Overview

Incorporated in March 1995, we are a provider of content management solutions. Our software and services enable organizations to maximize online business performance and organize, find and govern business content. Our solutions unlock the value of content by delivering the right content to the right person in the right context at the right time. Over 4,700 companies, professional services firms and government entities in 70 countries have chosen Interwoven.

We operate in a single segment, which is the design, development, marketing and sale of software solutions. Our goal is to be the leading provider of content management software solutions. We are focused on generating profitable and sustainable growth through internal research and development, licensing from third parties and acquisitions of businesses with complementary products and technologies.

Total revenues for 2008 were $260.3 million, up 15% from 2007. We experienced increases in 2008 over 2007 in each revenue category - license and support and service. We believe the increases were attributable to the business-critical nature of our product and service offerings and to a favorable competitive environment, which has allowed us to be successful in displacing the solutions offered by our competitors. While we are striving to continue our business momentum, the challenging global economic and market conditions, combined with the pendency of Autonomy's proposed acquisition of us, have led to longer sales cycles and could cause deferrals of customer orders and reduced customer spending. Our primary sources of revenue, and the factors affecting them, are discussed below.

We license our software to companies, professional services firms and government entities generally on a non-exclusive and perpetual basis. The growth in software license revenues is affected by the strength of general economic and business conditions, customer budgetary constraints and the competitive position of our software solutions. Software license revenues are also affected by long, unpredictable sales cycles and, as a result, license revenues are difficult to forecast from period to period. While our consolidated results of operations have shown improvement in recent periods, the challenging global economic and market conditions, coupled with the typical challenges associated with the sales environment for content management products and services, could cause our revenue to decline in future periods.

Customer support revenues are primarily influenced by the number and size of new support contracts sold in connection with software licenses and the renewal rate of existing support contracts. Our support contracts entitle our customers to unspecified product upgrades and technical support during the support period, which is typically one year.

Service revenues consist of software installation and integration, training, business process consulting and software products sold on a subscription basis. Other than our sales of software on a subscription basis, service revenues tend to lag software license revenues since consulting services, if purchased at all, are typically performed after the purchase of new software licenses or in connection with software upgrades. Professional services are predominately billed on a time-and-materials basis and we recognize revenues when the services are performed. For the years ended December 31, 2008 and 2007, professional services revenues also include subscription revenues from our multivariable testing and Web optimization service, which we acquired through our acquisition of Optimost, and revenues from our eDiscovery service, which we acquired through our acquisition of Discovery Mining in August, 2008. Professional services revenues are influenced primarily by the number of professional services engagements sold in connection with software license sales and the customers' use of third party services providers. The growth in our services revenues is also affected by the strength of general economic and business conditions, customer budgetary constraints and the competitive position of our software solutions.

Because our products are complex and involve a consultative sales model, our strategy is to market and sell our products and services primarily through a direct sales force. We look to augment those efforts through relationships with technology vendors, professional services firms, systems integrators, digital/interactive marketing agencies and other strategic partners, which assist our direct sales force in obtaining customer leads and referrals. The percentage of our new customer license orders that are influenced by or co-sold with our strategic partners and

resellers was 65% for the year ended December 31, 2008. In general, these strategic partners and resellers perform the installation and integration, consulting and other services for the enterprises to which they resell our products, and we are not engaged by their customers for these services.

Our sales efforts are targeted to senior executives and personnel who are responsible for managing an enterprise's information technology initiatives. We generate demand for our products and services primarily through our direct sales force and strategic relationships. Our direct sales force is responsible for managing customer relationships and opportunities and is supported by product, marketing and service specialists.

In the rapidly changing and increasingly complex and competitive information technology environment, we believe product differentiation will be a key to market leadership. Thus, our strategy is to continually work to enhance and extend the features and functionality of our existing products and develop new and innovative solutions for our customers. We have in the past and expect to continue to devote substantial resources to our research and development activities and as a result our research and development expenses have continued to increase in absolute dollars each year. We recorded research and development expenses in 2008 of $40.4 million, as compared $37.4 million in 2007 and $35.1 million in 2006. As a percentage of total revenues, research and development expenses were 16%, 17% and 18% in 2008, 2007 and 2006, respectively.

