UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2003

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

For the transition period from to

Commission file number: 0-27358

DOCUMENTUM, INC.

(exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		95-4261421 (I.R.S. Employer Identification No.)

6801 Koll Center Parkway, Pleasanton, California (Address of principal executive offices)		94566-7047 (Zip Code)

(Registrant’s telephone number, including area code): (925) 600-6800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(Title of Class)

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X] No [ ]

The number of outstanding shares of the registrant’s Common Stock, par value $0.001 per share, was 51,130,521 on October 31, 2003.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEET
		CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
EXHIBIT 3.4
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

FORM 10-Q

Index


PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheet as of September 30, 2003 and December 31, 2002	Page 3
	Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2003 and 2002	Page 4
	Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2003 and 2002	Page 5
	Notes to Condensed Consolidated Financial Statements	Page 6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 39
Item 4.	Controls and Procedures	Page 41
PART II	OTHER INFORMATION
Item 5.	Other Information	Page 41
Item 6.	Exhibits and Reports on Form 8-K	Page 42
Signature		Page 42

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands; unaudited)


			September 30,			December 31,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	111,625		$	112,069
	Marketable securities			171,689			141,056
	Accounts receivable, net of allowances			51,225			50,803
	Other current assets			27,428			25,707

		Total current assets		361,967			329,635
Property and equipment, net				18,488			25,949
Goodwill				90,145			93,481
Identifiable purchased intangibles, net				15,136			24,818
Other assets				20,231			18,226

			$	505,967		$	492,109

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	8,792		$	2,782
	Accrued liabilities			44,467			71,520
	Deferred revenue			44,886			37,463

		Total current liabilities		98,145			111,765
Long-term convertible debt				125,000			125,000
Other long-term liabilities				6,633			109

		Total liabilities		229,778			236,874
Stockholders’ equity:
	Common stock			50			48
	Additional paid-in capital			337,523			317,539
	Deferred stock-based compensation			(3,446	)		(7,067	)
	Accumulated deficit			(61,817	)		(58,315	)
	Accumulated other comprehensive income			3,879			3,030

	Total stockholders’ equity			276,189			255,235

	Total liabilities and stockholders’ equity		$	505,967		$	492,109

See accompanying notes to condensed consolidated financial statements.

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


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenue:
	License		$	36,012		$	28,910		$	103,125		$	81,039
	Service			37,454			27,417		$	105,555			79,858

		Total revenue		73,466			56,327			208,680			160,897

Cost of revenue:
	License			5,538			2,465			15,137			6,404
	Service			16,134			12,126			44,200			37,351

		Total cost of revenue		21,672			14,591			59,337			43,755

Gross profit				51,794			41,736			149,343			117,142

Operating expense:
	Sales and marketing			28,571			23,753			85,403			70,384
	Research and development			11,218			8,905			34,479			27,688
	General and administrative			7,061			6,020			21,935			18,154
	Restructuring costs			45			—			12,024			1,043
	Amortization of purchased intangibles			565			75			1,776			224

		Total operating expense		47,460			38,753			155,617			117,493

Income (loss) from operations				4,334			2,983			(6,274	)		(351	)
Interest income				1,247			1,606			4,020			3,511
Interest expense				(1,600	)		(1,610	)		(4,793	)		(3,180	)
Other expense, net				(153	)		(118	)		(393	)		(206	)

Income (loss) before income taxes				3,828			2,861			(7,440	)		(226	)
Provision for (benefit from) income taxes				2,947			858			(3,937	)		(68	)

Net income (loss)			$	881		$	2,003		$	(3,503	)	$	(158	)

Basic income (loss) per share			$	0.02		$	0.05		$	(0.07	)	$	—
Diluted income (loss) per share			$	0.02		$	0.05		$	(0.07	)	$	—
Shares used to compute income (loss) per share:
Basic				49,866			39,760			49,143			39,527
Diluted				53,044			41,152			49,143			39,527

See accompanying notes to condensed consolidated financial statements.

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


					Nine Months Ended September 30,

					2003			2002

Cash flows from operating activities:
	Net loss				$	(3,503	)	$	(158	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Loss on sale and disposal of fixed assets				201			1,809
		Stock-based compensation expense				2,633			—
		Depreciation and amortization				9,079			11,027
		Amortization of purchased intangibles				9,681			715
		Amortization of debt issuance costs				611			210
		Provision for doubtful accounts				1,811			1,870
		In-process research and development write-off				—			25
		Changes in operating assets and liabilities:
			Accounts receivable			(2,226	)		212
			Other current assets and other assets			(1,001	)		(2,422	)
			Accounts payable			6,011			798
			Accrued liabilities			(8,406	)		(4,733	)
			Deferred revenue			7,423			2,762

				Net cash provided by operating activities		22,314			12,115

Cash flows from investing activities:
	Purchases of investments					(279,052	)		(320,636	)
	Sales and maturities of investments					247,918			208,710
	Purchases of property and equipment					(3,973	)		(4,333	)
	Proceeds from sale of property and equipment					1,861			—
	Cash used in acquisition of businesses, net of cash acquired					(12,082	)		(1,143	)

				Net cash used in investing activities		(45,328	)		(117,402	)

Cash flows from financing activities:
	Proceeds from issuance of common stock					20,974			10,584
	Payments on capital lease obligations					(41	)		(55	)
	Net proceeds from convertible debt offering					—			121,250

				Net cash provided by financing activities		20,933			131,779

Effect of exchange rate changes						1,637			1,332

Net increase (decrease) in cash and cash equivalents						(444	)		27,824
Cash and cash equivalents at beginning of period						112,069			48,420

Cash and cash equivalents at end of period					$	111,625		$	76,244

See accompanying notes to condensed consolidated financial statements.

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

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions in Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as described in Note 5, have been recorded as necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our 2002 Annual Report on Form 10-K. The consolidated results of operations for the three and nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results that may be expected for any future period.

Note 2. Summary of Significant Accounting Policies

Operations

Documentum, Inc. was incorporated in the state of Delaware in January 1990. We provide enterprise content management (ECM) solutions that enable organizations to unite teams, content and associated business processes. Our integrated set of content, compliance and collaboration solutions support the way people work, from initial discussion and planning through design, production, marketing, sales, service and corporate administration. This business-critical content includes everything from documents and discussions to email, Web pages, records and rich media. The Documentum platform makes it possible for companies to distribute all of this content across internal and external systems, applications and user communities.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Documentum and its wholly-owned subsidiaries after elimination of intercompany accounts and transactions.

Use of Estimates

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

Cash and Cash Equivalents and Marketable Securities

We consider all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. The following table details our cash and cash equivalents at September 30, 2003 and December 31, 2002 (in thousands):


	September 30,		December 31,
	2003		2002

Cash	$	6,389	$	3,530
Money market and cash equivalents		105,236		108,539

	$	111,625	$	112,069

In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, our marketable securities are classified as “available-for-sale” and are

stated at fair value based on quoted market prices, with the unrealized gains and losses, net of related tax effects, reported as a component of stockholders’ equity. We intend to maintain a liquid portfolio and have the ability to redeem our marketable securities at their carrying amounts. Therefore, all marketable securities at September 30, 2003 have been classified as current.

Foreign Currency and Derivative Instruments

Assets and liabilities of our foreign subsidiaries for which the local currency is the functional currency are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the actual current exchange rates prevailing at the time of each transaction. Gains and losses from the translation are included in accumulated other comprehensive income. Gains and losses resulting from remeasuring monetary asset and liability accounts of foreign subsidiaries for which the functional currency is the U.S. dollar are included in other expense, net. We incurred immaterial foreign currency remeasurement gains in the three months ended September 30, 2003 and 2002. We recorded foreign currency remeasurement losses of approximately $0.3 million and $0.1 million in the nine months ended September 30, 2003 and 2002, respectively.

We enter into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities denominated in a foreign currency. These contracts require us to exchange currencies at rates agreed upon at the contract’s inception. The principal foreign currencies hedged were the British Pound, Japanese Yen and Euro. A foreign currency forward exchange contract acts as an economic hedge as the gains and losses on these contracts typically offset or partially offset gains and losses on the assets, liabilities, and transactions being hedged. We do not designate foreign exchange forward contracts as accounting hedges and do not hold or issue financial instruments for speculative or trading purposes. Foreign exchange forward contracts are accounted for on a mark-to-market basis, with unrealized gains or losses recognized in the current period. Unrealized gains and losses were insignificant for both the three and nine months ended September 30, 2003 and 2002.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. We calculate depreciation using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over their estimated useful life or the life of the lease, whichever is shorter.

In connection with the renegotiation of a lease agreement, we sold and abandoned certain property and equipment resulting in cash proceeds of $1.9 million and a net gain of approximately $0.1 million during the three months ended September 30, 2003. Total net losses on the sale and disposal of fixed assets for the nine months ended September 30, 2003 and 2002 were $0.2 million and $1.8 million, respectively.

Software Development Costs

SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, requires the capitalization of certain software development costs once technological feasibility is established. To date, the period between achieving technological feasibility, which we have defined as the establishment of a working model, and the general availability of such software has been short and, accordingly, software development costs are expensed as incurred and are included in research and development costs.

In accordance with the provisions of Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, certain costs of computer software developed or obtained for internal use have been capitalized. The estimated useful life of the software costs capitalized is evaluated for each specific project and ranges from one to five years. We have capitalized costs in the amount of approximately $0.2 million for the three months ended September 30, 2003 and 2002, and approximately $0.9 million and $0.7 million for the nine months ended September 30, 2003 and 2002, respectively.

Goodwill and Identifiable Purchased Intangibles

Goodwill is stated at cost and identifiable purchased intangible assets are stated at cost less accumulated amortization. Goodwill is the excess of cost over fair value of the net assets acquired. All of our goodwill at September 30, 2003 is associated with acquisitions completed after June 30, 2001. Goodwill, including workforce intangibles that were subsumed into goodwill, arising from acquisitions that were completed after June 30, 2001 has not been amortized.

The provisions of SFAS No. 142, Goodwill and Other Intangible Assets, require that goodwill and identifiable purchased intangible assets with indefinite useful lives be tested annually for impairment or more frequently if events and circumstances indicate that the assets might be impaired. We completed our annual impairment test during the quarter ended September 30, 2003 and did not record an impairment charge as a result. See Note 3 of notes to condensed consolidated financial statements for additional information related to our annual impairment test.

Identifiable purchased intangible assets with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are one to five years).

Long-lived Assets, Excluding Goodwill

Our long-lived assets, excluding goodwill, consist of property and equipment and other purchased intangibles. We periodically review our long-lived assets for impairment in accordance with SFAS No. 144. For assets to be held and used, we initiate this review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted net cash flows (without interest charges) that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value.

Assets to be disposed of and for which we have committed to a plan of disposal of such assets, whether through sale or abandonment, are reported at the lower of their carrying amount or their fair value less cost to sell.

Warranty Reserve

We generally offer a 90-day warranty from shipment of the software. We estimate the costs that we expect to incur under our warranty obligations and record a liability in the amount of such costs at the time of the transaction. Factors that affect our warranty liability include the number of installed seats, historical and anticipated rates of warranty claims and cost per claim, as well as the introduction of new products or versions of existing products. We regularly assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

The following table summarizes changes in our warranty reserve during the nine months ended September 30, 2003 (in thousands):


Balance as of December 31, 2002	$	690
Provisions made during the period		199
Actual cost incurred during the period		(438	)

Balance as of September 30, 2003	$	451

Deferred Revenue

Deferred revenue primarily relates to maintenance and support agreements that have been paid for by customers prior to the performance of those services. Generally, the services will be provided within twelve months from the

transaction date. Payments received in advance of revenue recognition for license fees are recorded as deferred revenue.

Stock-based Compensation Plans

We apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for our stock-based compensation plans.

We have also included the disclosures prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation.

The following table illustrates the effect on net income (loss) and income (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):


			Three Months Ended September 30,						Nine Months Ended September 30,

			2003			2002			2003			2002

Net income (loss), as reported			$	881		$	2,003		$	(3,503	)	$	(158	)
Add:
	Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			813			—			2,633			—
Deduct:
	Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(8,725	)		(9,551	)		(30,107	)		(43,470	)

Pro forma net loss			$	(7,031	)	$	(7,548	)	$	(30,977	)	$	(43,628	)

Income (loss) per share:
		Basic—as reported	$	0.02		$	0.05		$	(0.07	)	$	(0.00	)

		Basic—pro forma	$	(0.14	)	$	(0.19	)	$	(0.63	)	$	(1.10	)

		Diluted—as reported	$	0.02		$	0.05		$	(0.07	)	$	(0.00	)

		Diluted—pro forma	$	(0.14	)	$	(0.18	)	$	(0.63	)	$	(1.09	)

Net Income (Loss) Per Share and Pro Forma Net Loss Per Share

Basic net income (loss) per share and basic pro forma net loss per share, as if we had applied the fair value recognition provisions of SFAS No. 123, are computed using the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share and diluted pro forma net loss per share are computed using the weighted average number of shares of common stock and, when dilutive, potential shares from options to purchase common stock using the treasury stock method. Diluted net income (loss) per share and diluted pro forma net loss per share also give effect, when dilutive, to the conversion of our convertible debt, using the if-converted method.

