##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-26679
  Art Technology Group,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

04-3141918(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)One Main Street

02142Cambridge,
    Massachusetts

(Zip
    Code)(Address of principal executive
    offices)   (617) 386-1000
 (Registrants telephone
    number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par
    value with Associated Preferred Stock Purchase Rights

The Nasdaq Stock Market, LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      Documents
    Incorporated by Reference




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##### 



ART
    TECHNOLOGY GROUP, INC.
  INDEX TO
    FORM 10-K
  PagePART IItem 1.


Business


1Item 1A.


Risk
    Factors


10Item 1B.


Unresolved Staff
    Comments


18Item 2.


Properties


18Item 3.


Legal
    Proceedings


18Item 4.


Submission of
    Matters to a Vote of Security Holders


19PART IIItem 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


20Item 6.


Selected
    Consolidated Financial Data


20Item 7.


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


23Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


35Item 8.


Consolidated
    Financial Statements and Supplementary Data


36Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


70Item 9A.


Controls and
    Procedures


70Item 9B.


Other
    Information


73PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


73Item 11.


Executive
    Compensation


74Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


74Item 13.


Certain
    Relationships and Related Transactions and Director
    Independence


74Item 14.


Principal
    Accountant Fees and Services


74PART IVItem 15.


Exhibits and
    Financial Statement Schedules


75SIGNATURESSignatures


76Ex-21.1 SubsidiariesEx-23.1 Consent of Ernst & Young LLPEx-31.1 Section 302 Certification of PEOEx-31.2 Section 302 Certification of PFOEx-32.1 Section 906 Certification of PEOEx-32.2 Section 906 Certification of PFO     i




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##### Table of Contents



PART I  Some of the information contained in this Report consists of
    forward-looking statements within the meaning of the
    Private Securities Litigation Reform Act of 1995. Use of words
    such as believes, expects,
    anticipates, intends, plans,
    estimates, should, likely or
    similar expressions indicate a forward-looking statement. These
    statements are subject to risks and uncertainties and are based
    on the beliefs and assumptions of our management based on
    information currently available to our management. Important
    factors that could cause actual results to differ materially
    from the forward-looking statements include, but are not limited
    to, those set forth below under the heading Risk
    Factors. We assume no obligation to update any
    forward-looking statements.
  Item 1.
    Business  Our
    Business
  e-commerce e-commerce e-commerce
  Corporate
    Information
  www.atg.com
  Overview
    e-mail,
   1




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
    Until 1995, we functioned primarily as a professional services
    organization in the Internet commerce market.
    In 1996, we began offering Internet commerce and software
    solutions, initially focusing on infrastructure products, such
    as our ATG Dynamo Application Server.
    In 2004, we began to concentrate on developing application
    products, having concluded that the market for infrastructure
    products had become increasingly standards driven and that we
    could best differentiate ourselves by offering our clients
    advanced applications functionality.
    In November 2004, we acquired Primus Knowledge Solutions, Inc.
    (Primus), a provider of software solutions for
    customer service designed to help companies deliver a superior
    customer experience via contact centers,
    e-mail and
    web self-service. The Primus solutions extended ATGs
    offerings beyond commerce and marketing and into customer
    service.
    In 2004, we also began to offer our clients hosted services,
    also known as software-as-a-service, as an alternative delivery
    model for our application solutions. We believe that hosted
    services can provide significant advantages for our clients, and
    provide us with a substantial opportunity for growth.
    In 2005, we completed the integration of Primus applications
    into the ATG platform, in what we call our Wisdom strategy.
    In October 2006, we acquired eStara, Inc. (eStara),
    a provider of proactive conversion solutions for enhancing
    online sales and support initiatives. The eStara solutions
    provided us with a new channel to help our clients convert web
    browsing activities into sales, as well as business
    opportunities independent of ATG-powered websites.  Our
    Strategy
    
    Deliver a commerce platform with leadership functionality,
    suitable for the most demanding enterprises.  Our
    clients tell us that, in some cases, our platform delivers over
    100,000 orders per day in peak periods. Leading industry
    analysts rank our overall offering number one among commerce
    platforms for
    business-to-consumer
    sites, including reliability and scalability, administration and
    management, catalog/content management, campaign management and
    customer self-service. It is our objective to continue to
    provide leadership in
    e-commerce
    functionality and operational excellence.
    Through application hosting services, provide the same
    quality platform to mid-tier companies and others who opt to
    outsource their
    e-commerce
    operations.For clients that do not wish to
    expend resources on running
    e-commerce
    and
    e-business
    applications in-house, we offer hosting services for the full
    spectrum of ATG applications, which we call ATG OnDemand.
    Clients can purchase licenses to our solutions and elect an
    OnDemand managed services model where we host the clients
    solutions in our hosted environment. Or clients can elect an
    OnDemand subscription model, which requires neither an
    investment in software licenses, nor support and maintenance
    agreements. With the OnDemand subscription model, we provide a
    full solution for the client, including the software, hardware
    and management. There are several advantages for organizations
    to choose an OnDemand hosting model, which makes this a
    potential growth area for us. These include:  
    leveraging our experience to accelerate growth of the
    clients online business and allowing clients to focus on
    their core competencies;
    shifting the clients technology risks to us;
    shortening the time to market (vs. in-house development,
    deployment and maintenance); and
    avoiding upfront and ongoing expenditures required to purchase
    and maintain software and hardware. 2




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
    Differentiate by providing a more personalized, more
    relevant, more consistent shopping experience.  We
    give merchandisers and marketers the power and analytics to
    define offers and cross-sells, to follow up on abandoned
    shopping carts, to perform A/B split tests and to create
    multi-channel, multi-stage web and
    e-mail
    campaigns that match a companys selling strategy with
    information about a visitors browsing behavior, purchase
    and interaction history, preferences and profile. This increases
    basket size and the number of website visitors who go on to
    purchase items from that website, resulting in increased
    revenue. We use this same information to extend the consistent
    customer experience to the customer service agent in the call
    center, which results in a more satisfied, loyal and profitable
    customer.
    Through our eStara subsidiary, deliver solutions independent
    of the choice of web platform.  Our eStara
    proactive conversion solutions can be delivered to clients who
    are using any
    e-commerce
    platform, or custom-built websites, across all industries. This
    enlarges the size of our market opportunity and customer
    penetration.
    Leverage existing sales channels.  We sell our
    products primarily through our direct sales organization. In
    addition, a significant portion of our revenue is co-sold or
    influenced by a variety of business partners, including systems
    integrators, solution providers and other technology partners.
    We currently have a broad range of business alliances throughout
    the world, such as Accenture, Capgemini, Deloitte Consulting, HP
    Consulting and Tata Consultancy Services, as well as regional
    integrators and interactive agencies such as aQuantive,
    BlastRadius, imc2, CGI (EMEA), LBi Group (EMEA), McFadyen
    Consulting, Professional Access, Resource Interactive and D2C2
    (Taiwan). In most geographies and situations, our goal is both
    to maintain close relationships directly with our clients while
    also motivating systems integrators and other channel partners
    to implement our applications in their projects and solution
    sets.
    Leverage and expand our service
    capabilities.  We have extensive experience in web
    application development and integration services, as well as
    knowledge management design and call-center systems deployment.
    Through our Professional and Education Services organizations,
    we provide services to train our systems integrators, value
    added resellers and complementary software vendors in the use of
    our products and offer consulting services to assist with
    customer implementations. We seek to motivate our business
    partners to provide joint implementation services to our end
    user customers. We intend to continue to seek additional
    opportunities to increase revenues from product sales by
    expanding our base of business partners trained in the
    implementation and application of our products.  ATG
    Licensed Products
  e-commerce e-commerce
  ATG Commerce business-to-business
  The ATG Adaptive Scenario Engine e-commerce e-commerce
  ATG Commerce Search e-commerce
 3




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ATG Merchandising
  ATG Content Administration
  ATG Outreach e-marketing
  ATG Self-Service
  ATG Commerce Assist
  ATG Response Management e-mail,
  ATG Knowledge
  ATG Campaign Optimizer
  ATG Customer Intelligence
   4