We recorded income from operations in 2008 of $31.4 million, as compared $13.9 million in 2007 and $2.3 million in 2006. We are focused on improving our operating margins by increasing our revenues and managing our expenses through improved productivity and utilization of economies of scale. As a significant portion of our expenses are employee-related, we manage our headcount from period to period. We had 1,012 employees worldwide at December 31, 2008 versus 888 employees at December 31, 2007 and 774 at December 31, 2006. The increase in headcount from 2007 to 2008 was due primarily to the employees we hired as part of the acquisitions of Discovery Mining and staffing of our development operation in Bangalore, India. We also look to improve our cost structure by hiring personnel in countries where advanced technical expertise is available at lower costs. Additionally, we pay close attention to other costs, including facilities and related expense, professional fees and promotional expenses, which are each significant components of our cost structure. As discussed below, in January 2009, we announced a workforce reduction of approximately 70 positions across all functions.

Our acquisition strategy is an important element of our overall business strategy. We seek to identify acquisition opportunities that will enhance the features and functionality of our existing products, add new products and technologies to sell to our existing customers, provide additional customers that we can sell our current products to, or which facilitate entry into adjacent markets. In evaluating these opportunities, we consider, among other strategic objectives, both time to market of the technologies or products to be acquired and potential market share gains. We have completed a number of acquisitions in the past, and we may acquire other technologies, products and companies in the future. In recent years, we have acquired products and solutions with digital asset management, collaborative document management, records management, content publishing, multivariable testing and Website optimization services, eDiscovery services and capital markets vertical market capabilities. The results of operations of these business combinations have been included prospectively from the closing dates of these transactions. Accordingly, our financial results may not be directly comparable to those of the previous periods.

Recent Developments

In January 2009, we announced workforce reductions of approximately 70 positions across all functions. We expect that the workforce reduction will be substantially completed by the end of the first quarter of 2009 and estimate that we will incur pre-tax restructuring charges from the workforce reduction of approximately $1.5 million to $2.0 million.

In January 2009, we entered into a definitive agreement to be acquired by Autonomy in an all-cash transaction. Pursuant to the definitive agreement and subject to the terms and conditions set forth therein, Interwoven will be merged with and into a newly formed, wholly-owned subsidiary of Autonomy, with Interwoven surviving the merger as a wholly-owned subsidiary of Autonomy. Under the definitive agreement, our stockholders would be paid $16.20 in cash, without interest, for each share of Interwoven common stock. For a description of the proposed merger, please refer to the definitive proxy statement for the Special Meeting of Stockholders that was held on March 11, 2009, which is on file with the Securities and Exchange Commission and is available through the

Securities and Exchange Commission's website at www.sec.gov. The completion of the pending merger remains subject to various closing conditions, including that we must have a specified minimum amount of cash, marketable securities and other eligible investments if the closing of the merger occurs before April 22, 2009. For additional information regarding potential risks and uncertainties associated with the proposed merger, please see Part I, Item 1A, Risk Factors above.

Results of Operations

Revenues


                                           Years Ended December 31,                       Percentage Change
                                      2008           2007           2006          2007 to 2008          2006 to 2007
                                                           (In thousands, except percentages)

License                             $  96,027      $  86,788      $  75,678                  11 %                  15 %
Percentage of total revenues               37 %           38 %           38 %
Support and service                   164,261        138,880        124,641                  18 %                  11 %
Percentage of total revenues               63 %           62 %           62 %

                                    $ 260,288      $ 225,668      $ 200,319                  15 %                  13 %

Revenues

Total revenues increased 15% from $225.7 million in 2007 to $260.3 million in 2008. We believe that the increase in revenues was attributable to higher revenues from license, customer support and consulting services, including subscription revenues, in most of our geographic regions, particularly in the North America and Europe. Total revenues increased 13% from $200.3 million in 2006 to $225.7 million in 2007. We believe that the increase in total revenues was attributable to higher customer spending on content management initiatives in all our geographic regions. Sales outside of the United States of America represented 40%, 37% and 36% of our total revenues in 2008, 2007 and 2006, respectively.