The following is a reconciliation of the number of shares used in both the basic and diluted income (loss) per share calculation and the pro forma diluted net loss per share computations (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,

	2003		2002		2003		2002

Shares used in basic income (loss) per share		49,866		39,760		49,143		39,527

Effect of dilutive potential common shares resulting from stock options		3,178		1,392		—		—

Shares used to compute diluted income (loss) per share		53,044		41,152		49,143		39,527

Weighted average options to purchase 7,191,283 and 9,424,881 shares of common stock at prices ranging from $0.05 to $46.75 and $0.50 to $56.50 were outstanding during the three months ended September 30, 2003 and 2002, respectively, and 7,862,630 and 9,482,063 shares of common stock at prices ranging from $0.05 to $56.50 and $0.50 to $56.50 were outstanding during the nine months ended September 30, 2003 and 2002, respectively, but were excluded from the computation of diluted net loss per share if either the option’s exercise price was greater than the average market price of the common stock or inclusion of such options would have been anti-dilutive. Weighted average shares issuable upon conversion of convertible debt have been excluded for all periods presented because the inclusion of such shares would have been anti-dilutive.

Deferred Stock-based Compensation

The Company recorded deferred stock-based compensation totaling approximately $7.3 million related to the acquisition of eRoom Technology, Inc. This amount is amortized in accordance with Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, over the vesting period of the individual options which range from 1 to 4 years.

Revenue Recognition

Our revenue is derived from the sale of perpetual licenses for our enterprise content management solutions and related services, which include maintenance and support, consulting and education services. We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions and related accounting literature. Revenue from license arrangements is recognized upon contract execution, provided all shipment obligations have been met, fees are fixed or determinable, and collection is determined as being probable. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence of the fair value (VSOE) of the undelivered element until delivery occurs. If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. We consider fees on transactions with payment terms of up to 270 days from the contract execution date to be fixed or determinable. In the event payment terms exceed 270 days, we recognize revenue when it becomes due and payable as we do not consider the fees to be fixed or determinable. We have a history of successfully collecting under the original payment terms for transactions with similar types of customers and similar economics, without providing concessions in arrangements with payment terms up to 270 days. License revenue from resellers or distributors is recognized, net of fees, when there is evidence of an arrangement with the end-user or we have executed a contract directly with the reseller or distributor which identifies the end-user, and all other revenue recognition criteria are met. We recognize revenue from sales of third party products on a gross basis if we participate in price negotiations, ship the products, and maintain collection risk of the receivable. Revenue from annual maintenance and support agreements are deferred and recognized on a straight-line basis over the term of the contract. Revenue from consulting and training services are recognized as the services are performed and are typically on a time and materials basis. Such services primarily consist of implementation services related to the installation of our products and do not include significant customization, modification, or development of the underlying software code.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. We deposit substantially all of our cash with four financial institutions.

As stated in our investment policy, we are averse to principal loss and seek to preserve our invested funds by limiting credit risk, default risk, and market risk. We place our investments with high credit quality issuers and limit the amount of credit exposure to any one issuer.

We generally do not require collateral for our accounts receivable and maintain reserves for potential credit losses. At September 30, 2003 and 2002, no one customer comprised 10% or more of accounts receivable.

Income Taxes

We use the asset and liability method to account for income taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period in which the enactment date occurred. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

Fair Value of Financial Instruments

The fair value of our cash and cash equivalents, marketable securities, receivables, accounts payable and accrued liabilities approximate their carrying value due to the short-term nature of these instruments. The fair values of our capital lease obligations approximate their carrying values based upon current market rates of interest. The fair value of our convertible debt was approximately $135.0 million, based on the quoted market price of the convertible debt on September 30, 2003.

Advertising

We expense advertising costs as incurred. We have incurred an insignificant amount of advertising costs in the three months ended September 30, 2003 and expensed approximately $0.2 million in the three months ended September 30, 2002. Advertising expenses were approximately $0.2 million and $0.3 million for the nine months ended September 30, 2003 and 2002, respectively. Advertising expense is included in sales and marketing expense in the accompanying Condensed Consolidated Statement of Operations.

Reclassifications

Certain prior period amounts have been reclassified on the Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flow to conform to the current period presentation.

Note 3. Goodwill and Identifiable Purchased Intangible Assets

Goodwill

The following table presents the changes in goodwill for our one reporting unit during the nine months ended September 30, 2003 (in thousands):


Balance as of December 31, 2002	$	93,481
Effect of exchange rate change		497
Adjustments		(3,833	)

Balance as of September 30, 2003	$	90,145

Adjustments to goodwill in the amount of approximately $3.8 million were primarily related to purchase price adjustments that were made in connection with the acquisitions that were consummated during the fourth quarter of fiscal 2002.

The provisions of SFAS No. 142, Goodwill and Other Intangible Assets, require that goodwill and purchased intangible assets with indefinite useful lives be tested annually for impairment using a two-step process and more frequently if events and circumstances indicate that the assets might be impaired. The first step compares the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and no further testing is required. The second step is performed if the carrying amount of reporting unit goodwill exceeds its implied fair value, then an impairment loss

shall be recognized in an amount equal to that excess. We consider ourselves to be a single reporting unit and therefore any impairment is measured based upon the fair value of the business as a whole. During the quarter ended September 30, 2003, as part of our annual impairment test, we completed the first step of the impairment test measured as of August 1, 2003. This first test did not indicate impairment and, therefore, the second step of the impairment test was unnecessary.

Identifiable Purchased Intangible Assets

Amortization of identifiable purchased intangible assets with finite lives was approximately $3.1 million and $0.2 million for the three months ended September 30, 2003 and 2002, respectively, and approximately $9.7 million and $0.6 million for the nine months ended September 30, 2003 and 2002, respectively. Of the approximately $9.7 million and $0.6 million of amortization expense recognized in the nine months ended September 30, 2003 and 2002, respectively, approximately $7.9 million and $0.4 million, respectively, related to the amortization of technology related identifiable purchased intangible assets and was included as cost of license revenue in the respective periods. The remaining amortization of approximately $1.8 million and $0.2 million, respectively, related to the amortization of non-technology related identifiable purchased intangible assets and was recognized as operating expense in the nine months ended September 30, 2003 and 2002, respectively.

Note 4. Convertible Debt

On April 5, 2002, we sold $125.0 million (the “face value”) in senior convertible notes that mature on April 1, 2007 (the “Notes”). The Notes bear interest at a rate of 4.5% per annum. We received proceeds of $121.3 million, net of underwriter debt issuance costs of $3.7 million. We also incurred debt issuance costs totaling $0.4 million comprised of legal, accounting, and various other fees relating to the offering. Debt issuance costs are being amortized using the effective interest rate method through April 5, 2007. Holders of the Notes are entitled to convert the Notes, at any time after April 5, 2002, and before the close of business on April 1, 2007, subject to prior redemption or repurchase of the Notes, into shares of common stock at a conversion price of $30.02 per share. We may redeem the Notes on or after April 5, 2005. The Notes will effectively rank behind all other secured debt to the extent of the value of the assets securing those debts. The Notes do not contain any restrictive financial covenants.

Note 5. Restructuring Charges

In January 2003, we adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred and establishes that fair value is the means for initial measurement of the liabilities. During the first quarter of 2003, we recognized approximately $11.0 million in estimated costs, net of sublease income, in the United States and Europe as a result of abandoning certain facilities. Approximately $10.1 million of the estimated costs are related to one large facility in Europe that management has determined would not be utilized going forward. We worked with external real estate experts in each of the markets where the properties are located to determine the best estimate of sublease income. We did not estimate any sublease income in connection with our exit of the facility in Europe that resulted in a $10.1 million restructuring charge. This determination was based on the various restrictions that are included in the existing lease agreement that limit our ability to sublease the facility. This determination was also impacted by current and forecasted commercial real estate rates in the area.

In addition to these facilities exit costs, we also incurred approximately $1.3 million of severance and benefits-related restructuring costs in the first quarter of 2003 for the involuntary termination of 39 legacy Documentum employees, of which 36 were based in the United States and the remainder were located internationally. These charges were incurred as a result of management determining that certain synergies resulted from combining workforces that were assumed during our recent acquisition activity in fiscal 2002. Severance and benefit related costs associated with terminated employees of the acquired enterprise during the fourth quarter of fiscal 2002 were included in the cost of the respective acquisition.

The following table summarizes the components of the above restructuring charge, the cash payments, non-cash activities, and the remaining accrual as of and for the nine months ended September 30, 2003 (in thousands):


	Severance
	and			Other
	Benefits			Charges			Total

First quarter 2003 restructuring charges	$	1,245		$	11,020		$	12,265
Cash paid		(1,162	)		(1,896	)		(3,058	)
Non-cash activity		—			15			15

Restructuring accrual balance as of September 30, 2003	$	83		$	9,139		$	9,222

The remaining reserve balance of $9.2 million relating to the restructuring charge recognized during the nine months ended September 30, 2003 consists of $2.6 million of current liabilities to be paid out during fiscal 2003 and in the first quarter of fiscal 2004 and $6.6 million of long-term liabilities related to the fair value of remaining lease obligations on excess facilities, net of sublease income, to be paid out through fiscal 2007.

The remaining restructuring accrual relating to our restructuring activity in fiscal 2001 and 2002 of approximately $0.1 million relates to remaining facility costs net of sublease income. We expect to pay remaining facility obligations over the remaining lease terms, which expire in fiscal 2005.

Note 6. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other non-owner changes in stockholders’ equity, including foreign currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities. Our total comprehensive income (loss) was as follows (in thousands):


		Three Months Ended September 30,					Nine Months Ended September 30,

		2003			2002		2003			2002

Net income (loss)		$	881		$	2,003	$	(3,503	)	$	(158	)
Other comprehensive income (loss), net of tax:
	Unrealized (loss) gain on available for sale investments		(97	)		745		(125	)		1,111
	Foreign currency translation adjustment		11			133		734			932

Total comprehensive income (loss), net of tax		$	795		$	2,881	$	(2,894	)	$	1,885

Note 7. Segment Reporting

We are principally engaged in the design, development, marketing and support of ECM solutions. Substantially all of our revenue results from the sale of our software products and related services. Our chief operating decision-making group reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, we consider ourselves to be in a single reporting segment, specifically the licensing, implementation and support of our software. We do not prepare reports for, or measure the performance of, our individual software applications and, accordingly, we have not presented revenue or any other related financial information by individual software product.

We evaluate the performance of our geographic regions based on revenue and gross margin only. We do not assess the performance of our geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. Therefore, geographic information is presented for revenue, gross margin, and long-lived assets.

Revenue is generally attributable to geographic areas based on the country in which the customer is domiciled. For the three and nine months ended September 30, 2003 and 2002, no single customer accounted for more than 10% of total revenue.

