##### 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 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 000-26679


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.)
|                                                                                    
|25 First Street
    Cambridge, Massachusetts(Address of principal executive offices) |  | 02141(Zip Code)                         

(617) 386-1000


(Registrants telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, $0.01 par value with Associated Preferred
Stock Purchase Rights


(Title of Class)


þ o


o


þ o






Documents Incorporated by Reference












---










ART TECHNOLOGY GROUP, INC.


INDEX TO FORM 10-K


|                                                      |  |                                                                                                                      |  |            |    |  |    | 
|----------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---------- | -- |  | -- | 
|                                                      |  |                                                                                                                      |  | Page       |   
|                                                      |  |                                                                                                                      |  |            |   
|PART I                                               
|Item 1.                                               |  | Business                                                                                                             |  |            | 1  | 
|Item 2.                                               |  | Properties                                                                                                           |  |            | 24 | 
|Item 3.                                               |  | Legal Proceedings                                                                                                    |  |            | 24 | 
|PART II                                              
|Item 5.                                               |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |            | 26 | 
|Item 6.                                               |  | Selected Consolidated Financial Data                                                                                 |  |            | 27 | 
|Item 7.                                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |            | 28 | 
|Item 7A.                                              |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |            | 50 | 
|Item 8.                                               |  | Consolidated Financial Statements and
    Supplementary Data                                                         |  |            | 51 | 
|Item 9.                                               |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |            | 89 | 
|Item 9A.                                              |  | Controls and Procedures                                                                                              |  |            | 89 | 
|PART III                                             
|Item 10.                                              |  | Directors and Executive Officers of the
    Registrant                                                               |  |            | 93 | 
|Item 11.                                              |  | Executive Compensation                                                                                               |  |            | 93 | 
|Item 12.                                              |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |            | 93 | 
|Item 13.                                              |  | Certain Relationships and Related
    Transactions                                                                   |  |            | 93 | 
|Item 14.                                              |  | Principal Accountant Fees and Services                                                                               |  |            | 93 | 
|PART IV                                              
|Item 15.                                              |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                  |  |            | 93 | 
|SIGNATURES                                           
|                                                      |  |                                                                                                                      |  | Signatures |    |  | 97 | 
|EX-10.1 1996 Stock Option Plan                       
|EX-10.2 1999 Outside Director Stock Option Plan      
|EX-10.4 Primus 1999 Non-Officer Stock Option Plan    
|EX-10.5 Primus 1999 Stock Incentive Compensation Plan
|EX-10.28 Sixth Loan Modification Agreement           
|EX-10.29 Seventh Loan Modification Agreement         
|EX-10.32 Settlement Agreement Dated 11/01/2004       
|Subsidiaries                                         
|EX-23.1 Consent of Ernst & Young LLP                 
|EX-31.1 Section 302 Certification of P.E.O.          
|EX-31.2 Section 302 Certification of P.F.O.          
|EX-32.1 Section 906 Certification of P.E.O.          
|EX-32.2 Section 906 Certification of P.F.O.          





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PART I







|        |         
|------- | --------
|Item 1. | Business

Overview










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our online commerce applications are designed for the
    development of large consumer-facing e-commerce sites and
    channel partner extranets, and are used by our clients to
    facilitate transactions with consumers and channel partners. We
    believe that, by using our online sales and marketing solutions
    together, our clients can create sophisticated promotions and
    offers that can drive incremental sales.                                                                                                                                                                                                                           
|
| |  | Our customer service applications are designed to decrease
    call-center and help-desk service costs, to improve the speed
    with which customer needs are met, and to increase customer
    loyalty and satisfaction. We believe our self-service solutions
    become more useful through the use of our advanced
    personalization capabilities, which are designed to increase the
    likelihood that customer inquiries will be managed online
    avoiding the need for costly contact center inquiry, and to more
    quickly and accurately respond to inquiries which are handled by
    the contact center.                                       
|
| |  | Our marketing applications are designed to help businesses
    attract new customers, promote new offerings to existing
    customers, and improve the cost-effectiveness of existing
    marketing expenditures. Our clients use our software to maintain
    personalized, relevant email contact with their customers, and
    to integrate their online marketing activities with related
    sales and customer service initiatives. We strive to
    differentiate by providing better integration between email, Web
    and contact center marketing activities, and by enabling more
    personalized and relevant campaigns. Our products are designed to

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| |  |                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | allow businesses to increase marketing effectiveness by visually
    defining desired customer experience activities and events that
    will drive desirable customer behavior.

Our Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facilitate integrated life cycle experience for
    customers. We believe that customers want to cross
    seamlessly between the information-gathering, purchase and
    service phases of their online activity. We believe that
    consumers expect marketing messages they receive to be informed
    by their purchase and service history (for example, they should
    not be offered a product which they have recently purchased),
    service responses to be informed by their purchase history (for
    example, answers should be relevant to the products they own),
    and e-commerce should be informed by their service history and
    response to marketing campaigns. Rather than focusing solely on
    marketing or sales or service, we design our core software
    functionality to allow our clients to provide their customers
    with an integrated online marketing, sales and service
    experience.
|
| |  | Develop new applications that operate on leading
    infrastructure products. We believe the development of
    infrastructure products has become standards driven, but that
    there is an opportunity for continued innovation relating to
    application products. We design our products to operate on
    leading J2EE application server platforms, including those from
    BEA and IBM, in addition to our own J2EE application server
    software. As a result, our application software can provide
    value to new and existing clients, across a wide range of
    infrastructure environments.                                                                                                                                                                                                                                                                                                                      
|
| |  | Leverage existing sales channels. We sell our products
    directly to end-users and through value-added resellers. In
    addition, approximately one-half of our product revenue is
    co-sold or influenced by a variety of business entities,
    including systems integrators, solution providers, technology
    partners and value-added resellers. We currently have a broad
    range of business alliances throughout the world, including
    large system integrators like Capgemini, EDS, HP Consulting ,
    Bearing Point and CSC, as well as regional integrators such as
    Avenue A/ Razorfish, Blast Radius, Professional Access, Whittman
    Hart, McFadyen Consulting and Rikei. In most geographies and
    situations, our goal is to maintain close relationships directly
    with our clients and to motivate systems integrators to
    implement our applications in their projects and solution sets.
|
| |  | Leverage and expand 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 partners trained in the
    implementation and application of our products.                                                                              
|
| |  | Grow managed services as an alternate delivery model.
    Prior to our acquisition of Primus, it had been deploying and
    operating its software in a managed services/hosted model for
    nearly four years. We intend to expand this capability to
    include most of our other products, and we will market it as an
    alternative delivery option to the class of customers we
    currently address.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Products