License. License revenues increased 11% from $86.8 million in 2007 to $96.0 million in 2008. We believe that the increase in license revenues in 2008 over 2007 was primarily due to higher information technology spending for content management initiatives particularly in Europe. License revenues increased 15% from $75.7 million in 2006 to $86.8 million in 2007. We believe that the increase in license revenues for 2007 over 2006 was primarily due to higher license revenues from sales in all of our geographic regions and larger transaction sizes. Our average license transaction size for sales in excess of $50,000 was $209,000, $206,000 and $172,000 in 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, we had six, seven and three individual license transaction of $1.0 million or greater. License revenues represented 37%, 38% and 38% of total revenues in 2008, 2007 and 2006, respectively. For factors that could impact our future revenues, see Part I, Item 1A. "Risk Factors" above.

Support and Service. Support and service revenues increased 18% from $138.9 million in 2007 to $164.3 million in 2008. The increase in support and service revenues was primarily due to an increase of $14.2 million in customer support revenues from a larger installed base of customers purchasing support contracts and a $12.9 million increase in consulting revenues, mainly from subscription revenue derived from acquisitions of Discovery Mining and Optimost. Support and service revenues increased 11% from $124.6 million in 2006 to $138.9 million in 2007. This increase was primarily due to higher support revenue from our larger installed base of new and existing customers purchasing support contracts and higher consulting revenues primarily related to increased sales of software licenses and subscriptions related to Optimost, which was acquired in November 2007. Support and service revenues accounted for 63%, 62% and 62% of total revenues in 2008, 2007 and 2006, respectively.

To the extent that our license revenues decline in the future, our support and service revenues may also decline. Specifically, a decline in license revenues may result in fewer consulting engagements. Additionally, since customer support contracts are generally sold with each license transaction, a decline in license revenues may also result in a slowing of growth in customer support revenue. However, since customer support revenues are

recognized over the duration of the support contract, the impact will not be experienced for up to several months after a decline in license revenues. In the future, customer support revenues may also be adversely impacted if customers fail to renew their support agreements or reduce the license software quantity under their support agreements. Our ability to increase or maintain subscription revenues from our Website optimization and eDiscovery services depends on our success in attracting new customers, retaining our existing customers and cross-selling these services to customers that have licensed our software.

Cost of Revenues


                                             Years Ended December 31,                      Percentage Change
                                         2008          2007          2006        2007 to 2008           2006 to 2007
                                                             (In thousands, except percentages)

Cost of license revenues               $  7,415      $  7,886      $ 16,367                 (6 )%                  (52 )%
Percentage of license revenues                8 %           9 %          22 %
Percentage of total revenues                  3 %           3 %           8 %
Cost of support and service revenues     64,615        55,214        50,256                 17 %                    10 %
Percentage of support and service
revenues                                     39 %          40 %          40 %
Percentage of total revenues                 25 %          24 %          25 %

                                       $ 72,030      $ 63,100      $ 66,623                 14 %                    (5 )%

License. Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and documentation, costs of licensing third-party software embedded in or sold with our software products and amortization of purchased technology associated with business combinations. Cost of license revenues represented 8%, 9% and 22% of total license revenues in 2008, 2007 and 2006, respectively. The decrease in cost of license revenues for 2008 from 2007 was attributable primarily to a $1.6 million decrease in amortization of purchased technology as certain purchased technology has become fully amortized offset by a $1.1 million increase in costs of licensing third-party software. The decrease in cost of license revenues in absolute dollars and as a percentage of total revenues from 2006 to 2007 was primarily due to an $8.8 million decrease in amortization of certain purchased technology which had become fully amortized in November 2006, offset by a $232,000 increase in costs of licensing third-party software and a $104,000 increase in packaging expense.

