2001.10.24


Employment Agreement by and between the Company and David Lockwood dated September 25, 2001, incorporated herein by reference to Exhibit 10.24 to the
Registrants Form 10-K filed on April 1, 2002.99.1


Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for David Lockwood.99.2


Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Greg Wood.


---

|* | 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 Form S-1 (File No. 333-32484).
|-- | --------------------------------------------------------------------------------------------------------------------------------------------

|*** | Incorporated herein by reference to the exhibit of the same number in the Registrants Form 10-Q for the quarter ended September 30, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|**** | Incorporated herein by reference to the exhibit of the same number in the Registrants Form 10-K for the year ended December 31, 2000.
|---- | --------------------------------------------------------------------------------------------------------------------------------------

| | Confidential treatment requested.
|- | ---------------------------------




(b)Reports on Form 8-K





On May 2, 2002, the
Company filed a report on Form 8-K in which it disclosed that Edmund Fish resigned from his position as Executive Vice President, President of the MetaTrust Utility, and a member of the Board of Directors of Company.





(c)  Exhibits





See (a)(3) above.





(d)  Financial Statements
Schedule





See (a)(2) above.




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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 CORPORATIONBy:

/s/    DAVID
LOCKWOODDavid LockwoodExecutive Vice Chairman of the BoardChief Executive Officer, and President(Principal Executive Officer)By:

/s/    GREGORY S.
WOODGregory S. WoodChief Financial Officer(Principal Financial and Accounting Officer)





Date: August 14, 2002




30