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OnDemand
    Service Offerings
  e-commerce
  Subscription Services. set-up
  Managed Services.
  eStara
    Service Offerings
  e-commerce e-commerce
  eStara Click to Call e-mail PC-to-phone phone-to-phone
  eStara Click to Chat
  eStara Call Tracking
  Support
    and Services
    Customer Support and Maintenance Services. 24/7,
  Professional Services.
 5




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
    OnDemand Offerings.  By leveraging our
    experience with the pre-built OnDemand offerings, our
    Professional Services organization assists our clients with
    their ATG implementations, thus helping our clients quickly and
    economically launch their
    e-commerce
    and service projects.
    Full-lifecycle Solutions.  We work with our
    clients from the earliest stages of their projects. The
    full-lifecycle approach encompasses everything from working with
    our clients end users and technical staff to define
    project requirements to solution design, implementation,
    usability testing, staging and deployment.
    Custom Solutions.  We can also manage specific
    areas of our clients projects, such as designing a
    solution to meet a clients requirements, implementing
    scenarios or integrating our solutions with a third-party
    application.
    Structured Enablement.  In this model, we give
    our clients the guidance they need while maximizing the skills
    of the clients own personnel. Depending on a clients
    project goals and the expertise of its team, appropriate ATG
    personnel (such as architects or engineers) work onsite as
    advisors to aid the clients personnel in areas such as
    reviewing completed work or advising on a particular project
    area.  Education Services.
 6




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Markets
    Consumer Retail


Financial Services


ManufacturingAmazon


Allied Irish Banks


Abbott LaboratoriesAmerican Eagle Outfitters


Allstate


AirbusB&Q (UK)


American Express


American StandardBest Buy Companies, Inc.


Barclays Global Investors


BoeingBluefly


Canada Trust


Boston ScientificBody Shop


Citicorp


Coca-ColaCabelas


Conseco


Daimler-ChryslerCarrefour (Europe)


Dell Financial Services


Eastman KodakCVS


Deutsche Bank


General MotorsEl Corte Ingles (Spain)


Dreyfus Services Corporation


Heidelberger DruckmaschinenJ. Crew


Fidelity


Hoffman la RocheLL Bean


Ford Motor Credit


Johnson & JohnsonNeiman Marcus


Franklin Templeton Funds


Louis VuittonNew York & Company


Harris Bank


MarsOfficeMax


HSBC


MotorolaPetMed Express


Irwin Union Bank


Newell RubbermaidRestoration Hardware


John Hancock Funds


NikeSears


Merrill Lynch


NokiaTarget Corporation


MFS Investment Management


PhilipsThe Finish Line


PayPal


PirelliUrban Outfitters


Pioneer Investments


Procter & GambleWalgreens


St. James Place Management


RubbermaidWarnaco (Calvin Klein, Speedo)


Washington Mutual


Sony   Communications and Technology


Travel, Media and EntertainmentAdobe


AOLAT&T


BMG DirectBellSouth


Club MedDell


ElsevierEMC


ExpediaFrance Telecom


Harvard Business School PublishingHewlett-Packard


Hilton HotelsHitachi


Hotels.comIntuit


HyattMicrosoft


Intercontinental Hotels GroupOrange PLC


Knight-RidderSony


Media News GroupTelefonica


Meredith CorporationT-Mobile


NintendoVeriSign


Readers DigestVerizon


The MTVi GroupVodafone


Time, Inc.Warner Music  7




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Research
    and Development
      Sales and
    Marketing
          Strategic
    Alliances
    Competition
    
    in-house development efforts by potential clients or partners;
    e-commerce
    application vendors, such as IBM and Escalate Retail;
    e-commerce
    business process outsourcers, such as Digital River and GSI
    Commerce;
    hosting managed service providers, such as Accenture, EDS and
    IBM; 8




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
    hosting on-demand subscription service providers, such as
    Demandware, Digital River, MarketLive and Venda;
    marketing and customer-service application vendors, including
    natural language, self-service and traditional customer
    relationship management application vendors; and
    proactive solutions vendors, such as LivePerson.    out-of-the-box (e-commerce),
  Proprietary
    Rights and Licensing
      Employees
    Internet
    Address and SEC Reports
  Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330.
 9




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http://www.sec.gov
  Form 10-K.
  Item 1A.
    Risk
    Factors  Form 10-K
  We
    expect our revenues and operating results to continue to
    fluctuate for the foreseeable future. If our quarterly or annual
    results are lower than the expectations of securities analysts,
    then the price of our common stock is likely to
    fall.
    
    the timing of sales and revenue recognition of our products and
    services, which are affected by the mix of licensed, hosted and
    subscription-based sales in a period; depending on our sales
    terms with our customers, we expect to recognize an increasing
    portion of our revenue ratably over a period of time rather than
    at the time of invoice;
    the timing of customer orders, especially larger transactions,
    and product implementations;
    fluctuating economic conditions, particularly as they affect our
    customers willingness to implement new
    e-commerce
    solutions;
    delays in introducing new products and services;
    the size of price discounting and concessions;
    changes in the mix of revenues derived from products and
    services;
    timing of hiring and utilization of personnel;
    cost overruns related to fixed-price services projects;
    the mix of domestic and international sales;
    variation in our actual costs from our cost estimates related to
    long term hosting contracts;
    increased expenses, whether related to sales and marketing,
    product development or administration; and
    costs related to possible acquisitions of technologies or
    businesses.   10




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Our
    management has concluded that there were material weaknesses in
    our internal control over financial reporting which could
    undermine our investors confidence in our financial
    statements.
  Form 10-K.
    We may
    not be able to sustain or increase our revenue or attain
    profitability on a quarterly or annual basis.
    Our
    lengthy sales cycle makes it difficult to predict our quarterly
    results and causes variability in our operating
    results.
    Our
    common stock price has historically been volatile and will
    probably continue to be volatile.
    
    variations in our quarterly operating results, in particular,
    our ability to meet the expectations of brokerage firms,
    industry analysts and investors;
    changes in market valuations of software companies; 11




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
    our announcement of significant contracts, acquisitions,
    strategic partnerships, joint ventures or capital commitments;
    timing of completion of significant sales;
    additions or departures of our key personnel; or
    future sales of our common stock.  If the
    market for
    e-commerce
    does not continue to grow, then demand for our products and
    services may decrease.
  e-commerce.
  If we
    fail to adapt to rapid changes in the market for online business
    applications, then our products and services could become
    obsolete.
    e-commerce E-commerce
  We
    face intense competition in the market for online commerce
    applications and services, and we expect competition to
    intensify in the future. If we fail to remain competitive, then
    our revenues may decline, which could adversely affect our
    future operating results and our ability to grow our
    business.
    
    Potential clients or partners may choose to develop
    e-commerce
    applications in-house, rather than paying for our products or
    services.
    Some of our current and potential competitors have greater
    financial, marketing and technical resources than we do,
    allowing them to leverage a larger installed customer base and
    distribution network, adopt more aggressive pricing policies and
    offer more attractive sales terms, adapt more quickly to new
    technologies and changes in customer requirements, and devote
    greater resources to the promotion and sale of their products
    and services than we can.
    Our suite of service products competes against various vendor
    software tools designed to address a specific element or
    elements of the complete set of eService processes, including
    e-mail
    management, support, knowledge management, and web-based
    customer self-service and assisted service. 12




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
    Current and potential competitors have established or may
    establish cooperative relationships among themselves or with
    third parties to enhance their products and expand their
    markets. Accordingly, new competitors or alliances among
    competitors may emerge and rapidly acquire significant market
    share.
    Some of our current and potential competitors, especially our
    larger competitors like IBM that offer broad suites of computer
    and software applications may offer free or low-cost
    e-commerce
    applications and functionality bundled with their own computer
    and software products. Potential customers may not see the need
    to buy our products and services separately when they can use
    the bundled applications and functionality in our
    competitors product suites for little or no additional
    cost.  If the
    market for our OnDemand service offerings does not develop or
    develops more slowly than we expect, then our business could be
    negatively affected.
    If our
    clients experience interruptions, delays or failures in our
    hosted services, then we could incur significant costs and lose
    revenue opportunities.
    We
    depend heavily on key employees in a competitive labor
    market.
    If we
    fail to anticipate and address the risks associated with
    eStaras business, then our business could be
    harmed.
   13