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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ATG Adaptive Scenario Engine. This product provides a
    rich set of features to support online marketing, sales and
    service solutions. ATG Adaptive Scenario Engine collects and
    maintains customer profile information enabling consumer-facing
    applications to be personalized to the needs of a customer or
    customer segment. It also enables development of scenarios that
    model and respond to consumer behavior, guiding consumers
    through the data and processes appropriate to their situation.
    ATG Adaptive Scenario Engine incorporates a data repository
    integration capability. Some of our clients build custom
    applications directly on ATG Adaptive Scenario Engine, and our
    commerce, marketing and self-service application products
    utilize the capabilities of ATG Adaptive Scenario Engine.
|
| |  | ATG Commerce. This application provides a robust set of
    application components that allow our clients to create a
    customized experience for consumers, businesses and channel
    partners purchasing goods or services online, and facilitates
    administration by the online vendor. ATG Commerces
    functionality includes catalogs, product management, shopping
    carts, checkout, pricing management, merchandising, promotions,
    inventory management and business-to-business order management.                                                                                                                                                                                                                                                                                                                                    
|
| |  | ATG Campaign Optimizer. This application enables
    marketing professionals to define comparative tests of different
    offers, promotions and product representations, sometimes called
    A/ B tests, to put those tests into production, specifying the
    segments of site visitors to be tested, and finally to receive
    reports on the test results. Other methods for testing campaigns
    often involve programming by expert developers, and sometimes
    even involve network infrastructure modifications. ATG Campaign
    Optimizer is designed to allow non-technical marketing
    professionals to create and execute comparative tests that can
    be used to increase the effectiveness of online marketing
    activities.                                                                                                      
|
| |  | ATG Adaptive Customer Outreach. This application enables
    marketing professionals to design and deploy multi-step
    campaigns that include email, web interactions and external
    touch points. It is differentiated by its ability to target
    content, extend campaigns across many steps, and integrate Web
    interactions and email.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | ATG Adaptive Customer Assistance. This application
    combines natural language search technology (acquired with
    Primus) with the customer profile repositories in the ATG
    Adaptive Scenario Engine to provide a personalized tool for
    answering consumers questions during the buying process
    and for self-service. ATG Adaptive Customer Assistance provides
    consumers with personal transactional information by, for
    example, facilitating automated replies to questions such as
    How much is my account balance? ATG Adaptive
    Customer Assistance also enables a consumer to take direct
    action through relevant links built into the results. The
    product includes capabilities for creating and maintaining the
    answer repository, and for consumer feedback.                                         
|
| |  | ATG Content Administration. This application enables
    marketing professionals and others to create, manage, preview,
    and deploy content while ensuring proper quality control. The
    ATG Adaptive Scenario Engine and ATG Content Administration
    products provide the means to create and update dynamically
    changing content such as catalogs and offers for marketing
    campaigns.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | ATG Knowledge Center. This knowledge management solution
    is used by call center agents and help-desk personnel to more
    quickly and accurately find the answers to customer inquiries
    and resolve problems (also known as assisted service). By doing
    so, they can improve the satisfaction of their customers, and
    also reduce service expense. We will strive to differentiate our
    assisted service products by integrating our personalization,
    commerce and marketing technologies, thus enabling more relevant
    answers, and facilitating cross- and up-selling as part of the
    service encounter.                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ATG Communications Center. This inbound response solution
    facilitates the reception, categorization, routing, and
    answering of inbound queries received via email, Web forms and
    mobile devices. We will strive to differentiate this product by
    integrating it with the knowledge base common to our self- and
    assisted-service offerings.
|
| |  | ATG Search. This natural language search solution enables
    customers and agents to locate the answers, catalog items and
    other content they seek more quickly and more accurately, with
    fewer irrelevant responses.                                                                                                                                 





Services




Professional Services.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lifecycle Project Delivery. Our lifecycle project
    development capability builds upon our deep knowledge of best
    practices and the ATG Adaptive Delivery Framework methodology.
    Because we are responsible for the project from beginning to
    end, we can provide clients with a high-quality, structured
    experience from planning to post-deployment support.                                                                                                                                                                                  
|
| |  | Packaged Offerings. Our upgrade and migration packaged
    offerings are designed to provide clients with targeted services
    that can accelerate adoption of new versions of existing ATG
    products. We offer packaged offerings built to ease the
    implementation of newer products such as ATG Adaptive Customer
    Assistance. Our bundled implementation packages, which include
    best practices and methodologies, reduce the risk and increase
    the speed of implementation of products such as Content
    Administration and ATG Commerce.
|
| |  | Structured Enabling Services. Working with a service
    partner and the client or a designated team, we offer Structured
    Enabling Services to facilitate project success. Engaging our
    Professional Services organization gives partners and clients
    access to best practices that we have developed over hundreds of
    engagements. Structured Enabling Services also leverage the ATG
    Adaptive Delivery Framework methodology, while enabling the
    partners or clients project team to complete a
    significant portion of the work.  
|
| |  | Custom Solutions. We offer customized professional
    services solutions tailored to meet the specific needs of our
    clients across an entire project. Consulting services can
    include a combination of system architecture design, project
    management, Web design, technical training and business
    consulting services.                                                                                                                                                                                                                          

Education.


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Customer Support Services.


Application Hosting Services.




Markets




Consumer Retail




| |                          
| | -------------------------
| | Best Buy Companies, Inc. 
| | Cabelas                 
| | J. Crew                  
| | Neiman Marcus            
| | Restoration Hardware     
| | Target Corporation       
| | The Finish Line          
| | Walgreens                
| | Footlocker               
| | Body Shop                
| | American Eagle Outfitters

Financial Services




| |                             
| | ----------------------------
| | John Hancock Funds          
| | Citicorp                    
| | Deutsche Bank               
| | Ford Motor Credit           
| | HSBC                        
| | Barclays Global Investors   
| | MFS Investment Management   
| | Dreyfus Services Corporation
| | Merrill Lynch               
| | Pioneer Investments         
| | Conseco                     

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Manufacturing




| |                    
| | -------------------
| | Abbott Laboratories
| | Eastman Kodak      
| | General Motors     
| | Newell Rubbermaid  
| | Procter & Gamble   
| | Boeing             
| | Nike               

Communications & Technology




| |                
| | ---------------
| | Adobe          
| | BellSouth      
| | Cisco          
| | EMC            
| | Palm One       
| | Hewlett Packard
| | Intuit         
| | Microsoft      
| | Hitachi        
| | Cingular       
| | T-Mobile       
| | Verisign       

Travel Media and Entertainment




| |                              
| | -----------------------------
| | American Airlines            
| | BMG Direct                   
| | Hilton Hotels                
| | Hyatt                        
| | Intercontinental Hotels Group
| | Meredith Corporation         
| | Nintendo                     
| | Readers Digest              
| | Nokia                        
| | The MTVi Group               
| | Warner Music                 
| | Knight-Ridder                
| | Time, Inc.                   
| | Hotels.com                   
| | Media News Group             
| | Elsevier                     

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International




| |                            
| | ---------------------------
| | Airbus                     
| | Kingfisher                 
| | Direkt Anlage Bank         
| | Pirelli                    
| | BBC Worldwide, Ltd.        
| | Philips                    
| | Heidelberger Druckmaschinen
| | Lavazza                    
| | Hoffman la Roche           
| | Premier Farnell            
| | Royal Mail                 
| | Vodafone                   
| | France Telecom             
| | Telefonica                 
| | Deutsche Post              
| | LVMH                       
| | Orange PLC                 
| | IBM                        

Research and Development






Sales Coverage Model










| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ATG Certified Professional Programconsists of
    two exams. The first tests the developers expertise on our
    Adaptive Scenario Engine, including Dynamo Application Framework
    and ATG

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Scenario Personalization. The second exam assesses a
    developers proficiency with ATG Commerce, including
    consumer and business-to-business tools and concepts.
    Certification can provide a developer with a competitive
    advantage, since it offers evidence of the developers
    capabilities using our software.                                                                                                                                             
|
| |  | Our ATG Accredited Partner Programis intended to
    identify our most qualified partners. In order to become an
    accredited partner, a channel partner must complete sales
    training, obtain certifications and complete implementations of
    our software. This program helps our clients identify channel
    partners that are highly qualified to perform successful
    implementations of our software. As of December 31, 2004,
    we had 5 accredited partners.



North America




| |                                                   
| | --------------------------------------------------
| | Avenue A/ Razorfish                               
| | Blast Radius                                      
| | Capgemini                                         
| | Critical Mass                                     
| | EDS                                               
| | IBM                                               
| | Immix Technology (federal government)             
| | McFayden Consulting                               
| | Professional Access                               
| | Computer Sciences Corporation (federal government)
| | Whittman Hart                                     

International




| |                               
| | ------------------------------
| | Europe, Middle East and Africa



| |                                      
| | -------------------------------------
| | Al-Faris Information Technologies    
| | AMG.net                              
| | Atos-Origina Integration SAS         
| | Capgemini                            
| | CSC Computer Sciences Limited        
| | Coheris                              
| | Conexus Limited                      
| | EDS                                  
| | E-Tree                               
| | European Technology Consultants (ETC)
| | SDG Consulting                       
| | Sequenza SPA                         
| | Unilog                               
| | Valoris                              



| |                     
| | --------------------
| | Asia and Pacific Rim



| |                          
| | -------------------------
| | HP Japan                 
| | Rikei Corporation (Japan)
| | XM Sydney                
| | D2C2 Taiwan Limited      



