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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 June 30, 2003

OR

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

For the transition period from ___________ to _______

Commission file number: 0-27358

DOCUMENTUM, INC.

(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 49,875,330 on July 31, 2003.

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FORM 10-Q

Index

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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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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 Notes 4 and 5, have been recorded as necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods presented. These 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 six months ended June 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 Condensed Consolidated Financial Statements include those of Documentum and our 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 June 30, 2003 and December 31, 2002 (in thousands):

     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

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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 June 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 (loss). 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 recorded foreign currency remeasurement losses of approximately $0.2 million in the three months ended June 30, 2003 and incurred immaterial losses in the three months ended June 30, 2002. We recorded foreign currency remeasurement losses of approximately $0.3 million and $0.1 million in the six months ended June 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 six months ended June 30, 2003 and 2002.

Property and Equipment

     Property and equipment are recorded at cost. Depreciation and amortization of leasehold improvements is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful life or the life of the lease, whichever is shorter.

Software Development Costs

     SFAS No. 86 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 $0.3 million and $0.2 million for the three months ended June 30, 2003 and 2002, respectively, and approximately $0.7 million and $0.5 million for the six months ended June 30, 2003 and 2002, respectively.

Goodwill and Identifiable Purchased Intangibles

     Goodwill is stated at cost and purchased intangible assets are stated at cost less accumulated amortization. All of our goodwill at June 30, 2003 is associated with acquisitions completed after June 30, 2001. We have not amortized any goodwill, including workforce intangibles that were subsumed into goodwill, arising from acquisitions that were completed after June 30, 2001.

     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).

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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 Accounting for the Impairment or Disposal of Long-Lived Assets. 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.

     We concluded that there were no events or changes in circumstances during the three and six months ended June 30, 2003 that would indicate that the carrying amounts of our long-lived assets were impaired.

     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 six months ended June 30, 2003 (in thousands):

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. Accordingly, no compensation cost has been recognized for our stock option plans and our stock purchase plan.

     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.

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