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We
    could incur substantial costs defending against a claim of
    infringement or protecting our intellectual property from
    infringement.
      
    cease selling or using products or services that incorporate the
    challenged intellectual property;
    obtain a license, which may not be available on reasonable
    terms, to sell or use the relevant technology; or
    redesign those products or services to avoid infringement.        If we
    fail to maintain our existing customer base, then our ability to
    generate revenues will be harmed.
    
    provide high levels of customer service and product support to
    help our clients maximize the benefits that they derive from our
    products; 14




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
    remain competitive by introducing enhancements and new versions
    of our products that provide additional functionality; and
    manage the transition from our older products so as to minimize
    the disruption to our clients caused by the migration and
    integration with the clients information technology
    platform.  If we
    fail to address the challenges associated with our international
    operations, then revenues from our products and services may
    decline, and the costs of providing our products or services may
    increase.
    
    changes in regulatory requirements, exchange rates, tariffs and
    other barriers;
    longer payment cycles and problems in collecting accounts
    receivable in Western Europe and Asia;
    difficulties in managing systems integrators and technology
    partners;
    difficulties in staffing and managing foreign subsidiary
    operations;
    differing technology standards;
    difficulties and delays in translating products and product
    documentation into foreign languages for countries in which
    English is not the primary language;
    reduced protection for intellectual property rights in some of
    the countries in which we operate or plan to operate;
    difficulties related to entering into legal contracts under
    local laws and in foreign languages;
    fluctuations in the exchange rates between foreign and United
    States currency;
    potentially adverse tax consequences; and
    political and economic instability.  If we
    fail to comply with the financial covenants in our line of
    credit, or if our bank refuses to renew this facility, then our
    liquidity could be impaired.
      We may
    need additional financing in the future, and any additional
    financing may result in restrictions on our operations or
    substantial dilution to our stockholders.
   15




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If
    systems integrators or value added resellers reduce their
    support and implementation of our products, then our revenues
    may fail to meet expectations and our operating results would
    suffer.
    If our
    software products contain serious errors or defects, then we may
    lose revenues and market acceptance and may incur costs to
    defend or settle product liability claims.
    e-commerce,
  If the
    Sun®
    Javatm programming language loses market acceptance or if we are
    not able to continue using Java technologies, then our business
    could be harmed.
     16




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Government
    or industry regulations could directly restrict our business or
    indirectly affect our business by limiting the growth of
    e-commerce.
  e-commerce e-commerce e-commerce
  The
    Internet is generating privacy concerns that could result in
    legislation or market perceptions that could result in reduced
    sales of our products and harm our business.
      If
    NASDAQ were to delist our common stock from The NASDAQ Global
    Market, then the value of your investment could be reduced, and
    your shares could be more difficult to sell.
    
    hinder your ability to sell, or obtain an accurate quotation for
    the price of your shares of our common stock;
    hurt our reputation among our investors and prospects, which
    could lead to further declines in the market price of our common
    stock; 17




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
    make it more difficult and expensive for us to raise
    capital; and
    subject us to a Securities and Exchange Commission rule that
    could adversely affect the ability of broker-dealers to sell or
    make a market in our common stock, thus hindering your ability
    to sell your shares.  Anti-takeover
    provisions in our charter documents and Delaware law could
    prevent or delay a change in control of our
    company.
    
    authorizing the issuance of blank check preferred
    stock;
    providing for a classified board of directors with staggered,
    three-year terms;
    providing that directors may only be removed for cause by a
    two-thirds vote of stockholders;
    limiting the persons who may call special meetings of
    stockholders and prohibiting stockholder action by written
    consent;
    establishing advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings; and
    authorizing anti-takeover provisions.    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings  In re Art Technology
    Group, Inc. Securities Litigation. Rule 10b-5
   18




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Item 4.
    Submission
    of Matters to a Vote of Security Holders   19




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PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities    High


LowFiscal 2005First quarter

$
1.40


$
1.05Second quarter


1.22



0.95Third quarter


1.21



1.00Fourth quarter


2.13



0.92Fiscal 2006First quarter

$
3.49


$
1.83Second quarter


3.81



2.12Third quarter


3.10



2.32Fourth quarter


2.66



1.91         Item 6.
    Selected
    Consolidated Financial Data  Form 10-K. Form 10-K Form 10-K
     20




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Consolidated
    Statements of Operations Data:
  Year Ended December 31,2006


2005


2004


2003(1)


2002(1)(As restated)


(As restated)(In thousands, except per share data)Revenues:Product licenses

$
32,784


$
29,821


$
23,345


$
26,793


$
48,932Services


70,448



60,825



45,874



45,313



51,953Total revenues


103,232



90,646



69,219



72,106



100,885Cost of revenues:Product licenses


1,751



1,816



2,206



2,118



4,278Services


30,799



23,255



19,879



19,730



33,745Total cost of revenues


32,550



25,071



22,085



21,848



38,023Gross profit


70,682



65,575



47,134



50,258



62,862Operating expenses:Research and development


20,434



17,843



16,209



17,928



22,046Sales and marketing


31,992



30,034



29,602



31,400



42,800General and administrative


12,952



11,231



7,742



9,265



10,955Restructuring charge (benefit)


(62
)


885



3,570



(10,346
)


18,875Total operating expenses


65,316



59,993



57,123



48,247



94,676Income (loss) from operations


5,366



5,582



(9,989
)


2,011



(31,814
)Interest and other income, net


1,712



219



395



176



1,858Income (loss) before provision
    (benefit) for income taxes


7,078



5,801



(9,594
)


2,187



(29,956
)Provision (benefit) for income
    taxes


(2,617
)


32



(50
)


(255
)


Net income (loss)

$
9,695


$
5,769


$
(9,544
)

$
2,442


$
(29,956
)Basic net income (loss) per share

$
0.08


$
0.05


$
(0.12
)

$
0.03


$
(0.43
)Diluted net income (loss) per share

$
0.08


$
0.05


$
(0.12
)

$
0.03


$
(0.43
)Basic weighted average common
    shares outstanding


115,280



109,446



79,252



71,798



69,921Diluted weighted average common
    shares outstanding


120,096



111,345



79,252



73,678



69,921   Consolidated
    Balance Sheet Data:
  December 31,2006


2005


2004


2003(1)


2002(1)(As restated)


(As restated)(In thousands)Cash, cash equivalents and
    short-term marketable securities

$
31,223


$
33,569


$
26,507


$
41,584


$
68,558Long-term marketable securities










4,001







Total assets


149,981



92,765



97,803



67,360



104,835Long-term obligations, less
    current maturities






63



112







Total stockholders equity

$
105,074


$
50,160


$
42,185


$
20,937


$
15,999     (1)
    
    Refer to Note 2 to our consolidated financial statements in
    Item 8 of this annual report on Form 10-K for
    additional discussion of the restatement in 2002 and 2003. 22




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
  e-commerce
  Form 10-K. Form 10-K
  Recent
    Events
  Form 10-K.
    Critical
    Accounting Policies and Estimates
     23




---



##### Table of Contents



Definitions
      Revenue
    Recognition
  Revenue Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables
    97-2, Software Revenue Recognition SOP 98-9, Modifications of
    SOP 97-2,
    Software Revenue Recognition, With Respect to Certain
    Transactions SOP 97-2 SOP 98-9,
  SOP 97-2 SOP 97-2.
   24




---



##### Table of Contents



time-and-material
    Accounts
    Receivable and Bad Debts
    Research
    and Development Costs
  Accounting for Research and Development
    Costs, Accounting for the
    Costs of Computer Software to be Sold, Leased, or Otherwise
    Marketed
  Restructuring
    Expenses
  Accounting for Costs
    Associated with Exit or Disposal Activities Employers Accounting for
    Settlements and Curtailments
 25