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Competition






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | e-commerce application vendors, such as IBM, Microsoft and Blue
    Martini;                                                                                                                                                                                                                                                                                                                                                               
|
| |  | e-commerce business process outsourcers, including Amazon,
    Digital River and GSI Commerce;                                                                                                                                                                                                                                                                                                                                             
|
| |  | marketing and customer-service application vendors, including
    natural language, self-service and traditional customer
    relationship management application vendors, such as RightNow
    Technologies, Unica, Chordiant, E.piphany, Kana, eGain, Inquira,
    iPhrase Technologies and ServiceWare, some which may have a
    vertical industry focus, which may assist them in competing for
    customers in those industries; and
|
| |  | in-house development efforts by potential customers or partners.                                                                                                                                                                                                                                                                                                                                                                           













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Proprietary Rights and Licensing




Employees




Internet Address and SEC Reports




RISK FACTORS THAT MAY AFFECT RESULTS






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Risks Related To Our Business




| |                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect our revenues and operating results to continue
    to fluctuate for the foreseeable future, and the price of our
    common stock is likely to fall if quarterly or annual results
    are lower than the expectations of securities analysts.





| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuating economic conditions, particularly as they affect our
    customers willingness to implement new e-commerce
    solutions;
|
| |  | the timing of sales and revenue recognition of our products and
    services;                                                         
|
| |  | the timing of customer orders and product implementations;                                                                            
|
| |  | delays in introducing new products and services;                                                                                      
|
| |  | the mix of revenues derived from products and services;                                                                               
|
| |  | timing of hiring and utilization of services personnel;                                                                               
|
| |  | cost overruns related to fixed-price services projects;                                                                               
|
| |  | the mix of domestic and international sales;                                                                                          
|
| |  | increased expenses, whether related to sales and marketing,
    product development or administration; and                            
|
| |  | costs related to possible acquisitions of technologies or
    businesses.                                                             





| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Failure of our recent Primus acquisition to achieve its
    potential benefits could harm our business and operating
    results.





| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | sales, marketing, service and support organizations;                                            
|
| |  | information and communications systems;                                                         
|
| |  | operating procedures;                                                                           
|
| |  | accounting systems and financial controls; and                                                  
|
| |  | human resource practices, including benefit, training and
    professional development programs.





| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | problems with compatibility of business cultures;                                                                                         
|
| |  | customer perception of an adverse change in service standards,
    business focus, billing practices or product and service
    offerings;
|
| |  | costs and inefficiencies in delivering products and services to
    our customers;                                                        

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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | problems in successfully coordinating our research and
    development efforts;                                                    
|
| |  | difficulty in integrating sales, support and product marketing;                                                                    
|
| |  | costs and delays in implementing common systems and procedures,
    including financial accounting systems; and                    
|
| |  | the inability to retain and integrate key management, research
    and development, technical sales and customer support personnel.





| |                                                                                      
| | -------------------------------------------------------------------------------------
| | The substantial costs of our Primus acquisition could harm
    our financial results.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We could incur substantial costs protecting our
    intellectual property from infringement or defending against a
    claim of infringement.







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



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to sustain or increase our revenue or
    attain profitability on a quarterly or annual basis, which could
    lead to a material decrease in the price of our common
    stock.





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Turnover in our personnel may impair our ability to
    develop and implement a business strategy, which could have a
    material adverse effect on our operating results and common
    stock price.







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| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Our lengthy sales cycle makes it difficult to predict our
    quarterly results and causes variability in our operating
    results.









| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition in the market for Internet
    online marketing, sales and service applications, and we expect
    competition to intensify in the future. This competition could
    cause our revenues to fall short of expectations, which could
    adversely affect our future operating results and our ability to
    grow our business.





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| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | If we fail to maintain our existing customer base, our
    ability to generate revenues will be harmed.





| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If systems integrators or value added resellers reduce
    their support and implementation of our products, our revenues
    may fail to meet expectations and our operating results would
    suffer.







15



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| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Competition with our resellers could limit our sales
    opportunities and jeopardize these relationships.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If we acquire other companies or businesses, we will be
    subject to risks that could hurt our business.







| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



16



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| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure by us to comply with the financial covenants in
    our line of credit or the refusal of our bank to renew this
    facility, could negatively impact our cash, cash equivalents and
    marketable securities balances.







| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For the months ending January 31, 2005, February 28,
    2005, April 30, 2005, and May 31, 2005, the greater of
    (i) $15.0 million or (ii) two times the amount of
    outstanding obligations under the loan agreement, and
|
| |  | For the months ending March 31, 2005 and June 30,
    2005, and as of the last day of each month thereafter,
    $20 million.                                                                                                  







| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to adapt to rapid changes in the market for
    Internet online marketing, sales, and service applications, our
    existing products could become obsolete.





17



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| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to address the challenges associated with
    international operations, revenues from our products and
    services may decline or 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 the Far East;                                                                                                          
|
| |  | 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 to the extent that our
    products are sold in countries that do not have English as their
    primary language;
|
| |  | reduced protection for intellectual property rights in some of
    the countries in which we operate or plan to operate;                                                                                              
|
| |  | potentially adverse tax consequences; and                                                                                                                                                                             
|
| |  | political and economic instability.                                                                                                                                                                                   





| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our software products may contain errors or defects that
    could result in lost revenues, delayed or limited market
    acceptance, or product liability claims with substantial
    litigation costs.





18



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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our software offerings under our agreement with IBM may
    not achieve market acceptance, which may harm our business and
    operating results.





| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our packaged software offerings must meet the requirements of
    our current and prospective clients. We are working with IBM to
    further integrate our applications to optimize their performance
    while running on IBM WebSphere, but we cannot assure you that
    our integration efforts will satisfy the needs of current and
    prospective customers.
|
| |  | IBM may determine not to devote significant resources to the
    arrangements contemplated by our OEM agreement or may disagree
    with us as to how to proceed with the integration of our
    products. The amount and timing of resources dedicated by IBM
    under the OEM agreement are not under our direct control.                                         
|
| |  | Our arrangement with IBM may cause confusion among current and
    prospective customers as to our product focus and direction.                                                                                                                                                                                                                                      





| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Our announced restructurings may not result in the reduced
    cost structure we anticipate and may have other adverse impacts
    on productivity.





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The loss of technology licensed from third parties could
    delay our ability to deliver our products.



19



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| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We use the Java programming language to develop our
    products, and our business could be harmed if Java loses market
    acceptance or if we are not able to continue using Java or
    Java-related technologies.









Risks Related To the Internet Industry




| |                                                                              
| | -----------------------------------------------------------------------------
| | Our performance will depend on the growth of e-commerce
    and self-service.



20



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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Regulations could be enacted that either directly restrict
    our business or indirectly impact our business by limiting the
    growth of e-commerce.





| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Internet is generating privacy concerns that could
    result in legislation or market perceptions that could harm our
    business or result in reduced sales of our products, or
    both.





Risks Related To The Securities Markets And Our Stock




| |                                                    
| | ---------------------------------------------------
| | Our common stock price may continue to be volatile.



21



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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly operating results;                                                                             
|
| |  | changes in market valuations of Internet and software companies;                                                           
|
| |  | 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;                                                                              
|
| |  | future sales of our common stock; or                                                                                       
|
| |  | changes in financial estimates by securities analysts.                                                                     



| |                                                                 
| | ----------------------------------------------------------------
| | We may incur significant costs from class action
    litigation.





| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our common stock may not continue to trade on the Nasdaq
    National Market, which could reduce the value of your investment
    and make your shares more difficult to sell.





| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | 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;

22



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





| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The regulatory environment surrounding accounting and
    corporate governance subjects us to certain legal uncertainties
    in the operation of our business and may increase the cost of
    doing business.





| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are incurring significant costs to comply with changing
    laws and we may in the future need to report significant
    deficiencies or material weaknesses in our Annual Report, which
    could affect our operating results and cause our stock price to
    decline.









| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Changes in the accounting treatment of stock options could
    adversely affect our results of operations.