Long-lived assets are attributable to geographic areas based on where the assets are located. The following table presents a breakdown of total revenue and long-lived assets by geographic region (in thousands):


			Total Cost of		Long-Lived
	Total Revenue		Revenue		Assets

As of and for the three months ended September 30, 2003:
North America	$	48,904	$	14,505	$	123,933
EMEA		21,141		5,679		1,750
Asia/Pacific		3,036		1,430		856
Other		385		59		—

Total	$	73,466	$	21,672	$	126,539


			Total Cost of		Long-Lived
	Total Revenue		Revenue		Assets

As of and for the three months ended September 30, 2002:
North America	$	33,047	$	8,966	$	33,195
EMEA		18,594		4,705		2,404
Asia/Pacific		3,983		863		729
Other		703		57		—

Total	$	56,327	$	14,591	$	36,328


			Total Cost of		Long-Lived
	Total Revenue		Revenue		Assets

As of and for the nine months ended September 30, 2003:
North America	$	130,207	$	38,039	$	123,933
EMEA		66,996		17,174		1,750
Asia/Pacific		9,978		3,907		856
Other		1,499		218		—

Total	$	208,680	$	59,337	$	126,539


			Total Cost of		Long-Lived
	Total Revenue		Revenue		Assets

As of and for the nine months ended September 30, 2002:
North America	$	98,214	$	27,944	$	33,195
EMEA		54,150		13,689		2,404
Asia/Pacific		7,468		2,038		729
Other		1,065		84		—

Total	$	160,897	$	43,755	$	36,328

Note 8. Subsequent Event

On October 13, 2003, Documentum entered into an Agreement and Plan of Merger, or merger agreement, by and among EMC Corporation, Elite Merger Corporation, a wholly owned subsidiary of EMC, and Documentum. Pursuant to the merger agreement, Elite Merger Corporation will merge with and into Documentum, with the result that Documentum shall be the surviving corporation and shall become a wholly owned subsidiary of EMC. As a result of the merger, each share of Documentum common stock issued and outstanding immediately prior to the effective time of the merger shall be converted into the right to receive 2.175 shares of EMC common stock. In addition, EMC will assume all options or other rights to purchase capital stock of Documentum outstanding under Documentum’s existing stock option plans, including Documentum’s stock purchase plans (other than options granted under the 1995 Non-Employee Directors’ Stock Option Plan) and Documentum’s convertible debt. The stock options granted under the 1995 Non-Employee Directors’ Stock Option Plan will accelerate and fully vest immediately prior to the effective time of the merger and, if not exercised prior to the merger, will be cancelled. The consummation of the merger is subject to the approval of the stockholders of Documentum, expiration or termination of certain waiting periods under United States and applicable foreign antitrust laws,

the declaration of effectiveness of the Registration Statement on Form S-4 filed by EMC with the Securities and Exchange Commission and other customary closing conditions. In addition, if the merger is terminated under specified circumstances, Documentum may be required to pay EMC a termination fee under the merger agreement in the amount of $55.0 million, plus expenses. This termination fee could discourage other potential acquirors from seeking to enter into a business combination with Documentum. Under certain other circumstances, if the merger is not completed, Documentum may be required to pay the EMC’s fees and expenses, up to $2.5 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion contains forward-looking statements regarding our business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein as well as those discussed under the caption “Risk Factors”. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. Readers are also urged to carefully review and consider disclosures made in the Joint Proxy Statement/Prospectus contained in the Registration Statement filed on Form S-4 by EMC Corporation on October 28, 2003 (File No. 333-110017) regarding our proposed merger with EMC.

Overview

With a single platform, Documentum enables people to collaboratively create, manage, deliver, and archive unstructured content that drives critical business operations.

We provide enterprise content management (ECM) solutions that enable organizations to unite teams, content and associated business processes. Our integrated set of content, compliance and collaboration solutions support the way people work, from initial discussion and planning through design, production, marketing, sales, service and corporate administration. This business-critical content includes everything from documents and discussions to email, Web pages, records and rich media. The Documentum platform makes it possible for companies to distribute all of this content across internal and external systems, applications and user communities. As a result, our customers are able to harness corporate knowledge, accelerate their time to market, increase customer satisfaction, enhance supply chain efficiencies and reduce operating costs, thereby improving their overall competitive advantage.

From our inception in 1990 through December 1992, our activities consisted primarily of developing products, establishing infrastructure and conducting market research. We shipped the first commercial version of our Documentum Server product in late 1992, and since that time substantially all of our revenue has been from licenses of our family of ECM system products and related services, which include maintenance and support, education and consulting services.

Since 1993, we have delivered products that enable management of business-critical content and knowledge sharing within an enterprise. These solutions have been largely applied toward accelerating business processes that reduce new product time to market and time to revenue as well as ensure compliance in highly regulated industries. We are leveraging our substantial experience in managing dynamic content for business-critical documents and extending it to facilitate e-business connections.

In fiscal 1999, we evolved from focusing on enterprise document management to focusing on content management to power e-business. As the Internet evolved, we helped existing and new customers alike leverage the Web to conduct business by extending our platform to enable Web content management. Since that time, we have focused mainly on providing a complete content management solution — the ability to manage all of the information that exists inside a company, whether through enterprise document management or Web content management, and the use of that information to drive e-business initiatives aimed at customers, partners and employees. Increasingly, our ECM solutions are being used to accelerate and extend companies’ online presence by delivering active and trusted content to multiple channels. Today, these solutions enable more than 2,500 organizations worldwide to apply trusted content within and between organizations, driving e-business applications that connect employees, customers and business partners. To facilitate this evolution, we introduced Documentum 4i, an open, standards-based ECM platform, in 1999. Because it is an open, standards-based platform, developers outside Documentum are able to easily integrate with the product using the standard set of tools, resulting in a larger number of developers working to build applications on top of our platform. This platform allows for the creation, management and delivery of content to a wide variety of information devices, including the Web, cellular phone, pager, fax machine, printer, CD or PDA device.

In 2000 and 2001, we introduced four packaged solutions (formerly called “Editions” by us) based on our 4i platform. These solutions — Web Content Management, Portal Content Management, B2B Content Management, and Compliance Content Management — offer a tailored mix of core technology from Documentum 4i that can manage volumes of content. Early in 2002, a fifth solution — Digital Asset Management — was released, and later in the year we introduced Documentum 5, the next version of our ECM platform, which enables collaboration, communication, compliance and knowledge-sharing on a global scale. Incorporated within the newly released Documentum 5 platform are two of our newest products — Documentum eRoom Enterprise and Documentum Records Manager. Documentum eRoom Enterprise is the foundation of the now available Collaboration solution, which brings together people, processes, and content with a digital, collaborative workplace. Enterprise Records Management solution was also introduced, featuring Documentum Records Manager as an integrated records management solution that equips organizations to create, safeguard, and access necessary records, relate them to relevant business content, and archive or destroy records according to system-enforced administrative, regulatory, or legal rules. We continue to invest in research and development in order to update our family of products and expand our market focus to deliver products to provide an ECM solution for customers, partners, and employees.

We will continue to license and support the Documentum 4i platform, however, we expect that license and service revenue from Documentum 5 and newer product offerings will account for substantially all of our revenue for the foreseeable future.

On October 13, 2003, Documentum entered into an Agreement and Plan of Merger, or merger agreement, by and among EMC Corporation, Elite Merger Corporation, a wholly owned subsidiary of EMC, and Documentum. Pursuant to the merger agreement, Elite Merger Corporation will merge with and into Documentum, with the result that Documentum shall be the surviving corporation and shall become a wholly owned subsidiary of EMC. As a result of the merger, each share of Documentum common stock issued and outstanding immediately prior to the effective time of the merger shall be converted into the right to receive 2.175 shares of EMC common stock. In addition, EMC will assume all options or other rights to purchase capital stock of Documentum outstanding under Documentum’s existing stock option plans, including Documentum’s stock purchase plans and Documentum’s convertible debt. The consummation of the merger is subject to the approval of the stockholders of Documentum, expiration or termination of certain waiting periods under United States and applicable foreign antitrust laws, the declaration of effectiveness of Form S-4 registration statement filed by EMC with the Securities and Exchange Commission, and other customary closing conditions. The merger is intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. There can be no assurance that the closing conditions to the merger will be met or that the transaction will be consummated. If the transaction is not consummated, Documentum’s business could be substantially harmed due to the pendancy of the transaction.

For more information concerning the merger and related transactions, including risks and uncertainties related to the merger and these transactions, please see the Registration Statement on Form S-4 filed by EMC with the SEC in connection with the merger (File No. 333-110017). Documentum stockholders as of the record date for voting on the merger will also receive a proxy statement/prospectus, which is a part of the Form S-4. The proxy statement/prospectus contains important information about the merger and Documentum stockholders are urged to review it carefully.

Strategic Acquisitions

On November 26, 2002, we acquired privately-held TrueArc Corporation in exchange for consideration totaling approximately $3.8 million, which was comprised of cash consideration of $3.6 million and approximately $0.2 million in acquisition costs. TrueArc was a provider of records management and digital preservation software allowing companies to manage physical and electronic records. Since the time of the acquisition, we have integrated the records management technology acquired in this transaction and the product (currently called Documentum Records Manager) is now part of our comprehensive suite of enterprise content management solutions.

On December 10, 2002, we acquired privately-held eRoom Technology, Inc. in exchange for consideration totaling approximately $118.4 million, which was comprised of 7,772,708 shares of common stock valued at $90.8 million (share value was calculated using an average five-day stock price extending two days before and two days after the terms of the acquisition were publicly announced), cash of $12.6 million, issuance of options to purchase 1,605,108 shares of Documentum common stock valued at approximately $8.1 million, and direct acquisition costs of approximately $6.9 million. eRoom was a provider of business collaboration software products enabling organizations and their employees, customers, suppliers, and other partners to manage their business relationships over the Internet. Since the time of the acquisition, we have integrated the collaboration technology acquired in this transaction and the product (currently called Documentum eRoom Enterprise) is now part of our comprehensive suite of enterprise content management solutions.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 2 of notes to consolidated financial statements included in our 2002 Annual Report on Form 10-K. However, certain of our accounting policies are particularly important to obtaining an understanding of our financial position and results of operations. Application of many of these policies requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses related disclosures. In general, these estimates or judgments are based on historical experience of our management, prevailing industry trends, information provided by our customers, and information available from other outside sources, each as appropriate. Actual results may differ from these estimates under different conditions. We consider our most critical accounting policies to be those policies that are both most important to the portrayal of our financial condition and results of operations, and those that require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements.

Revenue Recognition

Our revenue is derived from the sale of perpetual licenses for our enterprise content management solutions and related services, which include maintenance and support, consulting and education services. We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions and related accounting literature. Revenue from license arrangements is recognized upon contract execution, provided all shipment obligations have been met, fees are fixed or determinable, and collection is determined as being probable. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered element until delivery occurs. If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. We consider fees on transactions with payment terms of up to 270 days from the contract execution date to be fixed or determinable. In the event payment terms exceed 270 days, we recognize revenue when it becomes due and payable as we do not consider the fees to be fixed or determinable. We have a history of successfully collecting under the original payment terms for transactions with similar types of customers and similar economics, without providing concessions in arrangements with payment terms up to 270 days. License revenue from resellers or distributors is recognized, net of fees, when there is evidence of an arrangement with the end-user or we have executed a contract directly with the reseller or distributor which identifies the end-user, and all other revenue recognition criteria are met. We recognize revenue from sales of third party products on a gross basis if we participate in price negotiations, ship the products, and maintain collection risk of the receivable. Revenue from

annual maintenance and support agreements is deferred and recognized on a straight-line basis over the term of the contract. Revenue from consulting and training services is recognized as the services are performed and are typically on a time and materials basis. Such services primarily consist of implementation services related to the installation of our products and do not include significant customization, modification, or development of the underlying software code.

Allowances

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We analyze accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms and practices when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers was to improve or deteriorate, revision to the allowance may be required. To date, actual experience has been consistent with our estimates.

Accounting for Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination was made if the adjustment was related to normal operating expenses. If a future adjustment to the valuation allowance were to relate to a deferred tax item resulting from stock-based compensation, the adjustment to the deferred tax asset would increase additional paid-in capital. Similarly, if a future adjustment to the valuation allowance were attributable to one or more of the acquired companies, the adjustment to the deferred tax asset would result in an increase to goodwill. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future related to normal operating expenses, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Goodwill and Identifiable Purchased Intangibles

Goodwill and identifiable purchased intangible assets are stated at cost less accumulated amortization. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested annually for impairment using a two-step process and more frequently if events and circumstances indicate that the assets might be impaired in accordance with the provisions of SFAS No. 142. The first step compares the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and no further testing is required. The second step is performed if the carrying amount of reporting unit goodwill exceeds its implied fair value, then an impairment loss shall be recognized in an amount equal to that excess. We consider ourselves to be a single reporting unit and therefore any impairment is measured based upon the fair value of the business as a whole. During the quarter ended September 30, 2003, as part of our annual impairment test, we completed the first step of the impairment test measured as of August 1, 2003. This first test did not indicate impairment and, therefore, the second step of the impairment test was unnecessary.

Long-lived Assets, Excluding Goodwill

Our long-lived assets consist of property and equipment and other acquired intangibles, excluding goodwill. We periodically review our long-lived assets for impairment in accordance with SFAS No. 144. For assets to be held and used, 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 group is measured by comparison of its carrying

amount to the expected future undiscounted net cash flows (without interest charges) that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value.

Assets to be disposed of and for which we have committed to a plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of their carrying amount or fair value less cost to sell.