---



##### Table of Contents



of Defined Benefit Pension Plans and for Termination Benefits Restructuring
    and Impairment Charges No. 94-3, Liability Recognition for Certain Employee Termination
    Benefits and Other Costs to Exit an Activity (including Certain
    Costs Incurred in a Restructuring)
      Impairment
    or Disposal of Long Lived Assets, including Intangible
    Assets
    Goodwill
  Goodwill and Other
    Intangible Assets
  Accounting
    for Income Taxes
  Accounting for Income Taxes
 26




---



##### Table of Contents



Stock-Based
    Compensation Expense
  Accounting for Stock Issued to Employees Share-Based Payment Form 10-K. Share-Based Payment
 27




---



##### Table of Contents



Results
    of Operations
    Year ended December 31,2006


2005


2004Revenues:Product licenses


32
%


33
%


34
%Services


68



67



66Total revenues


100



100



100Cost of revenues:Product licenses


2



2



3Services


30



26



29Total cost of revenues


32



28



32Gross margin


68



72



68Operating expenses:Research and development


20



20



23Sales and marketing


31



33



43General and administrative


12



12



11Restructuring charge (benefit)


(0
)


1



5Total operating expenses


63



66



82Income (loss) from operations


5



6



(14
)Interest and other income, net


2



0



0Income (loss) before provision
    (benefit) for income taxes


7



6



(14
)Provision (benefit) for income
    taxes


(2
)


0



(0
)Net income (loss)


9
%


6
%


(14
)%     Year ended December 31,2006


2005


2004Cost of product license revenues


5
%


6
%


9
%Gross margin on product license
    revenues


95



94



91Cost of services revenues


44



38



43Gross margin on services revenues


56



62



57   Years
    ended December 31, 2006, 2005 and 2004
  Revenues
   28




---



##### Table of Contents



e-commerce
        Product
    License Revenues
  e-commerce
            Services
    Revenues
       29




---



##### Table of Contents



Cost of
    Product License Revenues
      Gross
    Margin on Product License Revenues
    Cost of
    Services Revenues
        Gross
    Margin on Services Revenues
   30




---



##### Table of Contents



Research
    and Development Expenses
        Sales and
    Marketing Expenses
          General
    and Administrative Expenses
        Stock-based
    Compensation Expense
  Share-Based Payment,
 31




---



##### Table of Contents



Restructuring
  Form 10-K.
  Abandoned
    Facilities Obligations
  sub-lease
  2007


2008


2009


TotalWaltham, MA

$
1,384


$
1,384


$
346


$
3,114San Francisco, CA


515











515Reading, UK


483



483



81



1,047Facility obligations, gross


2,382



1,867



427



4,676Contracted and assumed sublet
    income


(1,153
)


(1,051
)


(193
)


(2,397
)Net cash obligations

$
1,229


$
816


$
234


$
2,279   Interest
    and Other Income, Net
      Provision
    (Benefit) for Income Taxes
     32




---



##### Table of Contents



eStara
    Acquisition
  five-day
    Liquidity
    and Capital Resources
           33




---



##### Table of Contents



Credit
    Facility
      Contractual
    Obligations
    Less than





More thanContractual Obligations

Total

1 year

1-3 years

3-5 years

5 yearsOperating Leases

$
15,216


$
4,823


$
6,819


$
3,574


$
0     Recent
    Accounting Pronouncements
  Accounting for
    Uncertainty in Income Taxes, an Interpretation of FASB Statement
    No. 109 Accounting for Income Taxes.
   34




---



##### Table of Contents



Fair Value Measurements,
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk  held-to-maturity
   35




---



##### Table of Contents



Item 8.
    Consolidated
    Financial Statements and Supplementary Data  Report of
    Independent Registered Public Accounting Firm
           Share-Based Payment
    Ernst &
    Young LLP
    36




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    BALANCE SHEETS
   December 31,2006


2005ASSETSCurrent Assets:Cash and cash equivalents

$
17,911


$
24,060Marketable securities


13,312



9,509Accounts receivable, net of
    reserves of $447 ($778 in 2005)


34,554



21,459Prepaid expenses and other current
    assets


2,501



1,130Total current assets


68,278



56,158Property and equipment, net


5,326



2,995Goodwill


59,328



27,347Intangible assets, net


16,013



4,859Other assets


1,036



1,406$
149,981


$
92,765LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
2,607


$
2,719Accrued expenses


15,791



13,359Deferred revenue


24,178



21,113Accrued restructuring, current
    portion


1,213



3,012Capital lease obligations, current
    portion


56



56Notes payable






198Total current liabilities


43,845



40,457Accrued restructuring, less
    current portion


1,031



2,085Capital lease obligations, less
    current portion






63Long-term deferred revenue


31



Commitments and contingencies
    (Notes 8 and 12)Stockholders equity:Preferred stock, $0.01 par
    value; Authorized  10,000,000 shares; Issued and
    outstanding  no shares






Common stock, $0.01 par
    value; Authorized  200,000,000 shares; Issued
    and outstanding  127,055,373 shares and
    110,637,606 shares at December 31, 2006 and 2005,
    respectively


1,270



1,106Additional paid-in capital


296,291



251,454Accumulated deficit


(191,558
)


(201,253
)Accumulated other comprehensive
    loss


(929
)


(1,147
)Total stockholders equity


105,074



50,160$
149,981


$
92,765    37




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##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
 (In
    thousands, except per share data)
  Year Ended December 31,2006


2005


2004Revenues:Product licenses

$
32,784


$
29,821


$
23,345Services


70,448



60,825



45,874Total revenues


103,232



90,646



69,219Cost of revenue:Product licenses


1,751



1,816



2,206Services


30,799



23,255



19,879Total cost of revenues


32,550



25,071



22,085Gross profit


70,682



65,575



47,134Operating expenses:Research and development


20,434



17,843



16,209Sales and marketing


31,992



30,034



29,602General and administrative


12,952



11,231



7,742Restructuring charge (benefit)


(62
)


885



3,570Total operating expenses


65,316



59,993



57,123Income (loss) from operations


5,366



5,582



(9,989
)Interest and other income, net


1,712



219



395Income (loss) before provision
    (benefit) for income taxes


7,078



5,801



(9,594
)(Benefit) provision for income
    taxes


(2,617
)


32



(50
)Net income (loss)

$
9,695


$
5,769


$
(9,544
)Net income per weighted average
    share:Basic

$
0.08


$
0.05


$
(0.12
)Diluted

$
0.08


$
0.05


$
(0.12
)Shares used in per share
    calculations:Basic


115,280



109,446



79,252Diluted


120,096



111,345



79,252    38




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
    COMPREHENSIVE INCOME (LOSS)
    (In thousands, except share and per share information)
  AccumulatedCommon Stock


Additional








Other


Total


ComprehensiveNumber of


Par


Paid-In


Deferred


Accumulated


Comprehensive


Stockholders


IncomeShares


Value


Capital


Compensation


Deficit


Loss


Equity


(Loss)(Restated)


(Restated)Balance, January 1, 2004 as
    restated (See Note 2)


72,936,165


$
729


$
218,927


$
(11
)

$
(197,478
)

$
(1,230
)

$
20,937Exercise of stock options


718,126



7



525















532Issuance of common stock in
    connection with employee stock purchase plan


1,016,419



10



926















936



Issuance of common stock and
    valuation of options related to Primus acquisition


33,471,256



335



29,087















29,422



Amortization of deferred
    compensation














11











11



Comprehensive Income:Net loss


















(9,544
)






(9,544
)

$
(9,544
)Foreign currency translation
    adjustment






















(109
)


(109
)


(109
)Comprehensive loss





























$
(9,653
)Balance, December 31, 2004


108,141,966


$
1,081


$
249,465


$



$
(207,022
)

$
(1,339
)

$
42,185Exercise of stock options


1,751,942



18



1,342















1,360Issuance of common stock in
    connection with employee stock purchase plan


743,698



7



647















654Comprehensive Income:Net income


















5,769







5,769


$
5,769Foreign currency translation
    adjustment






















192



192



192Comprehensive income





























$
5,961Balance, December 31, 2005


110,637,606


$
1,106


$
251,454


$



$
(201,253
)