Share-Based Payment


23



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Accounting
for Stock Issued to Employees, Accounting for Stock-Based Compensation (l)







|        |           
|------- | ----------
|Item 2. | Properties










|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





24



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25



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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 |      |  | Low |  
|                              |  |      |      |  |     |  
|Year ending December 31, 2003 |  |      |      |  |     |   |      | 
|First quarter                 |  | $    | 1.38 |  |     | $ | 0.81 | 
|Second quarter                |  |      | 1.96 |  |     |   | 0.75 | 
|Third quarter                 |  |      | 2.84 |  |     |   | 1.57 | 
|Fourth quarter                |  |      | 2.13 |  |     |   | 1.34 | 
|Year ending December 31, 2004 |  |      |      |  |     |   |      | 
|First quarter                 |  | $    | 2.25 |  |     | $ | 1.35 | 
|Second quarter                |  |      | 1.69 |  |     |   | 1.09 | 
|Third quarter                 |  |      | 1.23 |  |     |   | 0.70 | 
|Fourth quarter                |  |      | 1.61 |  |     |   | 0.84 | 





26



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|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data

Consolidated Statements of Operations Data:


|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |        |        |  
|------------------------------------------- | ------------------------------------ | --------------------------------------------------------- | ----- | ------- | ------- |  | -------- | ------ | -------- | - | ------- | ------ | ------- | ---- | ----- | ------- | ------ |  | ------ | ------ | ------ | -
|                                            |                                      | Year Ended December 31,                                   |      
|                                            |                                      |                                                           |      
|                                            |                                      | 2000                                                      |       |         | 2001    |  |          | 2002   |          |   | 2003    |        |         | 2004 |      
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | (In thousands, except per share data)                     |      
|Revenues:                                   |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |       
|                                            | Product license                      |                                                           | $     | 121,525 |         |  | $        | 76,631 |          |   | $       | 48,796 |         |      | $     | 27,159  |        |  | $      | 23,345 |       
|                                            | Services                             |                                                           |       | 42,917  |         |  |          | 63,707 |          |   |         | 52,697 |         |      |       | 45,333  |        |  |        | 45,874 |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Total revenues                                            |       |         | 164,442 |  |          |        | 140,338  |   |         |        | 101,493 |      |       |         | 72,492 |  |        |        | 69,219 |  
|Cost of Revenues:                           |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |       
|                                            | Product licenses                     |                                                           |       | 3,426   |         |  |          | 5,981  |          |   |         | 4,278  |         |      |       | 2,118   |        |  |        | 2,206  |       
|                                            | Services                             |                                                           |       | 36,221  |         |  |          | 47,827 |          |   |         | 33,745 |         |      |       | 19,808  |        |  |        | 19,879 |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Total cost of revenues                                    |       |         | 39,647  |  |          |        | 53,808   |   |         |        | 38,023  |      |       |         | 21,926 |  |        |        | 22,085 |  
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Gross profit                                              |       |         | 124,795 |  |          |        | 86,530   |   |         |        | 63,470  |      |       |         | 50,566 |  |        |        | 47,134 |  
|Operating Expenses:                         |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |       
|                                            | Research and development             |                                                           |       | 19,390  |         |  |          | 30,518 |          |   |         | 22,046 |         |      |       | 17,928  |        |  |        | 16,209 |       
|                                            | Sales and marketing                  |                                                           |       | 73,535  |         |  |          | 93,437 |          |   |         | 43,122 |         |      |       | 31,174  |        |  |        | 29,602 |       
|                                            | General and administrative           |                                                           |       | 22,984  |         |  |          | 24,116 |          |   |         | 11,087 |         |      |       | 9,538   |        |  |        | 7,742  |       
|                                            | Restructuring charge (benefit)       |                                                           |       |        |         |  |          | 75,580 |          |   |         | 19,005 |         |      |       | (10,476 | )      |  |        | 3,570  |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Total operating expenses                                  |       |         | 115,909 |  |          |        | 223,651  |   |         |        | 95,260  |      |       |         | 48,164 |  |        |        | 57,123 |  
|Income (loss) from operations               |                                      |                                                           | 8,886 |         |         |  | (137,121 | )      |          |   | (31,790 | )      |         |      | 2,402 |         |        |  | (9,989 | )     
|                                            | Interest and other income, net       |                                                           |       | 8,979   |         |  |          | 4,967  |          |   |         | 2,300  |         |      |       | 1,521   |        |  |        | 395    |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Income (loss) before (provision) benefit for income taxes |       |         | 17,865  |  |          |        | (132,154 | ) |         |        | (29,490 | )    |       |         | 3,923  |  |        |        | (9,594 | )
|                                            | Provision (benefit) for income taxes |                                                           |       | 3,378   |         |  |          | 23,851 |          |   |         |       |         |      |       | (255    | )      |  |        | (50    | )     
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            |                                      | Net income (loss)                                         |       | $       | 14,487  |  |          | $      | (156,005 | ) |         | $      | (29,490 | )    |       | $       | 4,178  |  |        | $      | (9,544 | )
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|Net income (loss) per share:                |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |       
|                                            | Basic                                |                                                           | $     | 0.22    |         |  | $        | (2.27  | )        |   | $       | (0.42  | )       |      | $     | 0.06    |        |  | $      | (0.12  | )     
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            | Diluted                              |                                                           | $     | 0.20    |         |  | $        | (2.27  | )        |   | $       | (0.42  | )       |      | $     | 0.06    |        |  | $      | (0.12  | )     
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|Weighted average common shares outstanding: |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |       |         |        |  |        |       
|                                            | Basic                                |                                                           |       | 66,932  |         |  |          | 68,603 |          |   |         | 69,921 |         |      |       | 71,798  |        |  |        | 79,252 |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      
|                                            | Diluted                              |                                                           |       | 73,138  |         |  |          | 68,603 |          |   |         | 69,921 |         |      |       | 73,768  |        |  |        | 79,252 |       
|                                            |                                      |                                                           |       |         |         |  |          |        |          |   |         |        |         |      |      

27



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Consolidated Balance Sheet Data:


|                                                            |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |  |  |   |        | 
|----------------------------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------ |  |  | - | ------ | 
|                                                            |  | December 31,   |        
|                                                            |  |                |        
|                                                            |  | 2000           |         |  | 2001 |   |         | 2002 |  |   | 2003    |  |  | 2004 |       
|                                                            |  |                |         |  |      |   |         |      |  |   |         |  |  |      |       
|                                                            |  | (In thousands) |        
|Cash, cash equivalents and short term marketable securities |  | $              | 126,473 |  |      | $ | 63,550  |      |  | $ | 68,558  |  |  | $    | 41,584 |  |  | $ | 26,507 | 
|Restricted cash                                             |  |                |        |  |      |   | 16,757  |      |  |   |        |  |  |      |       |  |  |   |       | 
|Long-term marketable securities                             |  |                | 17,734  |  |      |   |        |      |  |   |        |  |  |      |       |  |  |   | 4,001  | 
|Total assets                                                |  |                | 259,515 |  |      |   | 137,488 |      |  |   | 104,835 |  |  |      | 67,360 |  |  |   | 97,803 | 
|Long-term obligations, less current maturities              |  |                | 2,000   |  |      |   |        |      |  |   |        |  |  |      |       |  |  |   | 112    | 
|Total stockholders equity                                  |  | $              | 191,973 |  |      | $ | 42,909  |      |  | $ | 16,023  |  |  | $    | 20,937 |  |  | $ | 42,185 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview










Critical Accounting Policies and Estimates




28



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| |                    
| | -------------------
| | Revenue Recognition

Software Revenue Recognition Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.