Based solely on acquisitions completed through December 31, 2008 and assuming no impairments, we expect the amortization of purchased technology classified as a cost of license revenues to be $3.9 million in 2009, $5.5 million in 2010, $4.5 million in 2011, $3.2 million in 2012 and $1.5 million in 2013. We expect cost of license revenues as a percentage of license revenues to vary from period to period depending on the mix of software products sold, the extent to which third-party software products are bundled with our products and the amount of overall license revenues, as many of the third-party software products embedded in our software are under fixed-fee arrangements.

Support and Service. Cost of support and service revenues consists of salary and personnel-related expenses for our consulting, training and support personnel, costs associated with delivering product updates to customers under active support contracts, subcontractor expenses, facilities costs and depreciation of equipment used in our consulting, training and customer support operation. Cost of support and service revenues increased $9.4 million, or 17%, to $64.6 million in 2008 from $55.2 million for the same period in 2007. The increase in cost of support and service revenues in 2008 from the same period in 2007 was due primarily to a $7.6 million increase in personnel-related costs as a result of increased headcount over the period and salary adjustments, a $2.2 million increase in amortization of purchased technology and hosting costs related to subscription revenue, a $636,000 increase in travel costs, a $661,000 increase in stock-based compensation expense and a $431,000 increase in facilities costs. These costs were offset by a $2.4 million decrease in subcontractor fees primarily due to reduced consulting services engagements from customers in the global capital markets industry. Cost of support and services revenues increased $5.0 million or 10% to $55.2 million in 2007 from $50.3 million in 2006. The increase in cost of support and services revenues was primarily due to higher personnel costs of $2.9 million related to increased headcount and salary increases, higher outside consulting costs of $1.2 million and higher travel expenses of $430,000. Cost of

support and service revenues represented 39%, 40% and 40% of support and service revenues in 2008, 2007 and 2006, respectively. Support and service headcount was 322, 276 and 215 at December 31, 2008, 2007 and 2006, respectively. The headcount increase from 2006 to 2007 was due in part to employees hired from Optimost while the increase from 2007 to 2008 was due to staffing in India and employees hired in the acquisition of Discovery Mining, and to support our revenue growth and reduce our dependency on contract labor.

We realize lower gross profits on support and service revenues than on license revenues. In addition, we may contract with outside consultants and system integrators to supplement the services we provide to customers and use third parties to host our subscription services, which increases our costs and further reduces gross profits. Further, the acquisitions of Optimost and Discovery Mining increased the amortization of purchased technology recorded as cost of support and service. As a result, if support and service revenues increase as a percentage of total revenues or if we increase our use of third parties to provide such services, our gross profits will be lower and our operating results may be adversely affected.

Operating Expenses

Sales and Marketing


                                             Years Ended December 31,                     Percentage Change
                                         2008          2007          2006        2007 to 2008          2006 to 2007
                                                            (In thousands, except percentages)

Sales and marketing                    $ 89,943      $ 83,201      $ 77,114                  8 %                   8 %
Percentage of total revenues                 35 %          37 %          39 %

Sales and marketing expenses consist of salaries, commissions, benefits and related costs for sales and marketing personnel, facilities costs, travel and marketing programs, including customer conferences, promotional materials, trade shows and advertising. Sales and marketing expenses increased $6.7 million, or 8%, to $89.9 million for 2008 from $83.2 million for the same period in 2007. The increase in sales and marketing expenses in 2008 from 2007 was due primarily to a $3.8 million increase in personnel-related cost associated with increased headcount and salary adjustments, a $1.3 million increase in travel expenses, a $1.7 million increase in stock-based compensation, a $484,000 increase in marketing programs and a $277,000 increase in consulting expense offset by a $802,000 decrease in facilities cost. Sales and marketing expenses increased $6.1 million, or 8%, from $77.1 million in 2006 to $83.2 million in 2007. This increase was primarily due to $4.2 million increase in personnel-related costs related to increased headcount and salary increases, $1.7 million in increased in marketing program expense and $605,000 in increased stock-based compensation expense, offset by $739,000 in decreased outside consulting costs. As a percentage of total revenues, sales and marketing expenses represented 35%, 37% and 39% in 2008, 2007 and 2006, respectively. The decreases in sales and marketing expense as a percentage of total revenues from 2007 to 2008 and from 2006 to 2007 were due primarily to cost control efforts and higher productivity within our sales organization. Sales and marketing headcount was 283, 261 and 234 at December 31, 2008, 2007 and 2006, respectively. The headcount increase from 2007 to 2008 was primarily due to employees hired in the acquisition of Discovery Mining and the increase from 2006 to 2007 was primarily due to employees hired from Optimost and an increase in marketing personnel.