Results of Operations

The following table sets forth the condensed consolidated statement of operations expressed as a percentage of total revenue for the periods indicated:


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

Revenue:
	License			49	%		51	%		49	%		50	%
	Service			51	%		49	%		51	%		50	%

		Total revenue		100	%		100	%		100	%		100	%

Cost of revenue:
	License			8	%		4	%		7	%		4	%
	Service			21	%		22	%		21	%		23	%

		Total cost of revenue		29	%		26	%		28	%		27	%

Gross profit				71	%		74	%		72	%		73	%

Operating expense:
	Sales and marketing			39	%		42	%		41	%		44	%
	Research and development			15	%		16	%		17	%		17	%
	General and administrative			10	%		11	%		11	%		12	%
	Restructuring costs			—			—			6	%		—
	Amortization of purchased intangibles			1	%		—			1	%		—

		Total operating expense		65	%		69	%		75	%		73	%

Income (loss) from operations				6	%		5	%		(3	%)		—
Interest income				2	%		3	%		2	%		2	%
Interest expense				(2	%)		(3	%)		(2	%)		(2	%)
Other expense, net				(1	%)		—			—			—

Income (loss) before income taxes				5	%		5	%		(4	%)		—
Provision for (benefit from) income taxes				4	%		1	%		(2	%)		—

Net income (loss)				1	%		4	%		(2	%)		—

As a Percentage of Related Revenue:
Cost of license revenue				15	%		9	%		15	%		8	%
Cost of service revenue				43	%		44	%		42	%		47	%

Revenue

During the three months ended September 30, 2003 revenue increased over the comparable period a year ago as a result of growth in demand for our products driven by our ability to successfully provide the ECM solutions

required by organizations’ software infrastructure needs. Our success in the growing ECM space is attributed to several factors, including our ability to address enterprise content management needs as a result of heightened compliance and regulatory standards across several industries and the ability to offer a comprehensive suite of content management products. Through research and development and acquisition activity completed in fiscal 2002, we have expanded the breadth of our ECM platform.

The five core solutions that make up our enterprise content management offering — Enterprise Document Management, Web Content Management, Digital Asset Management, Collaboration, and Records Management have been historically marketed and sold in two key geographic regions: the United States and the Europe, Middle East and Africa (EMEA) region.

We continue to grow our customer list, as evidenced by the addition of 64 new customers in the three months ended September 30, 2003. The addition of these customers brings our total customer count to more than 2,700. In addition, we closed seven deals of over $1.0 million each in total license and service revenue in the current quarter.

License Revenue


	Three Months Ended									Nine Months Ended
	September 30,									September 30,

							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

License revenue	$	36.0		$	28.9			25	%	$	103.1		$	81.0			27	%
Percentage of total revenue		49	%		51	%					49	%		50	%

License revenue increased in absolute dollars in both the three and nine months ended September 30, 2003, as compared to the same periods in 2002. The increase in absolute dollars in both periods presented was due to an increase in the number of licenses sold to new customers and an increase in the number of existing customers who purchased additional products. The increase in demand was driven by an increase in enterprise requirements for a comprehensive content management solution needed for business process compliance, corporate record keeping and enterprise collaboration. Additionally, the increase in the current period is driven by incremental revenue generated by the records management and collaboration technology that has been recently integrated into our product suite as a result of our acquisition activity in the fourth quarter of fiscal 2002. License revenue as a percentage of total revenue decreased in the three and nine months ended September 30, 2003, as compared to the same periods in 2002. The decrease in license revenue as a percentage of total revenue was due to the increase in service revenue in the three and nine months ended September 30, 2003 as described in the “Service Revenue” section. Sales to one customer in multiple transactions accounted for $5.8 million, or 16%, of license revenue for the three months ended September 30, 2003. Sales to one customer accounted for $7.2 million, or 25%, of total license revenue in the same period last year. No customer accounted for greater than 10% of total license revenue for the nine months ended September 30, 2003 and 2002.

We anticipate that the demand for our products will continue to increase if overall economic conditions strengthen and overall demand for enterprise content management increases; more specifically, we expect license demand to increase as we see a growing trend of customers requiring a common enterprise-wide approach to content management and a platform suitable for fulfilling compliance requirements, which includes new legislative regulations for document archiving and record keeping. Furthermore, as a result of our acquisition activity completed in fiscal 2002, we are now shipping a comprehensive suite of products that addresses these requirements. We have seen and expect to continue to see increased license revenue opportunities as more user seats are deployed throughout existing customer enterprises and as we make additional sales to new customers.

International license revenue represented 31% and 46% of total license revenue for the three months ended September 30, 2003 and 2002, respectively, and 40% and 46% for the nine months ended September 30, 2003 and 2002, respectively. The decrease in international revenue as a percentage of license revenue in both comparable periods presented was primarily due to a decrease in license revenue in the EMEA region. The EMEA region contributed 22% and 29% of license revenue in the three and nine months ended September 30, 2003, respectively, as compared to 31% and 37%, respectively, in the comparable periods a year ago. The decrease in license revenue in EMEA as a percentage of total license sales for the three months ended September 30, 2003 is primarily attributed to the lack of large sales transactions as well as decreased demand overseas due to seasonality. The decrease in

license revenue in EMEA as a percentage of total license sales for the nine months ended September 30, 2003 is primarily due to the strong performance of our collaboration offering in North America relating to the eRoom acquisition as well as the lack of large sales transactions and decreased demand overseas due to seasonality as described above in the quarter ended September 30, 2003.

Our customers include several of our vendors and, on occasion, we have purchased goods or services for our operations from these vendors at or about the same time we have licensed our software to these same organizations (a “concurrent transaction”). Concurrent transactions are separately negotiated, settled in cash, and recorded at terms we consider to be arm’s length. We recognized no such transactions during the three and nine months ended September 30, 2003. We recognized approximately $0.2 million and $2.3 million of software license revenue from concurrent transactions in the three and nine months ended September 30, 2002, respectively.

During the quarter ended September 30, 2003, we completed several transactions with financial institutions including a transaction in which Morgan Stanley & Co., a customer since 1997, entered into an agreement to license additional software products for its internal use. The aggregate amount of the contract was approximately $1.2 million, $1.0 million of which was recognized as revenue for the quarter. Separately, subsequent to the end of the quarter, we entered into an engagement letter with Morgan Stanley & Co. pursuant to which Morgan Stanley provided financial advisory services and a financial opinion in connection with the proposed acquisition of us by EMC Corporation.

We classify license revenue as domestic or international based upon the billing location of the customer. In many instances, especially with large purchases from multinational companies, the customer has the right to deploy the licenses anywhere in the world. Thus, the percentages discussed herein represent where licenses were sold, and may or may not represent where the products are used. As a result, we believe that period to period comparisons of international revenue are not necessarily meaningful and should not be relied upon as an indication of future performance.

Service Revenue


	Three Months Ended									Nine Months Ended
	September 30,									September 30,

							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

Service revenue	$	37.5		$	27.4			37	%	$	105.5		$	79.9			32	%
Percentage of total revenue		51	%		49	%					51	%		50	%

Service revenue includes revenue from consulting, education services, and maintenance and support.

Service revenue increased in absolute dollars and as a percentage of total revenue for the three and nine months ended September 30, 2003, as compared to the same periods a year ago. The 37% increase in the three months ended September 30, 2003 was comprised of a 25% increase in maintenance revenue, 11% increase in consulting revenue and a 1% increase in training revenue. The 32% increase in the nine months ended September 30, 2003 consisted of a 24% increase in maintenance revenue, 7% increase in consulting revenue and a 1% increase in training revenue. The increase in overall service revenue in both periods presented was attributable to additional maintenance fees associated with sales of new software licenses, renewals by our existing customers as well as the assumption of customers and additional maintenance renewals as a result of our acquisition activities.

Fluctuations in our license revenue typically impact our consulting and education service revenue in future periods since these types of revenue are typically derived from license revenue. Accordingly, the increase in consulting and education service revenue in the three and nine months ended September 30, 2003 is primarily due to greater license revenue seen in the first nine months of fiscal 2003 as well as in the fourth quarter of fiscal 2002 as compared to the first nine months of fiscal 2002 and the fourth quarter of fiscal 2001.

The continued growth of our consulting revenue depends in large part on the growth of our software license revenue and customer deployment methodologies, while the growth of our maintenance revenue depends on the growth of our software license revenue coupled with the renewals of maintenance agreements by our existing installed base. With the release of Documentum 5 in the latter part of fiscal 2002, the new functionality acquired

through our acquisition activity, and other new generation platform functionality, we expect that demand from our installed base and new customers for consulting, education and maintenance services will increase over the next several quarters.

Cost of Revenue

Cost of License Revenue


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

Cost of license revenue	$	5.5		$	2.5			120	%	$	15.1		$	6.4			136	%
Percentage of license revenue		15	%		9	%					15	%		8	%

Cost of license revenue consists of amortization of technology-related identifiable purchased intangibles, royalties paid to third-party vendors, packaging, documentation, production, and freight costs. Royalties, which are paid to third parties for selected products, are both fixed and variable.

Cost of license revenue increased in absolute dollars and as a percentage of the associated license revenue in both the three and nine months ended September 30, 2003, as compared to the same periods in 2002. Of the 120% increase in the three months ended September 30, 2003, 99% was related to the recognition of amortization expense for our technology-related identifiable purchased intangibles, which were acquired in the fourth quarter of fiscal 2002. Of the 136% increase in the nine months ended September 30, 2003, 120% was related to the same amortization expense. The remaining increase in both periods presented was driven by the variable cost of increased license revenue and in the third-party product mix being sold, as compared to the same periods a year ago.

We expect the cost of license revenue to fluctuate in absolute dollar amount and as a percentage of total license revenue as the related license revenue fluctuates.

Cost of Service Revenue


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

Cost of service revenue	$	16.1		$	12.1			33	%	$	44.2		$	37.4			18	%
Percentage of service revenue		43	%		44	%					42	%		47	%

Cost of service revenue consists primarily of royalties paid to third-party vendors for maintenance arrangements, personnel-related and third party contractor costs incurred in providing consulting services, education services and maintenance services to customers, which includes telephone support costs.

Cost of service revenue increased in absolute dollars in both the three and nine months ended September 30, 2003, as compared to the same periods in 2002. The 33% and 18% increase in the three and nine months ended September 30, 2003, respectively, was primarily attributable to a 17% and 12% increase in variable cost as a result of the increase in service revenue for the three and nine months ended September 30, 2003, respectively. Of the remaining increase for the three and nine months ended September 30, 2003, as compared to the same periods a year ago, 11% and 9%, respectively, was due to an increase in compensation and related benefits associated with headcount increase, including personnel from our acquisitions of TrueArc and eRoom in November and December of 2002, respectively. In addition, the 18% increase in the nine months ended September 30, 2003 was offset by a 4% decrease in maintenance royalties due to $1.9 million of benefit that we recognized during the nine months ended September 30, 2003. The benefit was a result of renegotiated third-party contracts with existing vendors which resulted in the release of $1.9 million of obligations that were accrued in previous periods and included in accrued liabilities. The remaining 5% and 3% variance for both periods presented were due to various individually insignificant fluctuations.

We expect the cost of service revenue to fluctuate in absolute dollar amount and as percentage of overall service revenue as the related service revenue fluctuates.

Operating Expenses

Sales and Marketing


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

Sales and marketing expenses	$	28.6		$	23.8			20	%	$	85.4		$	70.4			21	%
Percentage of total revenue		39	%		42	%					41	%		44	%

Sales and marketing expenses consist of salaries, benefits, sales commissions and other expenses related to the direct sales force, various marketing expenses, costs of other market development programs as well as an allocation of overall corporate expenses, calculated on the basis of headcount, related to items such as amortization of deferred stock-based compensation, corporate insurance, corporate taxes, facilities, telephone and others.

Sales and marketing expenses increased in absolute dollars in the three and nine months ended September 30, 2003, as compared to the same periods in 2002. Of the 20% increase in the three months ended September 30, 2003, 15% was due to an increase in compensation and related benefits associated with additional headcount, including personnel from our acquisitions of TrueArc and eRoom in November and December of 2002, respectively. Of the remaining increase, 4% was due to an increase in commissions related to an increase in license revenue, and the remaining 1% was a result of insignificant individual fluctuations.

Of the 21% total increase for the nine months ended September 30, 2003, 14% was due to an increase in compensation and related benefits associated with additional headcount, including personnel from our acquisitions of TrueArc and eRoom in November and December of 2002, respectively. Of the remaining increase, 5% was due to an increase in commissions related to an increase in license revenue, and the remaining 2% was a result of insignificant individual fluctuations.

Sales and marketing as a percentage of total revenue in the three and nine months ended September 30, 2003 decreased as compared to the comparable periods in 2002. The decrease in the percentages was principally the result of an increase in total revenue and management’s cost control initiatives designed to decrease spending in a number of discretionary areas.

Research and Development


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

Research and development expenses	$	11.2		$	8.9			26	%	$	34.5		$	27.7			25	%
Percentage of total revenue		15	%		16	%					17	%		17	%

Research and development expenses consist of salaries and benefits for software developers, contracted development efforts, as well as an allocation of overall corporate expenses, calculated on the basis of headcount, related to items such as amortization of deferred stock-based compensation, corporate insurance, corporate taxes, facilities, telephone and others.