29



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| |                                  
| | ---------------------------------
| | 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 of Defined Benefit Pension Plans and for
Termination Benefits Restructuring and
Impairment Charges. Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)




30



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| |                                                                             
| | ----------------------------------------------------------------------------
| | Impairment or Disposal of Long Lived Assets, including
    Intangible Assets







| |         
| | --------
| | Goodwill

Goodwill and Other Intangible Assets




31



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| |                            
| | ---------------------------
| | Accounting for Income Taxes

Accounting for Income Taxes




32



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Results of Operations




|                                                          |                                 |                          |     |    |      |  |   |      |     |  |     |    |     | 
|--------------------------------------------------------- | ------------------------------- | ------------------------ | --- | -- | ---- |  | - | ---- | --- |  | --- | -- | --- | 
|                                                          |                                 | Year Ended               |    
|                                                          |                                 | December 31,             |    
|                                                          |                                 |                          |    
|                                                          |                                 | 2004                     |     |    | 2003 |  |   | 2002 |    
|                                                          |                                 |                          |     |    |      |  |   |      |    
|Revenues:                                                 |                                 |                          |     |    |      |  |   |      |     |  |     |   
|                                                          | Product license                 |                          |     | 34 | %    |  |   | 37   | %   |  |     | 48 | %  
|                                                          | Services                        |                          |     | 66 |      |  |   | 63   |     |  |     | 52 |    
|                                                          |                                 |                          |     |    |      |  |   |      |    
|                                                          |                                 | Total revenues           |     |    | 100  |  |   |      | 100 |  |     |    | 100 | 
|Cost of revenues:                                         |                                 |                          |     |    |      |  |   |      |     |  |     |   
|                                                          | Product license                 |                          |     | 3  |      |  |   | 3    |     |  |     | 4  |    
|                                                          | Services                        |                          |     | 29 |      |  |   | 27   |     |  |     | 33 |    
|                                                          |                                 |                          |     |    |      |  |   |      |    
|                                                          |                                 | Total cost of revenues   |     |    | 32   |  |   |      | 30  |  |     |    | 37  | 
|                                                          |                                 |                          |     |    |      |  |   |      |    
|                                                          | Gross margin                    |                          |     | 68 |      |  |   | 70   |     |  |     | 63 |    
|                                                          |                                 |                          |     |    |      |  |   |      |    
|Operating expenses:                                       |                                 |                          |     |    |      |  |   |      |     |  |     |   
|                                                          | Research and development        |                          |     | 23 |      |  |   | 25   |     |  |     | 22 |    
|                                                          | Sales and marketing             |                          |     | 43 |      |  |   | 43   |     |  |     | 42 |    
|                                                          | General and administrative      |                          |     | 11 |      |  |   | 13   |     |  |     | 11 |    
|                                                          | Restructuring (benefit) charges |                          |     | 5  |      |  |   | (14  | )   |  |     | 19 |    
|                                                          |                                 |                          |     |    |      |  |   |      |    
|                                                          |                                 | Total operating expenses |     |    | 83   |  |   |      | 66  |  |     |    | 94  | 
|                                                          |                                 |                          |     |    |      |  |   |      |    
|Income (loss) from operations                             |                                 |                          | (14 | )  |      |  | 3 |      |     |  | (31 | ) 
|Interest and other income, net                            |                                 |                          |    |    |      |  | 2 |      |     |  | 2   |   
|                                                          |                                 |                          |     |    |      |  |   |      |    
|Income (loss) before (benefit) provision for income taxes |                                 |                          | (14 | )  |      |  | 5 |      |     |  | (29 | ) 
|(Benefit) provision for income taxes                      |                                 |                          |    |    |      |  |  |      |     |  |    |   
|                                                          |                                 |                          |     |    |      |  |   |      |    
|Net income (loss)                                         |                                 |                          | (14 | )% |      |  | 6 | %    |     |  | (29 | )%
|                                                          |                                 |                          |     |    |      |  |   |      |    



|                                 |                                          |              |    |    |      |  |    |      |  |  |    |    | 
|-------------------------------- | ---------------------------------------- | ------------ | -- | -- | ---- |  | -- | ---- |  |  | -- | -- | 
|                                 |                                          | Year Ended   |   
|                                 |                                          | December 31, |   
|                                 |                                          |              |   
|                                 |                                          | 2004         |    |    | 2003 |  |    | 2002 | 
|                                 |                                          |              |    |    |      |  |    |      | 
|Cost of product license revenues |                                          |              | 9  | %  |      |  | 8  | %    |  |  | 9  | % 
|                                 | Gross margin on product license revenues |              |    | 91 |      |  |    | 92   |  |  |    | 91 | 
|Cost of services revenues        |                                          |              | 43 |    |      |  | 44 |      |  |  | 64 |   
|                                 | Gross margin on services revenues        |              |    | 57 |      |  |    | 56   |  |  |    | 36 | 



| |                                             
| | --------------------------------------------
| | Years ended December 31, 2004, 2003 and 2002



| |         
| | --------
| | Revenues



33



---



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| |                         
| | ------------------------
| | Product License Revenues









34



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|                                    |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                    |  | 2004 |       |   | 2003 |   |       | 2002 | 
|                                    |  |      |       |   |      |   |       |      | 
|Reseller revenues                   |  | $    | 5,223 |   |      | $ | 6,537 |      |  | $ | 9,154 |  
|Percent of product license revenues |  |      | 22    | % |      |   | 24    | %    |  |   | 19    | %



| |                  
| | -----------------
| | Services Revenues













| |                                 
| | --------------------------------
| | Cost of Product License Revenues







35



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| |                                         
| | ----------------------------------------
| | Gross Margin on Product License Revenues





| |                          
| | -------------------------
| | Cost of Services Revenues











| |                                  
| | ---------------------------------
| | Gross Margin on Services Revenues



36



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| |                                  
| | ---------------------------------
| | Research and Development Expenses











| |                             
| | ----------------------------
| | Sales and Marketing Expenses











| |                                    
| | -----------------------------------
| | General and Administrative Expenses





37



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| |                                
| | -------------------------------
| | Restructuring (Benefit) Charges





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. Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring,


2001 Actions




38



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|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |        |  |  |   |        | 
|---------------------------------------------- |  | ------- | ------ | ------------ | ------------------ | - | ------------ | ------------ |  | - | -------------- | ------------- |  | ----------------- | ------ |  |  | - | ------ | 
|                                               |  |         |        | 2001         |                    |   | 2001         |              |  |   |                |              
|                                               |  |         |        | Adjustments  |                    |   | Adjustments  |              |  |   |                | Accrued       | 
|                                               |  |         |        | in Estimates |                    |   | in Estimates |              |  |   |                | Restructuring | 
|                                               |  | 2001    |        |              | Resulting in       |   |              | Resulting in |  |   | Write-Offs and |               |  | Balance as of     |       
|                                               |  | Charges |        |              | Additional Charges |   |              | Credits      |  |   | Payments       |               |  | December 31, 2001 |       
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       
|Facilities-related costs and impairments       |  | $       | 59,418 |              |                    | $ | 9,700        |              |  | $ | (8,200         | )             |  | $                 | 16,208 |  |  | $ | 44,710 | 
|Employee severance, benefits and related costs |  |         | 7,938  |              |                    |   |             |              |  |   |               |               |  |                   | 6,748  |  |  |   | 1,190  | 
|Asset impairments                              |  |         | 4,205  |              |                    |   |             |              |  |   |               |               |  |                   | 4,205  |  |  |   |       | 
|Exchangeable share settlement                  |  |         | 1,263  |              |                    |   |             |              |  |   |               |               |  |                   | 1,263  |  |  |   |       | 
|Marketing costs                                |  |         | 851    |              |                    |   |             |              |  |   |               |               |  |                   | 851    |  |  |   |       | 
|Legal and accounting                           |  |         | 405    |              |                    |   |             |              |  |   |               |               |  |                   | 232    |  |  |   | 173    | 
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       
|Total                                          |  | $       | 74,080 |              |                    | $ | 9,700        |              |  | $ | (8,200         | )             |  | $                 | 29,507 |  |  | $ | 46,073 | 
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       

|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |        |  |  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ----- | ------------ |  | - | -------- | - | ------------- | ----------------- | ------ |  |  | - | ------ | -
|                                               |  |                   |        | 2002 |                    |   | 2002  |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |       | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |       | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |       | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2001 |        |      | Additional Charges |   |       | Credits      |  |   | Payments |   |               | December 31, 2002 |       
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Facilities-related costs and impairments       |  | $                 | 44,710 |      |                    | $ | 2,207 |              |  | $ | (853     | ) |               | $                 | 9,016  |  |  | $ | 37,048 |  
|Employee severance, benefits and related costs |  |                   | 1,190  |      |                    |   |      |              |  |   |         |   |               |                   | 920    |  |  |   | 270    |  
|Marketing costs                                |  |                   |       |      |                    |   |      |              |  |   | (536     | ) |               |                   |       |  |  |   | (536   | )
|Legal and accounting                           |  |                   | 173    |      |                    |   |      |              |  |   |         |   |               |                   | 173    |  |  |   |       |  
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Total                                          |  | $                 | 46,073 |      |                    | $ | 2,207 |              |  | $ | (1,389   | ) |               | $                 | 10,109 |  |  | $ | 36,782 |  
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       

|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |        |   |  |   |        | 
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ----- | ------------ |  | - | -------- | - | ------------- | ----------------- | ------ | - |  | - | ------ | 
|                                               |  |                   |        | 2003 |                    |   | 2003  |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |       | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |       | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |       | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2002 |        |      | Additional Charges |   |       | Credits      |  |   | Payments |   |               | December 31, 2003 |       
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Facilities-related costs and impairments       |  | $                 | 37,048 |      |                    | $ | 2,769 |              |  | $ | (11,466  | ) |               | $                 | 18,143 |   |  | $ | 10,208 | 
|Employee severance, benefits and related costs |  |                   | 270    |      |                    |   | 229   |              |  |   |         |   |               |                   | 270    |   |  |   | 229    | 
|Marketing costs                                |  |                   | (536   | )    |                    |   |      |              |  |   |         |   |               |                   | (536   | ) |  |   |       | 
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Total                                          |  | $                 | 36,782 |      |                    | $ | 2,998 |              |  | $ | (11,466  | ) |               | $                 | 17,877 |   |  | $ | 10,437 | 
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       