$
(1,147
)

$
50,160Exercise of stock options


1,474,897



15



1,535















1,550Issuance of common stock in
    connection with employee stock purchase plan


327,643



3



658















661Issuance of common stock related to
    eStara acquisition


14,523,386



145



38,894















39,039Vesting of restricted stock issued
    to employees


45,284







120















120Vesting of restricted stock issued
    under the non-employee director plan


46,557



1



55















56Stock based compensation expense










3,575















3,575Comprehensive Income:Net income


















9,695







9,695


$
9,695Foreign currency translation
    adjustment






















218



218



218Comprehensive income





























$
9,913Balance, December 31, 2006


127,055,373


$
1,270


$
296,291


$



$
(191,558
)

$
(929
)

$
105,074    39




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##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (In
    thousands)
  Years Ended December 31,2006


2005


2004Cash Flows from Operating
    Activities:Net income (loss)

$
9,695


$
5,769


$
(9,544
)Adjustments to reconcile net
    income (loss) to net cash provided by (used in) operating
    activities:Stock-based compensation expense


3,751







11Depreciation and amortization


5,141



4,180



2,957Non-cash restructuring charge






1,167



667Loss on disposal of fixed assets,
    net










33Changes in current assets and
    liabilities:Accounts receivable, net


(9,424
)


2,940



(7,147
)Prepaid expenses and other current
    assets


(1,183
)


434



671Deferred rent


562



664



978Accounts payable


(629
)


(1,428
)


519Accrued expenses


(169
)


310



(3,364
)Deferred revenues


2,417



(4,067
)


6,957Accrued restructuring


(2,536
)


(6,061
)


(6,841
)Net cash provided by (used in)
    operating activities


7,625



3,908



(14,103
)Cash Flows from Investing
    Activities:Purchases of marketable securities


(18,904
)


(14,115
)


(11,426
)Maturities of marketable securities


15,101



13,804



11,878Purchases of property and equipment


(4,459
)


(1,924
)


(763
)Acquisition costs, net of cash
    acquired


(7,153
)


(1,010
)


2,730Decrease in other assets


(155
)


313



(12
)Net cash (used in) provided by
    investing activities


(15,570
)


(2,932
)


2,407Cash Flows from Financing
    Activities:Principal payments on notes payable


(198
)


(413
)


(502
)Proceeds from exercise of stock
    options


1,537



1,360



532Proceeds from employee stock
    purchase plan


661



654



936Payments on capital leases


(63
)


(55
)


(7
)Net cash provided by financing
    activities


1,937



1,546



959Effect of foreign exchange rate
    changes on cash and cash equivalents


(141
)


228



113Net increase (decrease) in cash
    and cash equivalents


(6,149
)


2,750



(10,624
)Cash and cash equivalents,
    beginning of period


24,060



21,310



31,934Cash and cash equivalents, end of
    period

$
17,911


$
24,060


$
21,310Supplemental Disclosure of Cash
    Flow information:Cash paid for interest expense

$
11


$
18


$
4Cash paid for income taxes

$



$
39


$
38Supplemental Disclosure of Noncash
    Investing and Financing Activities:Issuance of stock and options
    related to acquisitions

$
39,039


$



$
29,422    40




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (1) Organization,
    Business and Summary of Significant Accounting
    Policies
  e-commerce
  (a)
    Principles
    of Consolidation    (b)
    Use of
    Estimates    (c)
    Revenue
    Recognition  Revenue Recognition, No. 00-21, Revenue Arrangements with Multiple Deliverables.
    97-2, Software Revenue Recognition, SOP 98-9, Modifications of
    SOP 97-2,
    Software Revenue Recognition, With Respect to Certain
    Transactions. SOP 97-2 SOP 98-9,
  SOP 97-2
 41




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   SOP 97-2.
    SOP 97-2.
  time-and-material
    (d)
    Allowances
    for Doubtful Accounts and Returns  Revenue Recognition
    When Right of Return Exists.
 42




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     AdditionsBeginning of


Charges to


Deductions/


Balance at EndPeriod


Expense


Write-Offs


of PeriodYear Ended December 31, 2004

$
799


$
259


$
(378
)

$
680Year Ended December 31, 2005

$
680


$
677


$
(579
)

$
778Year Ended December 31, 2006

$
778


$
323


$
(654
)

$
447   (e)
    Cost
    of Product License Revenues    (f)
    Cost
    of Services Revenues    (g)
    Net
    Income (Loss) Per Share  in-the-money.
 43




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005


2004(In thousands, except per share amounts)Net income (loss)

$
9,695


$
5,769


$
(9,544
)Weighted average common shares
    outstanding used in computing basic net income per share


115,280



109,446



79,252Dilutive employee common stock
    options


4,816



1,899



Total weighted average common
    stock and common stock equivalent shares outstanding used in
    computing diluted net income per share


120,096



111,345



79,252Basic net income (loss) per share

$
0.08


$
0.05


$
(0.12
)Diluted net income (loss) per share

$
0.08


$
0.05


$
(0.12
)Anti-dilutive common stock options


5,237



7,443



15,236   (h)
    Cash,
    Cash Equivalents and Marketable Securities  Accounting for
    Certain Investments in Debt and Equity Securities. held-to-maturity.
  December 31,2006


2005Cash and cash equivalents:Cash

$
16,750


$
15,473Money market accounts


262



5,253U.S. Treasury and
    U.S. Government Agency securities






1,323Commercial paper


899



2,011Total cash and cash equivalents

$
17,911


$
24,060Marketable securities:U.S. Treasury and
    U.S. Government Agency securities

$
996


$
389Certificates of deposit


1,775



450Commercial paper


4,792



2,011Corporate debt securities


5,749



6,659Total marketable securities

$
13,312


$
9,509  44




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (i)
    Other
    Assets      December 31,2006


2005Deferred rent resulting from lease
    settlements

$



$
562Other assets, primarily lease
    deposits


1,036



844$
1,036


$
1,406   (j)
    Property
    and Equipment      December 31,Asset Classification

Estimated Useful Life

2006


2005Computer equipment

3 years

$
5,839


$
12,564Leasehold improvements

Lesser of useful life or
    life of lease


2,309



3,342Furniture and fixtures

5 years


1,512



2,969Computer software

3 years


4,875



4,41714,535



23,292Less  accumulated
    depreciation and amortization




9,209



20,297$
5,326


$
2,995       Accounting for the
    Impairment or Disposal of Long-Lived Assets
 45




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     (k)
    Research
    and Development Expenses for Software Products  Accounting for the Costs of Computer Software to be Sold,
    Leased, or Otherwise Marketed
  (l)
    Income
    Taxes  Accounting for Income
    Taxes.
  (m)
    Stock-Based
    Compensation  Share-Based
    Payment Accounting for Stock Issued to
    Employees Statement of
    Cash Flows.
  (n)
    Comprehensive
    Income (Loss)  Reporting Comprehensive Income
 46




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (o)
    Fair
    Value of Financial Instruments    (p)
    Concentrations
    of Credit Risk        (q)
    Goodwill  Goodwill and Other
    Intangible Assets
  Years Ended December 31,2006


2005Balance at beginning of year

$
27,347


$
27,458Acquisition of eStara


32,071



Reversal of reserves related to
    Primus acquisition


(90
)


(111
)$
59,328


$
27,347     (r)
    Intangible
    Assets   47




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         December 31, 2006


December 31, 2005Gross








GrossCarrying


Accumulated


Net Book


Carrying


Accumulated


Net BookAmount


Amortization


Value


Amount


Amortization


ValueCustomer relationships

$
11,500


$
(3,492
)

$
8,008


$
4,200


$
(1,927
)

$
2,273Purchased technology


8,900



(2,336
)


6,564



3,600



(1,258
)


2,342Trademarks


1,400



(70
)


1,330











Non-compete agreements


400



(289
)


111



400



(156
)


244Total intangible assets

$
22,200


$
(6,187
)

$
16,013


$
8,200


$
(3,341
)

$
4,859     Total2007

$
4,9052008


4,0132009


3,3812010


2,7092011


1,005Total

$
16,013   (s)
    Foreign
    Currency Translation  Foreign Currency Translation
 48