Research and development expenses increased in absolute dollars in the three and nine months ended September 30, 2003, as compared to the same periods in 2002. Of the 26% and 25% increases in the three and nine months ended September 30, 2003, respectively, 20% and 22% was due, respectively, to an increase in compensation and related benefits associated with additional headcount, including personnel from our acquisitions of TrueArc and

eRoom in November and December of 2002, respectively. The remaining 6% and 3% variance for both periods presented were due to various individually insignificant fluctuations.

The decrease in research and development costs as a percentage of total revenue in the three and nine months ended September 30, 2003, as compared to the same periods in 2002, was due to an increase in worldwide revenue.

General and Administrative


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
							Percent									Percent
($ in millions)	2003			2002			Change			2003			2002			Change

General and administrative expenses	$	7.1		$	6.0			18	%	$	21.9		$	18.2			20	%
Percentage of total revenue		10	%		11	%					11	%		12	%

General and administrative expenses consist primarily of personnel costs for finance, information technology, legal, human resources and general management, as well as outside professional services and an allocation of overall corporate expenses, calculated on the basis of headcount, related to items such as amortization of deferred stock-based compensation, corporate insurance, corporate taxes, facilities, telephone and others.

General and administrative expenses increased in absolute dollars in the three and nine months ended September 30, 2003, as compared to the same periods in 2002. The 18% increase in the three months ended September 30, 2003, was primarily due to an increase in staffing, including personnel from our acquisitions of TrueArc and eRoom in November and December of 2002, respectively, necessary to manage and support our growth. Consequently, compensation and related benefits increased. Of the 20% increase in the nine months ended September 30, 2003, 16% was due to the increase in compensation and benefits as described above. The remaining 4% increase was due to various individually insignificant fluctuations.

The decrease in general and administrative costs as a percentage of total revenue in the three and nine months ended September 30, 2003, as compared to the same periods in 2002, was due to management’s cost control initiatives designed to decrease spending in a number of discretionary areas as well as an increase in overall revenue.

Restructuring Costs

In January 2003, we adopted SFAS No. 146 which provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred and establishes that fair value is the means for initial measurement of the liabilities. During the first quarter of 2003, we recognized approximately $11.0 million in estimated costs, net of sublease income, in the United States and Europe as a result of abandoning certain facilities. Approximately $10.1 million of the estimated costs are related to one large facility in Europe that management has determined would not be utilized going forward. We worked with external real estate experts in each of the markets where the properties are located to determine the best estimate of sublease income. We did not estimate any sublease income in connection with our exit of the facility in Europe that resulted in a $10.1 million restructuring charge. This determination was based on the various restrictions that are included in the existing lease agreement that limit our ability to sublease the facility. This determination was also impacted by current and forecasted commercial real estate rates in the area. We anticipate future cost savings related to this facility of approximately $0.5 million per quarter through the expiration of the lease in December of 2007.

In addition to these facilities exit costs, we also incurred approximately $1.3 million of severance and benefits-related restructuring costs for the involuntary termination of 39 legacy Documentum employees, of which 36 were based in the United States and the remainder were located internationally. These charges were incurred as a result of management determining that certain synergies resulted from combining workforces that were assumed during our recent acquisition activity in fiscal 2002. Severance and benefits related costs associated with terminated employees of the acquired enterprise during the fourth quarter of fiscal 2002 were included in the cost of the respective acquisition.


	Severance
	and			Other
	Benefits			Charges			Total

First quarter 2003 restructuring charges	$	1,245		$	11,020		$	12,265
Cash paid		(1,162	)		(1,896	)		(3,058	)
Non-cash activity		—			15			15

Restructuring accrual balance as of September 30, 2003	$	83		$	9,139		$	9,222

The remaining reserve balance of $9.2 million relating to the restructuring charge we recognized during the nine months ended September 30, 2003 consists of $2.6 million of current liabilities to be paid out during fiscal 2003 and in the first quarter of fiscal 2004 and $6.6 million of long-term liabilities related to the fair value of remaining lease obligations on excess facilities, net of sublease income, to be paid out through fiscal 2007.

The remaining restructuring accrual relating to our restructuring activity in fiscal 2001 and 2002 of approximately $0.1 million relates to remaining severance and benefits and facility costs, net of sublease income. We expect that the remaining severance and benefits will be paid in fiscal 2003 and the remaining facility obligations are expected to be paid in fiscal 2005.

Amortization of Purchased Intangibles

Amortization of purchased intangible assets recorded in cost of license revenue was approximately $2.5 million and $7.9 million in the three and nine months ended September 30, 2003, respectively, as compared to approximately $0.1 million and $0.3 million in the three and nine months ended September 30, 2002, respectively. This amortization was related to the value of developed technology-related identifiable purchased intangibles.

Amortization of purchased intangible assets recorded in operating expenses was approximately $0.6 million and $1.8 million in the three and nine months ended September 30, 2003, respectively, as compared to approximately $0.1 million and $0.2 million in the three and nine months ended September 30, 2002, respectively. This amortization was related to the value of non-technology-related assets, such as contracts and non-compete agreements, and were acquired in connection with the eRoom, TrueArc and other previously completed acquisitions.

Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities. Interest income decreased by $0.4 million, or 22%, to $1.2 million in the three months ended September 30, 2003, as compared to $1.6 million in the comparable period in 2002. The $0.4 million decrease in the three months ended September 30, 2003, in interest income earned on our cash and cash equivalents and short-term investments was due primarily to the continuing decline in the yield on new investments as earlier investments mature. Interest income increased by $0.5 million, or 15%, to $4.0 million for the nine months ended September 30, 2003, as compared to $3.5 million for the comparable period in 2002. The increase was due to higher average cash balances throughout the current period.

Interest Expense

Interest expense consists primarily of amortization of issuance costs and fixed interest obligations related to our outstanding convertible debt as well as interest paid on capital lease obligations. Interest expense was $1.6 million and $4.8 million in the three and nine months ended September 30, 2003, respectively, as compared to $1.6 million and $3.2 million, respectively, in the comparable periods in 2002. The interest expense in all periods presented was primarily a result of the obligations related to our outstanding convertible debt, which was issued in April of 2002.

Other Expense, net

Other expense, net consists primarily of items such as foreign exchange gains and losses and gains and losses on the sale and disposal of fixed assets. Other expense, net was $0.2 million and $0.1 million in the three months ended

September 30, 2003 and 2002, respectively. The $0.2 million of other expense, net in the current period is composed of losses on the disposal of fixed assets in the amount of $0.8 million offset by gains on the sale of leasehold improvements in connection with a facility lease amendment in the amount of $0.9 million. This lease amendment is described in further detail below in Liquidity and Capital Resources. Foreign exchange gains and losses were immaterial for the current period. Other expense, net was $0.4 million for the nine months ended September 30, 2003, as compared to $0.2 million for the comparable period in 2002. The increase was due to the activity incurred in the current period as described above.

To date, our international sales are made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. However, for transactions that are initiated in the United States that are denominated in a foreign currency, we have entered into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risk as the exposure to currency fluctuations has been significant.

Income Taxes

Income tax provision and benefit for the interim periods is based on an estimate of the effective annual income tax rates expected to apply for the fiscal year. Our effective tax rate was 77% and 53% for the three and nine months ended September 30, 2003, respectively, as compared to an effective tax rate of 30% in both the comparable periods in 2002. The effective tax rate for the three months ended September 30, 2003 is higher than the estimated annual income tax rate due to a revision in the estimated annual effective income tax rate which occurred during the third quarter.

The estimated annual income tax rate is greater than in the prior year as a result of the non-deductible lease loss provision of approximately $11.0 million that was recognized as part of our restructuring activity in the nine months ended September 30, 2003. The estimated annual effective tax rate can also vary as a result of differences between our estimated and actual results of operations. Our estimated annual tax rate can also vary if our estimate of the mix of domestic and international income differs from our actual results.

Liquidity and Capital Resources

Since 1993, we have financed our operations primarily through the sale of stock, cash generated from operations and the issuance of convertible debt.

In February 1996, we completed our initial public offering, selling 2,058,000 shares of our common stock and receiving net proceeds of approximately $45 million. In October 1997, we completed a secondary public offering, selling 1,115,700 shares of our common stock and received net proceeds of approximately $31 million.

On April 5, 2002, we sold $125.0 million (the “face value”) in senior convertible notes that mature on April 1, 2007 (the “Notes”). The Notes bear interest at a rate of 4.5% per annum. We received proceeds of $121.3 million, net of underwriter debt issuance costs of $3.7 million. We also incurred debt issuance costs totaling $0.4 million comprised of legal, accounting, and various other fees relating to the debt offering. Holders of the Notes are entitled at any time after April 5, 2002, and before the close of business on April 1, 2007, subject to prior redemption or repurchase of the Notes, to convert the Notes into shares of common stock at a conversion price of $30.02 per share. The Notes will be limited to $125.0 million aggregate principal amount. The Notes may be redeemed by us on or after April 5, 2005. The Notes will effectively rank behind all other secured debt to the extent of the value of the assets securing those debts. The Notes do not contain any restrictive financial covenants. We recognized $1.6 million and $4.8 million of interest expense, which included amortization of debt issuance costs, in the three and nine months ended September 30, 2003, respectively. As of September 30, 2003, our debt obligation totaled $125.0 million.

The indenture under which the Notes were issued provides that an event of default will occur if (i) we fail to pay principal or premium on the Notes, (ii) we fail to pay interest on the Notes and fail to cure such non-payment within 30 days, (iii) we fail to perform any other covenant that is required of us in the indenture and the failure is not cured or waived within 60 days, or (iv) we or one of our significant subsidiaries fails to pay, at final maturity or upon acceleration, any indebtedness for money borrowed in an outstanding principal amount in excess of $10.0 million, and

the indebtedness is not discharged, or the default is not cured, waived or rescinded within 30 days after notice is provided in accordance with the terms of the indenture. If any of these events of default occurs, either the trustee or the holders of at least 25% of the outstanding Notes may declare the principal amount of the Notes to be due and payable. In addition, an event of bankruptcy, insolvency or reorganization (involving us or any of our significant subsidiaries) will constitute an event of default under the indenture and, in that case, the principal amount of the Notes will automatically become due and payable. To the extent we are required to repay the Notes prior to the maturity date as a result of an event of default, such repayment will negatively impact our liquidity. There have been no events of default through September 30, 2003.

At September 30, 2003, our principal sources of liquidity consisted of approximately $283.3 million of cash and cash equivalents and marketable securities, compared to approximately $253.1 million at December 31, 2002. Our liquidity could be negatively impacted by a decrease in demand for our products, which are subject to rapid technological changes, reductions in capital expenditures by our customers and intense competition, among other factors. We do not have any off-balance sheet arrangements with unconsolidated entities or related parties and, accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities.

Cash provided by operating activities was approximately $22.3 million and $12.1 million for the nine months ended September 30, 2003 and 2002, respectively. The approximate $22.3 million of cash provided by operations in the nine months ended September 30, 2003 was primarily attributable a net increase in operating assets and liabilities of approximately $1.8 million and adjustments for non-cash activities of approximately $24.0 million, offset by our net loss of approximately $3.5 million. The following notable financial statement changes that impact our cash and liquidity were noted on the balance sheet as of September 30, 2003:

	•		Accrued liabilities decreased by approximately $27.1 million in the nine months ended September 30, 2003 due to the payment of obligations assumed as a result of our 2002 acquisition activity in the amount of approximately $12.4 million, decreases in taxes payable of approximately $6.4 million, accrued royalties of approximately $2.3 million, accrued commissions of approximately $2.2 million, accrued convertible debt interest of approximately $1.4 million, and various other net decreases of approximately $2.4 million.

	•		Accounts payables decreased by approximately $6.0 million in the nine months ended September 30, 2003 due mainly to the timing of payments to vendors.

	•		Deferred revenue increased by approximately $7.4 million in the nine months ended September 30, 2003 as a result of growth in maintenance revenue from a larger installed base of customers receiving ongoing maintenance and support services. This larger installed base is a result of continued growth through new product sales as well as customers added in connection with recent acquisitions.

The following notable financial statement change was noted on the balance sheet as of September 30, 2003, however, this change did not have an immediate impact on our cash or liquidity:

•

Other long-term liabilities increased by approximately $6.5 million in the nine months ended September 30, 2003 primarily as result of an accrual for long-term lease obligations related to restructuring activity conducted in the first quarter of 2003.

The approximate $12.1 million of cash provided by operations in the nine months ended September 30, 2002 was driven by a decrease in operating assets and liabilities of approximately $3.4 million and an increase in net non-cash related expenses of approximately $15.7 million, offset by our net loss of approximately $0.2 million.