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|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |       |  |  |   |       | 
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ---- | ------------ |  | - | -------- | - | ------------- | ----------------- | ----- |  |  | - | ----- | 
|                                               |  |                   |        | 2004 |                    |   | 2004 |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |      | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |      | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |      | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2003 |        |      | Additional Charges |   |      | Credits      |  |   | Payments |   |               | December 31, 2004 |      
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      
|Facilities-related costs and impairments       |  | $                 | 10,208 |      |                    | $ | 112  |              |  | $ |         |   |               | $                 | 4,066 |  |  | $ | 6,254 | 
|Employee severance, benefits and related costs |  |                   | 229    |      |                    |   |     |              |  |   | (172     | ) |               |                   |      |  |  |   | 57    | 
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      
|Total                                          |  | $                 | 10,437 |      |                    | $ | 112  |              |  | $ | (172     | ) |               | $                 | 4,066 |  |  | $ | 6,311 | 
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      



| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments











40



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| |                                                                           
| | --------------------------------------------------------------------------
| | Employee Severance, Benefits and Related Costs and
    Exchangeable Shares





| |                  
| | -----------------
| | Asset Impairments





| |                                       
| | --------------------------------------
| | Marketing Costs and Legal & Accounting





2002 Actions






|                                               |  |              |        |                |          |               |              |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | -------------- | -------- | ------------- | ------------ | ---- |  | - | ------ | 
|                                               |  |              |        |                |          | Accrued       |             
|                                               |  |              |        |                |          | Restructuring |             
|                                               |  |              |        |                |          | Balance as of |             
|                                               |  |              |        | Write-Offs and |          |               | December 31, |     
|                                               |  | 2002 Charges |        |                | Payments |               |              | 2002 | 
|                                               |  |              |        |                |          |               |              |      | 
|Facilities-related costs and impairments       |  | $            | 14,634 |                |          | $             | 2,613        |      |  | $ | 12,021 | 
|Employee severance, benefits and related costs |  |              | 3,553  |                |          |               |             |      |  |   | 3,553  | 
|                                               |  |              |        |                |          |               |              |      | 
|Total                                          |  | $            | 18,187 |                |          | $             | 2,613        |      |  | $ | 15,574 | 
|                                               |  |              |        |                |          |               |              |      | 

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|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |       |  |  |   |       | 
|---------------------------------------------- |  | ------------- | ------ |  | ------------ | - | ----------- | ------------ |  | - | -------- | ------------- | ------------- | ---- | ----- |  |  | - | ----- | 
|                                               |  | Accrued       |        |  |              |   | 2003        |              |  |   |          | Accrued       |              
|                                               |  | Restructuring |        |  |              |   | Adjustments |              |  |   |          | Restructuring |              
|                                               |  | Balance as of |        |  | 2003         |   |             | in Estimates |  |   |          |               | Balance as of |     
|                                               |  | December 31,  |        |  | Adjustments  |   |             | Resulting in |  |   |          |               | December 31,  |     
|                                               |  | 2002          |        |  | in Estimates |   |             | Credits      |  |   | Payments |               |               | 2003 |      
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      
|Facilities-related costs and impairments       |  | $             | 12,021 |  |              | $ | 4,094       |              |  | $ | (7,235   | )             |               | $    | 2,993 |  |  | $ | 5,887 | 
|Employee severance, benefits and related costs |  |               | 3,553  |  |              |   | 327         |              |  |   | (86      | )             |               |      | 3,794 |  |  |   |      | 
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      
|Total                                          |  | $             | 15,574 |  |              | $ | 4,421       |              |  | $ | (7,321   | )             |               | $    | 6,787 |  |  | $ | 5,887 | 
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      

|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |       |  |  |   |       | 
|---------------------------------------- |  | ------------- | ----- |  | ------------ | - | ------------ |  |  | -------- | ---- | ------------- | ---- | - | ----- |  |  | - | ----- | 
|                                         |  | Accrued       |       |  |              |   | 2004         |  |  |          |      | Accrued       |     
|                                         |  | Restructuring |       |  |              |   | Adjustments  |  |  |          |      | Restructuring |     
|                                         |  | Balance as of |       |  | 2004         |   | in Estimates |  |  |          |      | Balance as of |     
|                                         |  | December 31,  |       |  | Adjustments  |   | Resulting in |  |  |          |      | December 31,  |     
|                                         |  | 2003          |       |  | in Estimates |   | Credits      |  |  | Payments |      |               | 2004 |  
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |  
|Facilities-related costs and impairments |  | $             | 5,887 |  |              | $ |             |  |  | $        | (242 | )             |      | $ | 4,490 |  |  | $ | 1,155 | 
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |      
|Total                                    |  | $             | 5,887 |  |              | $ |             |  |  | $        | (242 | )             |      | $ | 4,490 |  |  | $ | 1,155 | 
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |      



| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments









42



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| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs



2003 Actions






|                                               |  |                |       |              |              |      |             |              |      |             |              |  |  |                |     |            |              |   |       |  |  |   |       | 
|---------------------------------------------- |  | -------------- | ----- | ------------ | ------------ | ---- | ----------- | ------------ | ---- | ----------- | ------------ |  |  | -------------- | --- | ---------- | ------------ | - | ----- |  |  | - | ----- | 
|                                               |  |                |       |              |              | 2003 |             |              | 2003 |             |              |  |  |               
|                                               |  |                |       | Three Months |              |      | Adjustments |              |      | Adjustments |              |  |  |                |    
|                                               |  | Three Months   |       |              | Ended        |      |             | in Estimates |      |             | in Estimates |  |  |                |     | Balance at |             
|                                               |  | Ended June 30, |       |              | September 30 |      |             | Resulting in |      |             | Resulting in |  |  | Write-Offs and |     |            | December 31, |  
|                                               |  | 2003           |       |              | 2003         |      |             | Charges      |      |             | Credits      |  |  | Payments       |     |            | 2003         |  
|                                               |  |                |       |              |              |      |             |              |      |             |              |  |  |                |     |            |              |  
|Facilities-related costs and impairments       |  | $              | 1,071 |              |              | $    | 393         |              |      | $           | 425          |  |  | $              |    |            |              | $ | 275   |  |  | $ | 1,614 | 
|Employee severance, benefits and related costs |  |                | 927   |              |              |      | 309         |              |      |             | 69           |  |  | $              | (84 | )          |              |   | 1,160 |  |  |   | 61    | 
|                                               |  |                |       |              |              |      |             |              |      |             |              |  |  |                |     |            |              |  
|Total                                          |  | $              | 1,998 |              |              | $    | 702         |              |      | $           | 494          |  |  |                | (84 | )          |              | $ | 1,435 |  |  | $ | 1,675 | 
|                                               |  |                |       |              |              |      |             |              |      |             |              |  |  |                |     |            |              |  

|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |     |  |  |   |       | 
|---------------------------------------------- |  | ------------ | ----- | ------------ | ------------ | ----------- | ------------ |  |  | -------- | --- | ------------ | ---- | - | --- |  |  | - | ----- | 
|                                               |  |              |       | 2004         |              |             |              |  |  |         
|                                               |  |              |       | Adjustments  |              | 2004        |              |  |  |          |    
|                                               |  |              |       | in Estimates |              | Adjustments |              |  |  |          |    
|                                               |  | Balance at   |       |              | Resulting in |             | in Estimates |  |  |          |     | Balance at   |     
|                                               |  | December 31, |       |              | Additional   |             | Resulting in |  |  |          |     | December 31, |     
|                                               |  | 2003         |       |              | Charges      |             | Credits      |  |  | Payments |     |              | 2004 |  
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |  
|Facilities-related costs and impairments       |  | $            | 1,614 |              |              | $           |             |  |  | $        | (62 | )            |      | $ | 179 |  |  | $ | 1,373 | 
|Employee severance, benefits and related costs |  |              | 61    |              |              |             |             |  |  |          | (15 | )            |      |   | 46  |  |  |   |      | 
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |    
|Total                                          |  | $            | 1,675 |              |              | $           |             |  |  | $        | (77 | )            |      | $ | 225 |  |  | $ | 1,373 | 
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |    