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     (t)
    Recent
    Accounting Pronouncements  Accounting for Uncertainty in Income Taxes, an Interpretation
    of FASB Statement No. 109 Accounting for
    Income Taxes.
    Fair Value Measurements,
  (2) Restatement
    of Financial Statements
   49




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        50




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      As of or for the


As of or for theYear Ended


Year EndedDec. 31, 2003


Dec. 31, 2002Consolidated Statement of
    Operations Data:License revenue as previously
    reported

$
27,159


$
48,796License revenue as restated


26,793



48,932Service revenues as previously
    reported


45,333



52,697Service revenues as restated


45,313



51,953Cost of services revenue as
    previously reported


19,808



33,745Cost of services revenue as
    restated


19,730



33,745Sales and marketing expenses as
    previously reported


31,174



43,122Sales and marketing expenses as
    restated


31,400



42,800General and administrative
    expenses as previously reported


9,538



11,087General and administrative
    expenses as restated


9,265



10,955Restructuring charge (benefit) as
    previously reported


(10,476
)


19,005Restructuring charge (benefit) as
    restated


(10,346
)


18,875Interest and other income, net as
    previously reported


1,521



2,300Interest and other income, net as
    restated(1)


176



1,858Net income (loss) as previously
    reported

$
4,178


$
(29,490
)Net income (loss) as restated

$
2,442


$
(29,956
)Net income (loss) per share, basic
    and diluted, as previously reported

$
0.06


$
(0.42
)Net income (loss) per share, basic
    and diluted, as restated

$
0.03


$
(0.43
)Consolidated Balance Sheet
    Data:Accrued expenses as previously
    reported

$
12,363


$
18,219Accrued expenses as restated


11,590



17,364Accrued restructuring, short term,
    as previously reported


9,427



19,819Accrued restructuring, short term,
    as restated


9,427



19,689Deferred revenue as previously
    reported


14,915



15,674Deferred revenue as restated


16,103



16,683Accumulated deficit as previously
    reported


(195,691
)


(199,869
)Accumulated deficit as restated


(197,478
)


(200,335
)Accumulated other comprehensive
    loss as reported


(3,017
)


(1,711
)Accumulated other comprehensive
    loss as restated

$
(1,230
)

$
(1,269
)     (1)
    
    Reflects the write-off of cumulative translation adjustments for
    entities substantially liquidated.  (3) Disclosures
    about Segments of an Enterprise
  Disclosures About Segments of an
    Enterprise and Related Information
 51




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         Years EndedDecember 31,2006


2005


2004United States


75
%


76
%


67
%Europe, Middle East and Africa
    (excluding UK)


9
%


9
%


20
%United Kingdom (UK)


14
%


14
%


10
%Asia Pacific


0
%


1
%


2
%Other


2
%


0
%


1
%100
%


100
%


100
%   (4) Credit
    Facility and Notes Payable
  Credit
    Facility
     52




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Notes Payable
    (5)  Income
    Taxes
    Years Ended December 31,2006


2005


2004Domestic

$
3,176


$
5,777


$
(7,930
)Foreign


3,902



24



(1,664
)Total

$
7,078


$
5,801


$
(9,594
)     Years Ended December 31,2006


2005


2004FederalCurrent

$



$



$
Deferred










StateCurrent


12







30Deferred










ForeignCurrent


(2,629
)


32



(80
)Deferred










$
(2,617
)

$
32


$
(50
)  53




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Federal tax at statutory rate


35.0
%


35.0
%


(35.0
)%State taxes, net of federal benefit


0.1



0.9



0.2Stock-based compensation


18.7







Meals and entertainment


2.1



2.5



1.8Reversal of previously accrued
    taxes


(36.8
)






(1.6
)Research and development


(34.6
)






Other


6.8







Provision before valuation
    allowance


(8.7
)


38.4



(34.6
)Use of fully reserved net
    operating losses


(28.0
)


(37.8
)


34.1(36.7
)%


0.6
%


(0.5
)%     December 31,2006


2005Deferred tax assets:Restructuring

$
1,025


$
1,968Depreciation and amortization


1,348



1,036Reserves and accruals


72



758Capitalized expenses


20,450



24,305US Income tax credits


7,643



5,195Net operating losses


93,218



88,066Total gross deferred tax assets


123,756



121,328Valuation allowance


(117,797
)


(119,384
)Total deferred tax assets


5,959



1,944Deferred tax liabilities:Intangible assets


(5,959
)


(1,944
)Net deferred tax assets

$



$
    54




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                  (6)  Stock-Based
    Compensation and Stockholders Equity
  Share-Based Payment Accounting
    for Stock Issued to Employees Statement of Cash Flows. Accounting for
    Stock-Based Compensation.
 55




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Equity
    Compensation Plans
    1996
    Stock Option Plan
      1999
    Outside Director Stock Option Plan
   56




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Primus
    Stock Option Plans
    1999
    Employee Stock Purchase Plan
    Grant-Date
    Fair Value
    Year Ended December 31,Stock Options

2006


2005


2004Options granted (in thousands)


4,540



3,839



8,750Weighted-average exercise price

$
2.64


$
1.22


$
1.06Weighted-average grant date
    fair-value

$
2.28


$
0.83


$
0.72Assumptions:Expected volatility


113.2
%


93.5
%


98.1
%Expected term (in years)


6.25



4.11



4.02Risk-free interest rate


4.68
%


3.71
%


3.24
%Expected dividend yield


0.00
%


0.00
%


0.00
%    57




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Stock-Based
    Compensation Expense
      Accounting for Stock-Based Compensation.
  Year Ending December 31,2005


2004Net income (loss) as reported

$
5,769


$
(9,544
)Add: Stock-based compensation
    expense included inreported net income (loss)






11Deduct: Total stock-based
    compensation expensedetermined under fair value method
    for all awards


(2,553
)


(15,659
)Pro forma net income (loss)

$
3,216


$
(25,192
)Basic and diluted net income
    (loss) per share:As reported

$
0.05


$
(0.12
)Pro forma net income (loss) per
    share:Basic

$
0.03


$
(0.32
)Diluted

$
0.03


$
(0.32
)  58




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Stock-Based
    Compensation Activity
    Weighted


WeightedAverage


AverageExercise


Remaining


AggregateNumber


Price


Contractual


Intrinsicof Options


Per Share


Term in Years


ValueOutstanding, December 31, 2005


13,244



2.33



7.5Granted


4,540



2.64Exercised


(1,474
)


1.04Cancelled


(1,081
)


1.75Outstanding, December 31, 2006


15,229


$
2.55



7.7


$
11,742Exercisable, December 31, 2006


8,278


$
3.00



6.8


$
8,090Options vested or expected to vest
    at December 31,
    2006(1)


14,614


$
2.56



7.6


$
11,489    (1)
    In addition to the vested options, the Company expects a portion
    of the unvested options to vest at some point in the future.
    Options expected to vest are calculated by applying an estimated
    forfeiture rate to the unvested options.      WeightedRestricted


Average GrantShares


Date Fair ValueOutstanding


Per ShareNon-Vested shares outstanding
    at December 31,
    2005






Awards granted


439


$
2.43Restrictions lapsed


(85
)


2.05Awards forfeited


Non-Vested shares outstanding
    at December 31, 2006


354


$
2.52     Adoption
    of Shareholders Rights Plan
   59




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (7)  Acquisitions
  Acquisition
    of eStara, Inc.
  five-day
     60




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Cash

$
2,699Accounts receivable


3,671Other current assets


188Property, plant and equipment


167Goodwill


32,071Intangible assets:Customer relationship (estimated
    useful life of 4 years)


7,300Purchased technology (estimated
    useful life of 5 years)


5,300Trademarks (estimated useful life
    of 5 years)


1,400Total intangible assets


14,000Other long-term assets


37Accounts payable


(517
)Deferred revenue


(679
)Accrued and other expenses


(1,821
)Total purchase price

$
49,816     December 31,2006


2005(Unaudited)Revenue

$
113,935


$
98,078Net income

$
7,111


$
2,591Net income per share 
    basic

$
0.06


$
0.02Net income per share 
    assuming dilution

$
0.05


$
0.02     Acquisition
    of Primus Knowledge Solutions, Inc.
   61




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31, 2006InvoluntaryTermination