We expect that the percentage of total revenues represented by sales and marketing expenses will fluctuate from period to period due to the timing of hiring of new sales and marketing personnel, our spending on marketing programs and the level of revenues, in particular license revenues, in each period. We are endeavoring to control and reduce, our sales and marketing costs in absolute dollars in view of current economic conditions. We anticipate that with evidence of a sustained recovery of the global economy, we would review spending in sales and marketing to expand our customer base and increase brand awareness.

Research and Development


                                             Years Ended December 31,                     Percentage Change
                                         2008          2007          2006        2007 to 2008          2006 to 2007
                                                            (In thousands, except percentages)

Research and development               $ 40,378      $ 37,447      $ 35,069                  8 %                   7 %
Percentage of total revenues                 16 %          17 %          18 %

Research and development expenses consist of salaries and benefits, third-party contractor costs and facilities and related overhead costs associated with our product development and quality assurance activities. Research and development expense increased $3.0 million, or 8%, to $40.4 million for 2008 from $37.4 million for the same period in 2007. The increase in 2008 from the same period in 2007 was primarily due to a $3.3 million increase in personnel related costs due to increased headcount over the period and salary adjustments, a $870,000 increase in stock-based compensation and a $135,000 increase in travel expense offset by a $1.2 million decrease in facilities costs and a $540,000 decrease in outside consultants. Research and development expenses increased $2.4 million, or 7%, from $35.1 million in 2006 to $37.4 million in 2007. This increase was primarily due to an increase of $878,000 in third-party contractor costs, higher personnel costs of $868,000 because of increased headcount and salary increases, an increase of $500,000 in facilities costs and an increase of $131,000 in travel expenses. Research and development headcount was 296, 243 and 232 at December 31, 2008, 2007 and 2006, respectively. The increase in research and development headcount from 2007 to 2008 and from 2006 to 2007 was primarily due to staffing in our Bangalore, India operations.

General and Administrative


                                             Years Ended December 31,                      Percentage Change
                                         2008          2007          2006         2007 to 2008           2006 to 2007
                                                             (In thousands, except percentages)

General and administrative             $ 23,656      $ 24,620      $ 16,787                   (4 )%                 47 %
Percentage of total revenues                  9 %          11 %           8 %

General and administrative expenses consist of salaries and personnel-related costs for general corporate functions including finance, accounting, human resources, legal and information technology. General and administrative expenses decreased $1.0 million, or 4%, to $23.7 million for 2008 from $24.6 million for the same period in 2007. The decrease in general and administrative expense in 2008 from the same period in 2007 was primarily due to a decrease of $3.5 million legal and accounting service fees mainly as a result of the completion of our voluntary review of historical stock option granting practices and related restatement in 2007 offset by a $1.8 million increase in stock-based compensation expense and a $768,000 increase in personnel-related costs as a result of increased headcount over the period and salary adjustments. General and administrative expenses increased $7.8 million or 47%, from $16.8 million in 2006 to $24.6 million in 2007. In 2007, we incurred $6.6 million in accounting and legal expenses relating to the review of historical stock option granting practices and related restatement. We also incurred additional rent expense of $758,000 associated with our new corporate headquarters while we were in the process of completing tenant improvements prior to occupying the facilities in July 2007. The increase in general and administrative expenses in 2007 was also . . .