Second Quarter 2003 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments



43



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| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs





| |                  
| | -----------------
| | Asset Impairments



Third Quarter 2003 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments





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| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs





2004 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments







| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs



45



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|                                               |  |         |       |  |                |            |       |              |  |   |       | 
|---------------------------------------------- |  | ------- | ----- |  | -------------- | ---------- | ----- | ------------ |  | - | ----- | 
|                                               |  |         |       |  |                | Balance at |      
|                                               |  | 2004    |       |  | Write-Offs and |            |       | December 31, | 
|                                               |  | Charges |       |  | Payments       |            |       | 2004         | 
|                                               |  |         |       |  |                |            |       |              | 
|Facilities-related costs and impairments       |  | $       | 1,488 |  |                | $          | 738   |              |  | $ | 750   | 
|Employee severance, benefits and related costs |  |         | 2,461 |  |                |            | 892   |              |  |   | 1,569 | 
|                                               |  |         |       |  |                |            |       |              | 
|Total                                          |  | $       | 3,949 |  |                | $          | 1,630 |              |  | $ | 2,319 | 
|                                               |  |         |       |  |                |            |       |              | 

Abandoned Facilities Obligations




|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   |        |        | 
|------------------------------------ | --------------------------- | ---- | ----- | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | ---- | ------ | ----- | ----- | - | ---- | --- |  | - | ------ | ------ | 
|Lease Locations                      |                             | 2005 |       |       | 2006 |   |        | 2007  |  |   | 2008   |       |  | 2009 |        |       | Total |  
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|Cambridge, MA*                       |                             | $    | 2,069 |       |      | $ | 1,035  |       |  |   |        |       |  |      |        |       |       |   |      |     |  | $ | 3,104  |       
|Cambridge, MA                        |                             |      | 137   |       |      |   | 91     |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 228    |       
|Cambridge, MA                        |                             |      | 531   |       |      |   | 531    |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 1,062  |       
|Waltham, MA                          |                             |      | 1,466 |       |      |   | 1,466  |       |  | $ | 1,466  |       |  | $    | 1,466  |       |       | $ | 122  |     |  |   | 5,986  |       
|Chicago, IL                          |                             |      | 652   |       |      |   | 435    |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 1,087  |       
|San Francisco, CA                    |                             |      | 111   |       |      |   | 111    |       |  |   | 111    |       |  |      |        |       |       |   |      |     |  |   | 333    |       
|Reading, UK                          |                             |      | 570   |       |      |   | 570    |       |  |   | 570    |       |  |      | 570    |       |       |   | 142  |     |  |   | 2,422  |       
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|                                     | Facility obligations, gross |      |       | 5,536 |      |   |        | 4,239 |  |   |        | 2,147 |  |      |        | 2,036 |       |   |      | 264 |  |   |        | 14,222 | 
|Contracted and assumed sublet income |                             |      | (700  | )     |      |   | (1,438 | )     |  |   | (1,302 | )     |  |      | (1,256 | )     |       |   | (150 | )   |  |   | (4,846 | )     
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|                                     | Net cash obligations        |      | $     | 4,836 |      |   | $      | 2,801 |  |   | $      | 845   |  |      | $      | 780   |       |   | $    | 114 |  |   | $      | 9,376  | 
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|Assumed sub-lease income             |                             | $    | 74    |       |      | $ | 320    |       |  | $ | 315    |       |  | $    | 270    |       |       | $ | 67   |     |  | $ | 1,046  |       






|  |                                                                                  
|- | ---------------------------------------------------------------------------------
|* | represents a location for which we have executed a lease
    settlement agreement







| |                               
| | ------------------------------
| | Interest and Other Income, Net



46



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| |                           
| | --------------------------
| | Provision for Income Taxes



Liquidity and Capital Resources












47



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| |                                               
| | ----------------------------------------------
| | Accounts Receivable and Days Sales Outstanding



|                    |  |                                  |        |  |      |   |        |      |  |   |         | 
|------------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------- | 
|                    |  | 2004                             |        |  | 2003 |   |        | 2002 | 
|                    |  |                                  |        |  |      |   |        |      | 
|                    |  | (In thousands (except DSO data)) |       
|DSO                 |  |                                  | 129    |  |      |   | 77     |      |  |   | 91      | 
|Revenue             |  | $                                | 69,219 |  |      | $ | 72,492 |      |  | $ | 101,493 | 
|Accounts Receivable |  | $                                | 24,430 |  |      | $ | 15,364 |      |  | $ | 25,221  | 











| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for the months ending January 31, 2005, February 28,
    2005, April 30, 2005, and May 31, 2005, the greater of
    (i) $15.0 million or (ii) two times the amount of
    outstanding obligations, which includes letters of credit, under
    the loan agreement, and
|
| |  | for the months ending March 31, 2005 and June 30,
    2005, and as of the last day of each month thereafter,
    $20.0 million.                                                                                                                                       



48



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| |                        
| | -----------------------
| | Contractual Obligations



|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |       |  |  |   |   | 
|----------------------- |  | ---------------------- | ------ | --------- | ------ | - | ----- | --------- | ----- | - | --------- |  |  | ------- | ----- |  |  | - | - | 
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  |                        |        | Less Than |        |   |       |           | After
|Contractual Obligations |  | Total                  |        |           | 1 Year |   |       | 1-3 Years |       |   | 4-5 Years |  |  | 5 Years
|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |        
|Lease Commitments       |  | $                      | 21,495 |           |        | $ | 8,842 |           |       | $ | 9,402     |  |  | $       | 3,251 |  |  | $ |  | 



Recent Accounting Pronouncements


-Based Payment




49



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk





50



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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary
    Data

Report of Independent Registered Public Accounting Firm
















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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ART TECHNOLOGY GROUP, INC.