FacilitiesBenefits


Related Costs


TotalsObligations

$
1,682


$
376


$
2,058Payments


(464
)


(97
)


(561
)Balance December 31, 2004


1,218



279



1,497Payments


(891
)


(279
)


(1,170
)Balance December 31, 2005


327



0



327Payments


(327
)


0



(327
)Balance December 31, 2006

$



$



$
   (8)  Commitments
    and Contingencies
  Leases
        Capital Leases


Operating LeasesYears Ending
    December 31,2007

$
59


$
4,8232008






4,3262009






2,4932010






1,8772011






1,697Total future minimum lease payments


59


$
15,216Less amount representing interest


3Present value of minimum lease
    payments

$
56      62




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Indemnifications
        (9)
    Employee
    Benefit Plan    (10)
    Accrued
    Expenses    2006


2005Compensation and benefits

$
6,609


$
5,130Taxes


1,560



4,172Other


7,622



4,057$
15,791


$
13,359   (11)
    Restructuring   63




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Accounting for Costs Associated with
    Exit or Disposal Activities Employers Accounting for Settlements and Curtailments
    of Defined Benefit Pension Plans and for Termination Benefits Restructuring and Impairment Charges. No. 94-3, Liability Recognition for Certain Employee Termination
    Benefits and Other Costs to Exit an Activity (Including Certain
    Costs Incurred in a Restructuring)
      Restructuring Charge (Benefit)(In thousands)2006


2005


2004


2003


2002


2001


TotalFacility-related costs and
    impairments

$



$
1,817


$
1,488


$
1,464


$
14,634


$
59,418


$
78,821Employee severance and benefits
    costs










2,461



1,236



3,553



7,938



15,188Asset impairments






















4,205



4,205Exchangeable share settlement






















1,263



1,263Marketing costs






















851



851Legal and accounting






















405



405Restructuring charge






1,817



3,949



2,700



18,187



74,080



100,733Adjustments to 2001 action, net


545



(792
)


(60
)


(8,338
)


688



1,500



(6,457
)Adjustments to 2002 action, net






43



(242
)


(5,118
)










(5,317
)Adjustments to 2003 action, net


(607
)


74



(77
)


410











(200
)Adjustments to 2004 action, net






(257
)


















(257
)Adjustments to 2005 action, net


























Total adjustments to prior actions,
    net


(62
)


(932
)


(379
)


(13,046
)


688



1,500



(12,231
)Restructuring charge (benefit)

$
(62
)

$
885


$
3,570


$
(10,346
)

$
18,875


$
75,580


$
88,502   64




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##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Restructuring Accrual(In thousands)2005


2004


2003


2002


2001


TotalRestructuring charges for the year
    ended December 31, 2001

















$
74,080


$
74,080Changes in estimates resulting in
    additional charges


















9,700



9,700Changes in estimates reducing
    accruals


















(8,200
)


(8,200
)Write-offs


















(16,219
)


(16,219
)Facility related payments


















(6,308
)


(6,308
)Employee related payments


















(6,748
)


(6,748
)Legal and accounting payments


















(232
)


(232
)Balance December 31, 2001

















$
46,073


$
46,073Restructuring charges for the year
    ended December 31, 2002













$
18,187






$
18,187Changes in estimates resulting in
    additional charges


















2,207



2,207Changes in estimates reducing
    accruals


















(1,389
)


(1,389
)Write-offs














(2,613
)






(2,613
)Facility related payments


















(9,016
)


(9,016
)Employee related payments


















(920
)


(920
)Legal and accounting payments


















(173
)


(173
)Balance December 31, 2002













$
15,574


$
36,782


$
52,356Restructuring charges for the year
    ended December 31, 2003









$
2,700










$
2,700Changes in estimates resulting in
    additional charges










494



4,421



2,998



7,913Changes in estimates reducing
    accruals










(84
)


(7,321
)


(11,466
)


(18,871
)Write-offs










(371
)






536



165Facility related payments










(70
)


(2,993
)


(18,143
)


(21,206
)Employee related payments










(994
)


(3,794
)


(270
)


(5,058
)Legal and accounting paymentsBalance December 31, 2003









$
1,675


$
5,887


$
10,437


$
17,999Restructuring charges for the year
    ended December 31, 2004





$
3,949














$
3,949Changes in estimates resulting in
    additional charges


















112



112Changes in estimates reducing
    accruals










(77
)


(242
)


(172
)


(491
)Write-offs






(667
)














(667
)Facility related payments






(71
)


(179
)


(4,490
)


(4,066
)


(8,806
)Employee related payments






(892
)


(46
)










(938
)Balance December 31, 2004





$
2,319


$
1,373


$
1,155


$
6,311


$
11,158Restructuring charges for the year
    ended December 31, 2005

$
1,817


















$
1,817Changes in estimates resulting in
    additional charges






200



98



91







389Changes in estimates reducing
    accruals






(457
)


(24
)


(48
)


(792
)


(1,321
)Write-offs


(1,167
)


















(1,167
)Facility related payments


(264
)


(317
)


(428
)


(548
)


(2,676
)


(4,233
)Employee related payments






(1,546
)














(1,546
)Balance December 31, 2005

$
386


$
199


$
1,019


$
650


$
2,843


$
5,097 65




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Restructuring Accrual(In thousands)2005


2004


2003


2002


2001


TotalChanges in estimates reducing
    accruals









$
(607
)





$
(147
)

$
(754
)Facility related payments


(123
)


(143
)


(223
)


(333
)


(1,596
)


(2,418
)Foreign Currency exchange














(317
)






(317
)Employee related payments






(56
)














(56
)Changes in estimates resulting in
    additional accruals/charges


















692



692Balance December 31, 2006

$
263


$



$
189


$



$
1,792


$
2,244   2006
    Activity
  sub-lease sub-lease sub-lease
  sub-tenant sub-lease sub-tenant,
  2005
    Actions
       66




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   sub-lease
  2004
    Actions
          Form 10-K.
  Abandoned
    Facilities Obligations
   67




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   sub-lease sub-lease sub-lease
  2007


2008


2009


TotalWaltham, MA

$
1,384


$
1,384


$
346


$
3,114San Francisco, CA


515











515Reading, UK


483



483



81



1,047Facility obligations, gross


2,382



1,867



427



4,676Contracted and assumed sublet
    income


(1,153
)


(1,051
)


(193
)


(2,397
)Net cash obligations

$
1,229


$
816


$
234


$
2,279   (12) Litigation
  In re Art
    Technology Group, Inc. Securities Litigation. Rule 10b-5
     68




---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (13) Quarterly
    Results of Operations (Unaudited)
    For the Three Months EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006Total Revenues

$
23,956


$
25,229


$
21,840


$
32,207Gross Profit


16,793



17,808



14,173



21,908Net income (loss)


2,641



2,275



(285
)


5,064Basic and diluted net income
    (loss) per share

$
0.02


$
0.02


$
(0.00
)

$
0.04   For the Three Months EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005Total Revenues

$
21,994


$
20,261


$
22,705


$
25,686Gross Profit


15,990



14,516



16,323



18,746Net income (loss)


1,408



(327
)


1,510



3,178Basic and diluted net income
    (loss) per share

$
0.01


$
(0.00
)

$
0.01


$
0.03  69




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  1. Managements
    Report on Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
    2. Managements
    Annual Report on Internal Control over Financial
    Reporting.
  15d-15(f). Internal Control  Integrated Framework
        1.
    Inadequate
    and ineffective controls over the financial statement close
    process.   70