Cash used in investing activities was approximately $45.3 million and $117.4 million for the nine months ended September 30, 2003 and 2002, respectively. The approximate $45.3 million of cash used in investing activities during the nine months ended September 30, 2003 was primarily related to the net purchase of marketable securities of approximately $31.1 million, payments of obligations related to business acquisitions of approximately $12.1 million, purchases of property and equipment of approximately $4.0 million and proceeds from sales of property and equipment of approximately $1.9 million. The approximate $117.4 million of cash used in investing activities during the nine months ended September 30, 2002 was primarily related to the net purchase of marketable securities of

approximately $111.9 million, purchases of property and equipment of approximately $4.3 million and approximately $1.2 million used in acquisition activity.

Cash provided by financing activities was approximately $20.9 million and $131.8 million in the nine months ended September 30, 2003 and 2002, respectively. Cash provided by financing activities in the nine months ended September 30, 2003 was a result of proceeds from the issuance of common stock related to the exercise of stock options under our stock option plans and the sale of stock under the Employee Stock Purchase Plan. Of the $131.8 million of cash provided by financing activities in the nine months ended September 30, 2002, $121.3 million was a result of proceeds from our convertible debt offering and the remaining $10.5 million was primarily related to proceeds from the issuance of common stock related to the exercise of stock options under our stock option plans and the sale of stock under the Employee Stock Purchase Plan

At September 30, 2003, we had net working capital of approximately $263.8 million, as compared to approximately $217.9 million at December 31, 2002. The working capital increase of $45.9 million was driven by increases to marketable securities of approximately $30.6 million and other current assets of approximately $1.7 million, and a decrease in accrued liabilities of approximately $27.0 million, offset by increases in deferred revenue of approximately $7.4 million and accounts payable of approximately $6.0 million.

In June 1998, we signed an agreement to lease approximately 122,000 square feet and 63,000 square feet in Pleasanton, California beginning in June 1999 and November 1999, respectively, and expiring in May 2005 and March 2006, respectively. In January 2000, we signed an amendment to the existing leases, which provides for the rental of an additional 37,138 square feet of space, beginning July 2000 and expiring in March 2006. In July 2001, we signed an amendment to the existing leases, which provides for the rental of an additional 13,975 square feet of space, beginning July 2001 and expiring in March 2005. In September 2003, we signed an amendment to renegotiate the existing leases, whereby transferring 37,138 rentable square feet back to the lessor and extending the lease at a more beneficial rate into the year 2013. As a result of the lease amendment, we recognized an operating savings of approximately $0.6 million. Additionally, we also sold certain leasehold improvements in connection with this facility lease amendment realizing cash proceeds of approximately $1.9 million. The Pleasanton, California space serves as our headquarters and contains the principal administrative, engineering, marketing, and sales facilities.

In October 1997, we signed an agreement to lease approximately 24,000 square feet in Middlesex, United Kingdom beginning in October 1997 and expiring in April 2013. In September 2001, we signed an agreement to lease an additional 35,000 square feet in Middlesex, United Kingdom beginning in September 2001 and expiring in December 2007. These facilities serve as our principal European administrative, engineering, marketing and sales facilities. The remaining lease obligation of approximately $11.1 million for the additional leased space has been discounted to its net present value and is currently included in accrued liabilities as of September 30, 2003.

In December 2002, we assumed, through the acquisition of eRoom Technology, Inc., an agreement to lease approximately 34,000 square feet in Cambridge, Massachusetts. The lease expires in June of 2005. This facility serves as supplemental administrative, engineering, marketing, and sales space.

As a result of the pending merger with EMC, we have incurred certain expenses totaling approximately $15.0 million in fees and expenses to our financial and legal advisors and our accountants. A portion of these fees will be due only if the merger with EMC is consummated. If the merger is not consummated, we may be obligated under certain circumstances to pay EMC a termination fee of $55.0 million and reimburse EMC for certain expenses associated with the merger up to $2.5 million.

The following summarizes our contractual obligations at September 30, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):


	Payments due by Period

Contractual Cash Obligations	Total		Less than 1 year		2-3 years		4-5 years		After 5 years

Convertible debt obligation	$	125,000	$	—	$	—	$	125,000	$	—
Non-cancelable operating lease obligations		69,463		13,695		16,940		12,570		26,258
Convertible debt interest obligation		19,688		5,625		11,250		2,813		—
Liabilities related to excess facilities		9,310		2,560		3,224		3,526		—
Severance liability related to eRoom acquisition		41		41		—		—		—
Capital lease obligations		12		12		—		—		—

Total Contractual Cash Obligations	$	223,514	$	21,933	$	31,414	$	143,909	$	26,258

Our liquidity is affected by many factors, some of which are based on the normal ongoing operations of our business and some of which arise from fluctuations related to global economies and markets. Some of those factors include, but are not limited to, our lengthy sales and implementation cycles, a reliance on one family of products and related services, intense competition that could impair our ability to compete successfully, and an industry that is characterized by vigorous protection and pursuit of intellectual property rights. We believe that our existing cash, cash equivalents and marketable securities, our available bank financing and the cash flows generated from operations, if any, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, if we are not successful in generating sufficient cash flow from operations, we may need to raise additional capital at the end of such period. We cannot provide assurance that additional financing, if needed, will be available on favorable terms, if at all. Even if our cash is sufficient to fund our needs, we may elect to sell additional equity or debt securities, or obtain credit facilities to further enhance our liquidity position. The sale of additional securities could result in additional dilution to our stockholders. A portion of our cash could be used to acquire or invest in complementary businesses or products or obtain the right to use complementary technologies. We periodically evaluate, in the ordinary course of business, potential investments such as businesses, products or technologies. See “Risk Factors — Risks Associated with Acquisitions.”

RISK FACTORS

Risks Related to the Proposed Merger with EMC

Our proposed merger with EMC involves a high degree of risk, including the following risks.

The anticipated benefits of combining EMC and Documentum may not be realized. EMC and Documentum entered into the merger agreement with the expectation that the merger will result in various benefits including, among other things, benefits relating to enhanced revenues, technology, human resources, cost savings, operating efficiencies and other synergies. There can be no assurance that EMC and Documentum will realize any of these benefits or that the merger will not result in the deterioration or loss of significant business of the combined company. Costs incurred and liabilities assumed in connection with the merger, including pending and threatened disputes and litigation, could have a material adverse effect on the combined company’s business, financial condition and operating results.

EMC may have difficulty and incur substantial costs in integrating Documentum. Integrating EMC and Documentum will be a complex, time-consuming and expensive process, particularly in the context of the integration by EMC of LEGATO Systems, Inc., which EMC acquired on October 20, 2003. Before the merger, EMC and Documentum operate independently, each with its own business, products, customers, employees, culture and systems.

The combined company may face substantial difficulties, costs and delays in integrating EMC and Documentum. These factors may include:

	•		potential difficulty in leveraging the value of the separate technologies of the combined company;

	•		perceived adverse changes in product offerings available to customers or customer service standards, whether or not these changes do, in fact, occur;

	•		costs and delays in implementing common systems and procedures and costs and delays caused by communication difficulties;

	•		charges to earnings resulting from the application of purchase accounting to the transaction;

	•		the geographic distance between EMC’s and Documentum’s sites;

	•		diversion of management resources from the business of the combined company;

	•		potential incompatibility of business cultures;

	•		potential losses of key employees due to perceived uncertainty in career opportunities, compensation levels and benefits;

	•		the retention of existing customers of each company;

	•		reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;

	•		retaining and integrating management and other key employees of the combined company; and

	•		coordinating infrastructure operations in a rapid and efficient manner.

After the merger, EMC and Documentum may seek to combine certain operations and functions using common information and communication systems; operating procedures; financial controls; and human resource practices, including training, professional development and benefit programs. EMC and Documentum may be unsuccessful in implementing the integration of these systems and processes.

Any one or all of these factors may cause increased operating costs, worse than anticipated financial performance or the loss of customers and employees. Many of these factors are also outside the control of either company. The failure to timely and efficiently integrate EMC and Documentum could have a material adverse effect on the combined company’s business, financial condition and operating results.

The value of the shares of EMC common stock that Documentum stockholders receive in the merger will vary as a result of the fixed exchange ratio and fluctuations in the price of EMC’s common stock. At the effective time of the merger, each outstanding share of Documentum common stock will be converted into the right to receive 2.175 shares of EMC common stock. The ratio at which the shares will be converted is fixed and any changes in the price of EMC common stock will affect the value of the consideration that Documentum stockholders receive in the merger such that if the price of EMC common stock declines prior to completion of the merger, the value of the merger consideration to be received by Documentum stockholders will decrease. Stock price variations could be the result of changes in the business, operations or prospects of EMC, Documentum or the combined company, market assessments of the likelihood that the merger will be consummated within the anticipated time or at all, general market and economic conditions and other factors both within and beyond the control of EMC or Documentum.

The merger may result in a loss of customers, partners and suppliers. Some customers, including end users, resellers and original equipment manufacturers, may seek alternative sources of product and/or service after the announcement of the merger due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and develop certain product lines. We anticipate that the combined company could experience some customer attrition by reason of announcement of the merger or after the merger. Difficulties in combining operations could also result in the loss of partners and suppliers and potential disputes or litigation with customers, partners, suppliers, resellers or others. There can be no assurance that any steps by management to counter such potential increased customer, partner or supplier attrition will be effective. If the merger does not occur for any reason, it may be difficult for us to repair these relationships. Failure by our management to control attrition could have a material adverse effect on the combined company’s business, financial condition and operating results.

Substantial expenses will be incurred and payments made even if the merger is not completed. The merger may not be completed. Whether or not the merger is completed, we and EMC and will incur substantial expenses in pursuing the merger. In addition, if the merger is terminated under specified circumstances, we may be required to pay EMC a termination fee under the merger agreement in the amount of $55.0 million, plus expenses. This termination fee could discourage other potential acquirors from seeking to enter into a business combination with us. Under certain other circumstances, if the merger is not completed, we may be required to pay the EMC’s fees and expenses, up to $2.5 million.

Failure to complete the merger could cause our stock price to decline. If the merger is not completed for any reason, our stock price may decline because costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. In addition, if the merger is not completed, our stock price may decline to the extent that the current market price reflects a market assumption that the merger will be completed or the market’s perceptions as to the reason why the merger was not consummated.

If the conditions to the merger are not met, the merger will not occur. Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. We cannot assure you that each of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and we may lose some or all of the intended benefits of the merger.

Risks Related to Our Business

Our operating results are difficult to predict and fluctuate substantially from quarter to quarter and year to year, which may increase the difficulty of financial planning and forecasting and may result in decreases in our available cash and declines in our stock price. Our future operating results may vary from our past operating results, are difficult to predict and may vary from year to year due to a number of factors. Many of these factors are beyond our control. These factors include:

	•		the potential delay in recognizing revenue from license transactions due to revenue recognition rules which we must follow;

	•		the tendency to realize a substantial amount of revenue in the last weeks, or even days, of each quarter due to the tendency of some of our customers to wait until quarter or year end in the hope of obtaining more favorable terms;

	•		customer decisions to delay implementation of our products;

	•		the size and complexity of our license transactions;

	•		any seasonality of technology purchases;

	•		demand for our products, which can fluctuate significantly;

	•		the timing of new product introductions and product enhancements by both us and our competitors;

	•		changes in our pricing policy;

	•		the publication of opinions concerning us, our products or technology by industry analysts;

	•		changes in foreign currency exchange rates; and

	•		domestic and international economic and political conditions.

One or more of these factors may cause our operating expenses to be disproportionately high or our gross revenues to be disproportionately low during any given period, which could cause our net revenue and operating results to fluctuate significantly. Our operating results have fluctuated significantly in the past. We had diluted earnings per share of $0.02 and $0.05 in the three months ended September 30, 2003 and 2002, respectively, and a

loss per share of $0.20 in the three months ended September 30, 2001. You should not rely on our quarterly operating results to predict our future results because of the significant fluctuations to which our results are subject.

As a result of these and other factors, operating results for any fiscal quarter or year are subject to significant variation, and we believe that period-to-period comparisons of our results of operations are not necessarily meaningful in terms of their relation to future performance. You should not rely upon these comparisons as indications of future performance. It is likely that our future quarterly and annual operating results from time to time will not meet the expectations of public market analysts or investors, which could cause a drop in the price of our common stock.

The U.S., Europe and Asia/Pacific have experienced a general decline in economic conditions, leading to reduced demand for goods and services, including those that we offer. We are currently in the midst of a general economic downturn that commenced in 2001 in the U.S. and expanded to many other regions of the world during 2002. Each of our customers makes a discretionary decision to implement our products that is subject to its resources and budget cycles. Many of our customers have experienced budgeting constraints due to the economic downturn, causing them to defer or cancel projects. While we experienced a slight increase in demand for our products in the nine months ended September 30, 2003, demand for our products may decrease again. Continued weakening of economic conditions may result in a decreased demand for our products and decreased revenue, which could harm our operating results, causing the price of our common stock to fall.