---



##### Table of Contents



2. Inadequate
    staffing within the accounting organization.
  Form 10-K.
      3. Remedial
    actions
    
    We are enhancing our existing policies and procedures for
    accounting review of month-end close, account reconciliation
    processes, journal entries, write-offs, restructuring-related
    entries, purchase accounting-related entries, and impairment
    reviews; and
    We have taken steps to reduce the complexity of our
    consolidation processes.    
    Hiring key leadership accounting personnel to focus on our
    technical accounting issues and managing the monthly close
    process and the SEC reporting process; and
    Improving our documentation and training related to policies and
    procedures for the controls related to our significant accounts
    and processes.  4. Changes
    in internal control over financial reporting.
   71




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                 1. Inadequate
    and ineffective controls over the financial statement close
    process.
   72




---



##### Table of Contents



2. Inadequate
    staffing within the accounting organization.
  Form 10-K.
      Ernst &
    Young LLP
     Item 9B.
    Other
    information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance   73




---



##### Table of Contents



Form 8-K Form 8-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   74




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements
    
    Report of Independent Registered Public Accounting Firm
    Consolidated Balance Sheets as of December 31, 2006 and 2005
    Consolidated Statements of Operations for the years ended
    December 31, 2006, 2005 and 2004
    Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2006, 2005 and 2004
    Consolidated Statements of Cash Flows for the years ended
    December 31, 2006, 2005 and 2004
    Notes to Consolidated Financial Statements  Financial Statement Schedule
    Exhibits
   75




---



##### Table of Contents



SIGNATURES    
  By:
    /s/  ROBERT
    D. BURKE   Chief Executive Officer
 and President
    Name

Title/s/  ROBERT
    D. BURKERobert
    D. Burke

Chief Executive Officer and
    President(Principal Executive Officer)/s/  JULIE
    M.B.
    BRADLEYJulie
    M.B. Bradley

Senior Vice President and Chief
    Financial Officer(Principal Financial and Accounting Officer)/s/  DANIEL
    C. REGISDaniel
    C. Regis

Chairman of the Board/s/  JOHN
    R. HELDJohn
    R. Held

Director/s/  ILENE
    H. LANGIlene
    H. Lang

Director/s/  MARY
    E. MAKELAMary
    E. Makela

Director/s/  MICHAEL
    A. BROCHUMichael
    A. Brochu

Director/s/  DAVID
    B. ELSBREEDavid
    B. Elsbree

Director/s/  PHYLLIS
    S. SWERSKYPhyllis
    S. Swersky

Director  76




---



##### Table of Contents



EXHIBIT INDEX
  Filed withThis

Incorporated by ReferenceExhibit



Form





ExhibitNo.

Description

10-K

Form

Filing Date

No.2
.1

Agreement and Plan of Merger dated
    as of September 18, 2006 among ATG, eStara, Inc., Arlington
    Acquisition Corp., Storrow Acquisition Corp., and the
    stockholder representative and principal stockholders of eStara
    named therein



8-K

September 22, 2006


10.12
.2

Amendment No. 1 to Agreement
    and Plan of Merger dated as of October 2, 2006 among ATG,
    eStara, Inc. and the stockholder representative named therein



8-K

October 6, 2006


2.23
.1

Amended and Restated Certificate
    of Incorporation



S-8

June 12, 2003


4.13
.2

Amended and Restated By-Laws



S-3

July 6, 2001


4.24
.1

Rights Agreement dated
    September 26, 2001 with EquiServe Trust Company, N.A. (SEC
    file no. 000-26679)



8-K

October 2, 2001


4.110
.1*

1996 Stock Option Plan, as amended



10-Q

November 8, 2005


10.410
.2*

1999 Outside Director Stock Option
    Plan, as amended (including form of option agreement)



10-Q

November 8, 2005


10.310
.3*

1999 Employee Stock Purchase Plan



DEF14A
    (proxy 
    statement)

April 10, 2006


Annex A10
.4

Primus 1999 Non-Officer Stock
    Option Plan



10-K

March 16, 2005


10.410
.5

Primus 1999 Stock Incentive
    Compensation Plan



10-K

March 16, 2005


10.510
.6*

General
    Change-in-Control
    Policy for Employees



10-Q

November 9, 2004


10.2110
.7*

Amended and Restated Employment
    Agreement dated November 8, 2004 with Robert Burke



10-Q

November 9, 2004


10.2210
.8*

Offer letter with Julie M.B.
    Bradley dated July 6, 2005



10-Q

November 8, 2005


10.110
.10*

2006 Executive Management
    Compensation Plan, as Amended



8-K

June 19, 2006


99.110
.11*

Non-Employee Director Compensation
    Plan, as Amended



10-Q

May 10, 2006


10.3410
.12

Lease agreement dated May 6,
    2006 with RREEF America REIT II Corp. PPP



10-Q

May 10, 2006


10.3310
.13

Lease dated October 6, 1999
    with Pine Street Investors I, LLC



10-K

March 28, 2003


10.510
.14

First Amendment to Lease dated
    December 30, 1999 with Pine Street Investors I, LLC



10-K

March 28, 2003


10.610
.15

Second Amendment to Lease dated
    August 20, 2000 with Pine Street Investors I, LLC



10-K

March 28, 2003


10.710
.16

Third Amendment to Lease dated
    December 22, 2000 with Pine Street Investors I, LLC



10-K

March 28, 2003


10.810
.17

Fourth Amendment to Lease dated
    July 15, 2001 with Pine Street Investors I, LLC



10-K

March 15, 2004


10.1010
.18

Fifth Amendment to Lease dated
    March 31, 2003 with Pine Street Investors I, LLC



10-K

March 15, 2004


10.11 77




---



##### Table of Contents



Filed withThis

Incorporated by ReferenceExhibit



Form





ExhibitNo.

Description

10-K

Form

Filing Date

No.10
.19

Amended and Restated Loan and
    Security Agreement dated June 13, 2002 with Silicon Valley
    Bank



10-Q

August 14, 2002


10.110
.20

First Loan Modification Agreement
    dated September 30, 2002 with Silicon Valley Bank



10-Q

November 14, 2002


10.110
.21

Amendment Agreement dated
    October 4, 2002 with Silicon Valley Bank



10-Q

November 14, 2002


10.210
.22

Second Loan Modification Agreement
    dated December 20, 2002 with Silicon Valley Bank



10-K

March 28, 2003


10.2110
.23

Fourth Loan Modification Agreement
    dated November 26, 2003 with Silicon Valley Bank



10-K

March 15, 2004


10.2510
.24

Fifth Loan Modification Agreement
    dated June 2004 with Silicon Valley Bank



10-Q

August 9, 2004


10.2610
.25

Letter Agreement re:
    Loan Arrangement with Silicon Valley Bank dated
    June 16, 2004



10-Q

August 9, 2004


10.2510
.26

Sixth Loan Modification Agreement
    dated November 24, 2004 with Silicon Valley Bank



10-K

March 16, 2005


10.2810
.27

Seventh Loan Modification
    Agreement dated December 21, 2004 with Silicon Valley Bank



10-K

March 16, 2005


10.2910
.28

Eighth Loan Modification Agreement
    dated December 30, 2005 with Silicon Valley Bank



10-K

March 16, 2006


10.3110
.29

Ninth Loan Modification Agreement
    dated February 10, 2006 with Silicon Valley Bank



10-Q

May 10, 2006


10.3210
.30

Securities Account Control
    Agreement dated December 20, 2002 with Silicon Valley Bank



10-K

March 28, 2003


10.2010
.31

Tenth Loan Modification Agreement
    dated October 4, 2006 with Silicon Valley Bank



8-K

October 5, 2006


10.110
.32*

2007 Executive Management
    Compensation Plan



8-K

March 5, 2007


99.121
.1

Subsidiaries

X23
.1

Consent of Ernst & Young
    LLP

X31
.1

Certification pursuant to
    Rules 13a-14(a)
    and 15(d)-14(a) of the Exchange Act of 1934 of the principal
    executive officer

X31
.2

Certification pursuant to
    Rules 13a-14(a)
    and 15(d)-14(a) of the Exchange Act of 1934 of the principal
    financial officer

X32
.1

Certificate pursuant to
    18 U.S.C. Section 1350 of the principal executive
    officer

X32
.2

Certificate pursuant to
    18 U.S.C. Section 1350 of the principal financial
    officer

X     *
    
    Management contract or compensatory plan. 78