We cannot predict how long or severe the current economic downturn will be. As a result of this uncertainty, forecasting and financial and strategic planning are more difficult than usual. If the downturn continues for an extended period or becomes more severe, our business will suffer and we may experience declines in sales as our customers attempt to limit their spending. In addition, the adverse impact of the downturn on the capital markets could impair our ability to raise capital as needed and could impede our ability to expand our business.

You may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in our financial statements. Our Consolidated Financial Statements for each of the three years ending December 31, 2001 were audited by Arthur Andersen LLP. On March 14, 2002, Andersen was indicted on federal obstruction of justice charges arising from the government’s investigation of Enron Corporation and on June 15, 2002, Andersen was found guilty. Andersen has informed the SEC that it will cease practicing before the SEC. On March 14, 2002, we dismissed Andersen and retained KPMG LLP as our independent auditors for our fiscal year ended December 31, 2002. SEC rules require us to present historical audited financial statements in various SEC filings, such as registration statements, along with Andersen’s consent to our inclusion of its audit report in those filings. Since our former engagement partner and audit manager have left Andersen, and in light of the announced cessation of Andersen’s SEC practice, we will not be able to obtain the consent of Andersen to the inclusion of its audit report in our relevant current and future filings. The SEC recently has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the requirement to file a consent of Andersen in certain circumstances, but purchasers of securities sold under our registration statements that do not include the consent of Andersen to the inclusion of its audit report, will not be able to sue Andersen pursuant to Section 11(a)(4) of the Securities Act and therefore their right of recovery under that section may be limited as a result of our inability to obtain Andersen’s consent.

We have borrowed a significant amount of money, which could make it difficult to obtain additional financing; if we cannot obtain additional financing, our cash reserves could be depleted. Our debt payments and other commitments could impair our liquidity and cash reserves and make it difficult for us to obtain additional financing for working capital or acquisitions, should we need to do so. As of September 30, 2003, we had $125.0 million in outstanding indebtedness under our 4.5% senior convertible notes. As a result of this and other smaller debt commitments as of September 30, 2003, our debt-related future commitments for the fiscal year ended December 31, 2003 will be $5.7 million, assuming that none of our obligations are accelerated. Our obligations under the senior convertible notes may be accelerated if we default under the terms of the senior convertible notes. If our obligations are accelerated, the entire principal amount of our outstanding indebtedness under our senior convertible notes could become immediately payable. This would have a significant impact on our liquidity position. As of September 30, 2003, we had cash and cash equivalents of $111.6 million and marketable securities of $171.7 million. We intend to fulfill our debt service obligations both from cash generated by our operations and from our existing cash and investments.

Our indebtedness could have the following negative consequences:

	•		limit our ability to obtain additional financing;

	•		increase our vulnerability to general adverse economic and industry conditions;

	•		require the dedication of a portion of our expected cash flow from operations to service our indebtedness thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

	•		place us at a possible disadvantage to competitors that do not owe as much money as we do or that have better access to capital resources.

Our sales and implementation cycles are long and difficult to predict. The time that it takes to sell and implement our products is usually long and difficult to accurately predict. Our prospective customers usually involve their entire enterprise in deciding whether to buy our products, which is time consuming. This lengthy decision making process requires us to engage in a lengthy sales cycle, which is usually between three and nine months. As part of the sales cycle, we educate prospective customers about the use and benefits of our products. A larger or more complex transaction often has a longer sales cycle. You should not rely on the length of prior sales and implementation cycles as an indication of the length of future cycles.

The implementation of our products involves a significant commitment of resources by customers over an extended period of time, and is commonly a part of major information system changes or upgrades by the customer. Because of the significant customer commitment required over an extended time, sales and customer implementation cycles can be delayed indefinitely for reasons beyond our control should a customer fail to commit required resources. If the sale of even a limited number of software licenses is delayed, then our revenue could be lower than expected, our operating results could be harmed and we may experience significant fluctuations in results from quarter to quarter.

A substantial portion of our revenue is generated by sales of a single family of products and related services. To date, substantially all of our revenue has been generated by sales of licenses of the Documentum EDMS, Documentum 4i and Documentum 5 ECM Platform family of products and related services. We expect that this same family of products and services will continue to account for the majority of our future revenue, making us highly dependent on continued sales of this single product family. If the price of this product family declines, or if demand for this product family declines, then our revenue may decrease. Demand for this product family could decline for a number of reasons, including the introduction of new products by our competitors, general business and economic conditions and changing industry standards. If our revenue decreases, our operating results could be lower than expected and our common stock price may fall.

We are subject to risks associated with acquisitions. As part of our business strategy, we frequently evaluate strategic opportunities available to us and expect to make acquisitions of, or significant investments in, businesses that offer complementary products and technologies. For example, in 2002, we completed the acquisitions of eRoom Technology, Inc. and TrueArc Corporation (see Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Strategic Acquisitions). These acquisitions as well as any future acquisitions or investments, expose us to the risks commonly encountered in acquisitions of business, which include the following:

	•		we may find that the acquired company or assets do not further our business strategy or that we paid more than what the company or assets are worth;

	•		we may have difficulty integrating the operations and personnel of the acquired businesses;

	•		we may have difficulty maintaining the acquired company’s previous level of revenue;

	•		we may have difficulty incorporating the acquired technologies or products with our existing product lines;

	•		we may have product liability associated with the sale of the acquired company’s products;

	•		our ongoing business may be disrupted by transition or integration issues;

	•		our management’s attention may be diverted from other business concerns;

	•		we may have difficulty maintaining uniform standards, controls, procedures and policies;

	•		our relationship with current and new employees and clients could be impaired;

	•		the acquisition may result in litigation from terminated employees or third parties who believe a claim against us would be valuable to pursue; and

	•		our due diligence process may fail to identify significant issues with product quality, product architecture and legal contingencies, among other matters.

Our failure to successfully manage these risks associated with any past or future acquisition may harm our business, results of operations and financial condition. If we pay for an acquisition by issuing shares of stock or other rights to purchase stock, including stock options, existing stockholders may be diluted and earnings per share may decrease. Our investments in other businesses involve risks similar to those involved in an acquisition.

If we fail to identify new product opportunities or to develop new products, then our business could be harmed. We compete in the content management software and services market, which is characterized by (A) rapid technological change, (B) frequent introduction of new products and enhancements, (C) changing customer needs, and (D) evolving industry standards. Our future success depends in part on our ability to integrate web content management capabilities and business to business solutions into our products. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. We may be unable to develop, market and release new products or new versions of our products that respond to technological developments, evolving industry standards or changing customer requirements in a timely manner. These new products, even if introduced in a timely manner, may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance.

Most of our revenue is generated by sales of a single family of products and related services. If this single product family is rendered obsolete and unmarketable by technological change or new industry standards, then our revenue from sales of this product family will decrease. It is difficult to predict the life cycles of our products because of the rapid technological changes which can occur in our industry. If we do not correctly predict the life cycle of our primary product family and develop new products to replace obsolete products, then our gross revenue will decrease, our operating results could be lower than expected and our common stock price may fall.

The market for content management solutions may not continue to grow, and may decline. The market for content management software and services is intensely competitive, highly fragmented and rapidly changing. Our future financial performance depends primarily on the continued growth of the market for content management software and services and the adoption of our products by customers in this market. If the content management software and services market fails to grow or grows more slowly than we currently anticipate, our business, financial condition and operating results would be harmed, which could cause the price of our common stock to fall.

We face intense competition from several competitors and may be unable to compete successfully. Our products target the emerging market for ECM software solutions. There are many factors that may increase competition in the market for Web-based and client/server software solutions, including (A) entry of new competitors, (B) alliances among existing competitors and (C) consolidation in the software industry. This market is intensely competitive, rapidly changing and significantly affected by new product introductions and other market

activities of industry participants. As a result of this competition, we face competitive pricing pressures in many of our deals, particularly with respect to our web content management products.

We encounter direct competition from a number of public and private companies that offer a variety of products and services addressing this market. These companies include FileNet, IBM, Interwoven, OpenText, Stellent and Vignette. Additionally, several other enterprise software vendors, such as Microsoft and Oracle, are potential competitors in the future if they acquire competitive technology or otherwise expand their current product offerings. Many of these current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we do. Several of these companies, including IBM, Microsoft, Oracle and others, have well-established relationships with our current and potential customers and strategic partners, as well as extensive resources and knowledge of the enterprise software industry that may enable them to offer a single-vendor solution more easily than we can. In addition, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. If we cannot respond to our competitors adequately and in a timely manner, then we may be required to reduce prices for our products and could suffer reduced gross margins and loss of market share, any of which could harm our business, financial condition and operating results, causing the price of our common stock to fall.

We rely on relationships with systems integrators, and may face direct competition from them. We rely on a number of systems consulting and systems integration firms to implement our products and provide customer support services. We also rely on these firms to recommend our products to prospective customers during the evaluation stage of the purchase process. Although we seek to maintain close relationships with these service providers, many of them have similar, and often more established, relationships with our competitors. If we are unable to develop and maintain effective, long-term relationships with these systems consulting and systems integration firms then they may not recommend our products to prospective customers and we may not be able to rely on them to implement our products and provide customer support services. In addition, many of these firms possess industry-specific expertise and have significantly greater resources than we do, and may market software products that compete with us in the future. If we fail to develop and maintain good relationships with these systems consulting and systems integration firms, or if they become our competitors, then our competitive position would be materially and adversely affected, which could result in price reductions, reduced gross margins and loss of market share. Any of these effects could harm our business, financial condition and operating results and cause the price of our common stock to fall.

We are dependent on a relatively small number of customers and those customers are concentrated in a small number of industries. Our success depends on maintaining relationships with our existing customers. At certain times in the past, a relatively small number of our customers have accounted for a significant percentage of our revenue. In addition, our customers are concentrated in the process and discrete manufacturing, pharmaceutical, financial services, government and high technology industries. We may not be successful in obtaining significant new customers in different industry segments and we expect that sales of our products to a limited number of customers in a limited number of industry segments will continue to account for a large portion of our revenue in the future. If we are not successful at obtaining significant new customers or if a small number of customers cancel or delay their orders for our products, then our business and our prospects could be harmed. As many of our significant customers are concentrated in a small number of industry segments, if business conditions in one of those industry segments decline, then orders for our products from that segment may decrease, which could negatively impact our business, financial condition and operating results and cause the price of our common stock to fall.

We rely on a number of relationships with third parties for sales, distribution and integration of our products, and our failure to maintain these relationships, or establish new relationships, could harm our business. We have established strategic relationships with a number of organizations that we believe are important to our sales, marketing and support activities and the implementation of our products. We believe that our relationships with these organizations, including indirect channel partners and other consultants, provide marketing and sales opportunities for our direct sales force, expand the distribution of our products and broaden our product offerings through product bundling. These relationships allow us to keep pace with the technological and marketing developments of major software vendors and provide us with technical assistance for our product development efforts. We have entered into contractual relationships with these organizations, but these contracts generally do not

require the organizations to continue to work with us. If we fail to maintain these relationships, or to establish new relationships in the future, then our ability to sell and integrate our products would be impaired, which would harm our business.

We must also maintain and enhance our relations with technology partners, including Relational Data Base Management Systems vendors, to provide our customers with integrated product solutions incorporating our products and products of third parties. In some cases our technology is incorporated into product solutions sold by other parties and in some case we incorporate the technology of third parties into our products. If we are not successful at maintaining and enhancing our technology partner relationships, then we may be unable to offer these integrated product solutions, which could harm our business.

We depend on the service of key personnel. Our future performance depends on the continued service of our key technical, sales and senior management personnel, none of whom is bound by an employment agreement with us. Our key personnel include:

	•		David G. DeWalt, our President and Chief Executive Officer;

	•		Mark Garrett, our Executive Vice President and Chief Financial Officer;

	•		Jeffrey Beir, our Executive Vice President, Products;

	•		Jean-Claude Broido, our Executive Vice President and General Manger, EMEA;

	•		Mike DeCesare, our Executive Vice President, Worldwide Field Operations;

	•		David B. Milam, our Executive Vice President and Chief Marketing Officer;

	•		Howard I. Shao, our Executive Vice President, Founder and Chief Technology Officer;

	•		Robert Tarkoff, our Executive Vice President, Chief Strategy Officer.

Any of our key personnel could terminate their employment with us at any time and provide their services to one of our competitors. The loss of services from one or more of our executive officers or key technical personnel could harm our business, operating results and financial condition. Part of our total compensation program includes stock options. The volatility or lack of positive performance of our stock price could decrease the value of stock options, which may over time adversely affect our ability to retain or attract key employees.

Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we can retain key employees or that we can attract, assimilate or retain other highly qualified personnel in the future. If we fail to do so, then our business, operating results and financial condition could be harmed.

We are subject to risks associated with international operations. Our revenue is primarily derived from large multi-national companies. To service the needs of these companies, we must provide worldwide product support services. We have offices in Hong Kong, London, Madrid, Melbourne, Milan, Munich, Paris, Seoul, Singapore, Stockholm and Tokyo, among others. We operate our international technical support operations in the London, Melbourne, Munich and Toronto offices. We have expanded, and intend to continue expanding, our international operations and enter additional international markets. This will require significant management attention and financial resources that could adversely affect our operating margins and earnings. Despite the planned increase in our international presence, we may not be able to maintain or increase international market demand for our products. If we do not, then our international sales will be limited, and operating results could suffer. Our international operations are subject to a variety of risks, including:

	•		foreign currency fluctuations;

	•		economic or political instability;

	•		disruptions caused by possible foreign conflicts, including North Korea, Iraq and others, involving the U.S.;

	•		shipping delays;

	•		trade restrictions;

	•		our limited experience in, and the costs of, localizing products for foreign countries;

	•		political unrest or terrorism;

	•		reduced protection for intellectual property rights in some countries;

	•		longer accounts receivable payment cycles; and

	•		difficulties in managing international operations, including, among other things, the burden of complying with a wide variety of foreign laws and tax regimes.

Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.

Our industry is characterized by vigorous protection and pursuit of intellectual property rights that could result in substantial costs to us. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. From time to time, we have explored and resolved potential infringement claims against third parties. To date, we have not become aware of any material infringement of our intellectual property.

Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. We are unable to determine the extent to which piracy of our products exists, but expect software piracy to be a persistent problem. In addition, the laws of some foreign countries do not protect our intellectual property rights as fully as do the laws of the U.S. Our means of protecting our intellectual property rights in the U.S. or abroad may not be adequate. Even if our intellectual property protection is adequate, our competition may independently develop similar technology which does not violate our intellectual property rights, but which nonetheless competes with our products.

From time to time, third parties have explored potential infringement claims against us and we have resolved these potential claims. To date, we have not become aware of our material infringement of any intellectual property rights of others. Although we do not believe that we are infringing on any intellectual property rights of others, third parties may claim that we have infringed their intellectual property rights. Furthermore, former employers of our former, current or future employees may claim that these employees have improperly disclosed to us the confidential or proprietary information of these former employers. Any claims, with or without merit, could (A) be time-consuming to defend, (B) result in costly litigation, (C) divert management’s attention and resources, (D) cause product shipment delays, and (E) require us to pay money damages or enter into royalty or licensing agreements. A successful claim of intellectual property infringement against us and our failure or inability to license the infringed technology or create a similar technology to work around the infringed technology may result in substantial damages, payments or termination of sales of infringing products, any of which could harm our business, operating results and financial condition.

We license software from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. These third-party software licenses may not be available to us on

acceptable terms in the future. The loss of any of these software licenses could result in shipment delays or reductions, resulting in lower than expected operating results.

We may face product liability claims from our customers. Our license agreements with our customers usually contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective under the laws of some jurisdictions. A successful product liability claim brought against us could result in payment by us of substantial damages, which would harm our business, operating results and financial condition and cause the price of our common stock to fall.

We face risks associated with product defects and incompatibilities. Software products frequently contain errors or failures, especially when first introduced or when new versions are released. Also, new products or enhancements may contain undetected errors, or “bugs,” or performance problems that, despite testing, are discovered only after a product has been installed and used by customers. Errors or performance problems could cause delays in product introduction and shipments or require design modifications, either of which could lead to a loss in or delay in recognition of revenue. In the past, we have had delays of less than six months in the shipment of products as a result of errors or performance problems. However, we generally do not book orders or recognize revenue until a product is available for shipment and we do not believe that we have lost orders as a result of any shipping delays.

Our products are typically intended for use in applications that may be critical to a customer’s business. As a result, we expect that our customers and potential customers will have a greater sensitivity to product defects than the market for software products generally. Despite extensive testing by us and by current and potential customers, errors may be found in new products or releases after we begin commercial shipments, resulting in loss of revenue or delay in market acceptance, damage to our reputation, diversion of development resources, the payment of monetary damages or increased service or warranty costs, any of which could harm our business, operating results and financial condition.

The costs of software development can be high, and we may not realize revenue from our development efforts for a substantial period of time. Introducing new products that rapidly address changing market demands requires a continued high level of investment in research and development. Our product development and engineering expenses were $34.4 million, or 16% of total revenue, for nine months ended September 30, 2003 and $27.7 million, or 17% of total revenue, for the nine months ended September 30, 2002. As we undertake the extensive capital outlays to develop new products, we may be unable to realize revenue as soon as we expect. The costs associated with software development are increasing, including the costs of recruiting and retaining engineering talent and acquiring or licensing new technologies. Our investment in new and existing market opportunities prior to our ability to generate revenue from these new opportunities may adversely affect our operating results.

Risks Related to Ownership of Our Common Stock

Our stock price is extremely volatile. The trading price of our common stock is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by us or our competitors, general conditions in the software and computer industries and other factors. During the nine months ended September 30, 2003, our stock had a high sales price of $23.40 and a low sales price of $12.00, as reported on the Nasdaq National Market. During the fiscal year 2002, our stock had a high sales price of $27.18 and a low sales price of $8.67. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to ours and which have been unrelated to the operating performance of these companies. These market fluctuations may decrease the market price of our common stock.

Some provisions in our certificate of incorporation and our bylaws could delay or prevent a change in control. Our Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further approval by our stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of our common stock. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of

preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting stock.

We have a classified Board of Directors under our Amended and Restated Certificate of Incorporation, which means that our Board is divided into three staggered classes, each of which is elected to the Board for a three year period. We have also implemented a Share Purchase Plan, or a “Rights Plan,” under which all stockholders of record as of February 24, 1999 received rights to purchase shares of a new series of preferred stock. The rights are exercisable only if a person or group acquires 20% or more of our common stock or announces a tender offer for 20% or more of the common stock. These provisions and certain other provisions of our Amended and Restated Certificate of Incorporation and certain provisions of our Amended and Restated Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest by increasing the cost of effecting these types of transactions, which could have an adverse impact on stockholders who might want to vote in favor of a merger or participate in a tender offer.

In addition, the Agreement and Plan of Merger signed with EMC on October 13, 2003 contains certain provisions prohibiting us from seeking a competing acquisition transaction. For a more detailed discussion of such provisions, see “The Merger Agreement - No Solicitation of Third Parties by Documentum” section of the Registration Statement filed on Form S–4 as filed with the SEC by EMC on October 28, 2003 (file No. 333-110017) regarding our proposed merger with EMC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk is due to changes in the general level of U.S. interest rates and relates to our cash and cash equivalents and marketable security investment portfolios (the “securities”). The securities are maintained at four major financial institutions in the U.S. These securities, like all fixed instruments, are subject to interest rate risk and will decline if market interest rates increase. We manage interest rate risk by maintaining an investment portfolio with debt instruments of high credit quality and also by maintaining sufficient cash and cash equivalent balances such that we are typically able to hold the investments to maturity. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. The marketable securities are considered to be available-for-sale and have original maturities ranging from three months to over one year. The following table summarizes our securities and weighted average yields, as of September 30, 2003 (in thousands):


	Expected Maturity Date
	2003			2004			2005			2006			Total

U.S Treasury & Agency Securities	$	20,373		$	32,680		$	42,577		$	22,886		$	118,516
Wtd. Avg. Yield		2.23	%		2.95	%		2.56	%		2.36	%
Corporate Bonds		11,048			20,632			5,476			3,691			40,847
Wtd. Avg. Yield		2.17	%		2.60	%		2.17	%		2.24	%
Auction Rate Securities		1,000			—			—			—			1,000
Wtd. Avg. Yield		1.35	%		—			—			—
Certificates of Deposit		2,985			—			—			—			2,985
Wtd. Avg. Yield		3.25	%		—			—			—
Commercial Paper		4,253			—			—			—			4,253
Wtd. Avg. Yield		1.03	%		—			—			—
Municipals (Local and Government)		—			3,075			1,013			—			4,088
Wtd. Avg. Yield		—			3.09	%		2.10	%		—

	$	39,659		$	56,387		$	49,066		$	26,577		$	171,689

As of September 30, 2003, we had an investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $171.7 million. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from levels as of September 30, 2003, the fair value of the portfolio would decline by $2.2 million.

The fair value of our convertible debt fluctuates based upon changes in the price of our common stock, changes in interest rates and changes in our credit worthiness. The fair market value of the convertible debt as of September 30, 2003 was $135.0 million based upon reported trading activity of the debenture in the secondary market. We do not believe that we have interest rate exposure on our convertible debt because the interest rate is fixed and the convertible debt will be settled at its fair value.

Foreign Exchange Risk

Our revenue originating outside the U.S. was 34% and 39% in the three and nine months ended September 30, 2003, respectively, compared to 41% and 39% for the comparable periods in 2002. International sales are made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries incur and settle most of their expenses in their local currency.

We consider the U.S. dollar to be the functional currency for certain of our foreign subsidiaries and the local currency to be the functional currency for all other foreign subsidiaries. For subsidiaries where the local currency is the functional currency, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the daily current exchange rates. Gains and losses from translation are included in stockholders’ equity. Gains and losses resulting from remeasuring monetary asset and liability accounts for foreign subsidiaries where the U.S. dollar is the functional currency are included in other expense, net. We incurred insignificant foreign currency remeasurement gains in the three months ended September 30, 2003 and incurred immaterial losses in the three months ended September 30, 2002. We recorded foreign currency remeasurement losses of approximately $0.3 million and $0.1 million in the nine months ended September 30, 2003 and 2002, respectively.

Our exposure to foreign exchange fluctuations arise from these intercompany accounts, receivables and payables and from transactions initiated in the U.S. that are denominated in a foreign currency.

We use foreign currency forward contracts to hedge receivables and payables denominated in foreign currency, intercompany receivables and payables, and transactions initiated in the U.S. that are denominated in foreign currency. The principal foreign currencies hedged are the British Pound, Japanese Yen and the Euro using foreign currency forward contracts ranging in periods from one to nine months. Foreign exchange forward contracts are accounted for on a mark-to-market basis, with realized and unrealized gains or losses recognized in the current period as we do not designate our foreign exchange forward contracts as accounting hedges.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates

The table below provides information as of September 30, 2003 about our forward foreign currency contracts. The table presents the notional amounts, at contract exchange rates, the weighted average contractual foreign currency exchange rates, and the estimated fair value. The information is provided in U.S. dollar equivalent amounts.


				Weighted
				Average
	Notional Principal			Contract Rate

	(in thousands)
Functional Currency
Euro	$	4,740			1.16
British Pound		750			1.67
Australian Dollars		1,165			0.69
Japanese Yen		314			111.38

	$	6,969

Estimated fair value as of September 30, 2003:	$	(113	)

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all future conditions.

(b) Changes in Internal Controls. There was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

We have revised our Insider Trading Policy to allow directors, officers and other employees covered under the policy to establish, under limited circumstances contemplated by Rule 10b5-1 under the Exchange Act, written

programs that permit automatic trading of our stock or trading of our stock by an independent person who is not aware of material inside information at the time of the trade. We believe that certain of our officers have established such programs.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

	(a)		Exhibits:

			Exhibit 3.4 Amended and Restated Bylaws of the Registrant

			Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

			Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

			Exhibit 32.1 Certifications of Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	(b)		Reports on Form 8-K:

			On July 2, 2003, we filed a Form 8-K relating to our preliminary financial results for the quarter ended June 30, 2003.

			On July 17, 2003, we filed a Form 8-K relating to press releases issued by us concerning our financial results for the quarter ended June 30, 2003 and the quarter ended March 31, 2003.

			On September 9, 2003, we filed a Form 8-K/A, amendment number two to the Form 8-K we filed on December 20, 2002 relating to our acquisition of eRoom Technology, Inc., to include (i) the audit opinion of PricewaterhouseCoopers, LLP, the independent auditors of eRoom Technology, related to the financial statements of eRoom Technology filed as Exhibit 99.1 to form 8-K and (ii) the consent of PricewaterhouseCoopers, LLP to the inclusion of their audit opinion with this Form 8-K.

SIGNATURE

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, on this 10^th day of November, 2003.


		DOCUMENTUM, INC. (Registrant)

		By: /s/ Mark Garrett

		Mark Garrett
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)

DOCUMENTUM INC 10-Q