CONSOLIDATED BALANCE SHEETS


|                                                |                                                                                                                       |                             |        |          |        |   |        |          |        | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                                |                                                                                                                       | December 31,                |       
|                                                |                                                                                                                       |                             |       
|                                                |                                                                                                                       | 2004                        |        |          | 2003   |  
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | (In thousands, except share |       
|                                                |                                                                                                                       | and per-share information)  |       
|ASSETS                                         
|Current Assets:                                 |                                                                                                                       |                             |        |          |        |   |        |         
|                                                | Cash and cash equivalents                                                                                             |                             | $      | 21,310   |        |   | $      | 31,934   |       
|                                                | Marketable securities                                                                                                 |                             |        | 5,197    |        |   |        | 9,650    |       
|                                                | Accounts receivable, net of reserves of $680 ($799 in 2003)                                                           |                             |        | 24,430   |        |   |        | 15,364   |       
|                                                | Prepaid expenses and other current assets                                                                             |                             |        | 1,694    |        |   |        | 1,949    |       
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | Total current assets        |        |          | 52,631 |   |        |          | 58,897 | 
|Marketable securities, long term                |                                                                                                                       |                             | 4,001  |          |        |   |       |         
|Property and equipment, net                     |                                                                                                                       |                             | 3,120  |          |        |   | 3,751  |         
|Goodwill                                        |                                                                                                                       |                             | 27,458 |          |        |   |       |         
|Intangible assets, net                          |                                                                                                                       |                             | 7,177  |          |        |   |       |         
|Other assets                                    |                                                                                                                       |                             | 3,416  |          |        |   | 4,712  |         
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | $                           | 97,803 |          |        | $ | 67,360 |         
|                                                |                                                                                                                       |                             |        |          |        |  
|                                               
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Current Liabilities:                            |                                                                                                                       |                             |        |          |        |   |        |         
|                                                | Accounts payable                                                                                                      |                             | $      | 5,186    |        |   | $      | 1,146    |       
|                                                | Accrued expenses                                                                                                      |                             |        | 13,156   |        |   |        | 12,363   |       
|                                                | Capital lease obligations, current portion                                                                            |                             |        | 56       |        |   |        |         |       
|                                                | Notes payable                                                                                                         |                             |        | 595      |        |   |        |         |       
|                                                | Deferred revenue                                                                                                      |                             |        | 25,355   |        |   |        | 14,915   |       
|                                                | Accrued restructuring, short-term                                                                                     |                             |        | 6,095    |        |   |        | 9,427    |       
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | Total current liabilities   |        |          | 50,443 |   |        |          | 37,851 | 
|Capital lease obligations, less current portion |                                                                                                                       |                             | 112    |          |        |   |        |         
|Accrued restructuring, less current portion     |                                                                                                                       |                             | 5,063  |          |        |   | 8,572  |         
|Commitments and contingencies (Notes 3 and 7)   |                                                                                                                       |                             |        |          |        |   |        |         
|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  108,141,966 shares and
    72,936,165 shares at December 31, 2004 and 2003,
    respectively |                             |        | 1,081    |        |   |        | 729      |       
|                                                | Additional paid-in capital                                                                                            |                             |        | 249,465  |        |   |        | 218,927  |       
|                                                | Deferred compensation                                                                                                 |                             |        |         |        |   |        | (11      | )     
|                                                | Accumulated deficit                                                                                                   |                             |        | (205,235 | )      |   |        | (195,691 | )     
|                                                | Accumulated other comprehensive loss                                                                                  |                             |        | (3,126   | )      |   |        | (3,017   | )     
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | Total stockholders equity  |        |          | 42,185 |   |        |          | 20,937 | 
|                                                |                                                                                                                       |                             |        |          |        |  
|                                                |                                                                                                                       | $                           | 97,803 |          |        | $ | 67,360 |         
|                                                |                                                                                                                       |                             |        |          |        |  



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                               |                                                    |                               |        |        |        |   |       |         |        |  |         |         |         |  
|---------------------------------------------- | -------------------------------------------------- | ----------------------------- | ------ | ------ | ------ | - | ----- | ------- | ------ |  | ------- | ------- | ------- | -
|                                               |                                                    | Year Ended December 31,       |       
|                                               |                                                    |                               |       
|                                               |                                                    | 2004                          |        |        | 2003   |   |       | 2002    |       
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | (In thousands, except         |       
|                                               |                                                    | per-share information)        |       
|Revenues:                                      |                                                    |                               |        |        |        |   |       |         |        |  |         |        
|                                               | Product license                                    |                               | $      | 23,345 |        |   | $     | 27,159  |        |  | $       | 48,796  |        
|                                               | Services                                           |                               |        | 45,874 |        |   |       | 45,333  |        |  |         | 52,697  |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | Total revenues                |        |        | 69,219 |   |       |         | 72,492 |  |         |         | 101,493 |  
|Cost of Revenues:                              |                                                    |                               |        |        |        |   |       |         |        |  |         |        
|                                               | Product license                                    |                               |        | 2,206  |        |   |       | 2,118   |        |  |         | 4,278   |        
|                                               | Services                                           |                               |        | 19,879 |        |   |       | 19,808  |        |  |         | 33,745  |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | Total cost of revenues        |        |        | 22,085 |   |       |         | 21,926 |  |         |         | 38,023  |  
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | Gross profit                  |        |        | 47,134 |   |       |         | 50,566 |  |         |         | 63,470  |  
|Operating Expenses:                            |                                                    |                               |        |        |        |   |       |         |        |  |         |        
|                                               | Research and development                           |                               |        | 16,209 |        |   |       | 17,928  |        |  |         | 22,046  |        
|                                               | Sales and marketing                                |                               |        | 29,602 |        |   |       | 31,174  |        |  |         | 43,122  |        
|                                               | General and administrative                         |                               |        | 7,742  |        |   |       | 9,538   |        |  |         | 11,087  |        
|                                               | Restructuring charge (benefit)                     |                               |        | 3,570  |        |   |       | (10,476 | )      |  |         | 19,005  |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | Total operating expenses      |        |        | 57,123 |   |       |         | 48,164 |  |         |         | 95,260  |  
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               |                                                    | Income (loss) from operations |        |        | (9,989 | ) |       |         | 2,402  |  |         |         | (31,790 | )
|Interest and other income, net                 |                                                    |                               | 395    |        |        |   | 1,521 |         |        |  | 2,300   |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|Income (loss) before benefit from income taxes |                                                    |                               | (9,594 | )      |        |   | 3,923 |         |        |  | (29,490 | )      
|Benefit from income taxes                      |                                                    |                               | (50    | )      |        |   | (255  | )       |        |  |        |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               | Net income (loss)                                  |                               | $      | (9,544 | )      |   | $     | 4,178   |        |  | $       | (29,490 | )      
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               | Basic net income (loss) per share                  |                               | $      | (0.12  | )      |   | $     | 0.06    |        |  | $       | (0.42   | )      
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               | Diluted net income (loss) per share                |                               | $      | (0.12  | )      |   | $     | 0.06    |        |  | $       | (0.42   | )      
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               | Basic weighted average common shares outstanding   |                               |        | 79,252 |        |   |       | 71,798  |        |  |         | 69,921  |        
|                                               |                                                    |                               |        |        |        |   |       |         |       
|                                               | Diluted weighted average common shares outstanding |                               |        | 79,252 |        |   |       | 73,768  |        |  |         | 69,921  |        
|                                               |                                                    |                               |        |        |        |   |       |         |       



53



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ----------- |  | ---------- | - | ----- | ------- |  | - | ------------ | ----- |  | ----------- | ------ | - | ------------- | ------------- | -------- | ------------- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                       |  | Common Stock                                           |             |  |            |   |       |         |  |   | Accumulated  |       |  |             |        |  
|                                                                                       |  |                                                        |             |  | Additional |   |       |         |  |   |              | Other |  |             | Total  |   |               | Comprehensive |         
|                                                                                       |  | Number of                                              |             |  | Par        |   |       | Paid-In |  |   | Deferred     |       |  | Accumulated |        |   | Comprehensive |               |          | Stockholders |  |   | Income |  
|                                                                                       |  | Shares                                                 |             |  | Value      |   |       | Capital |  |   | Compensation |       |  | Deficit     |        |   | Loss          |               |          | Equity        |  |   | (Loss) |  
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|                                                                                       |  | (In thousands, except share and per-share information) |            
|Balance, January 1, 2002                                                               |  |                                                        | 68,982,030  |  |            | $ | 689   |         |  | $ | 214,597      |       |  | $           | (1,558 | ) |               | $             | (170,379 | )             |  |   | (440   | ) |  | $ | 42,909  |   |  |   |         |  
|Exercise of stock options                                                              |  |                                                        | 343,006     |  |            |   | 3     |         |  |   | 109          |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 112     |   |  |   |         |  
|Issuance of common stock in connection with employee stock
    purchase plan           |  |                                                        | 1,616,442   |  |            |   | 17    |         |  |   | 1,754        |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 1,771   |   |  |   |         |  
|Tudor Settlement (Note 12)                                                             |  |                                                        |            |  |            |   |      |         |  |   | 1,050        |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 1,050   |   |  |   |         |  
|Amortization of deferred compensation                                                  |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             | 942    |   |               |               |         |               |  |   |       |   |  |   | 942     |   |  |   |         |  
|Reversal of deferred compensation                                                      |  |                                                        |            |  |            |   |      |         |  |   | (222         | )     |  |             | 222    |   |               |               |         |               |  |   |       |   |  |   |        |   |  |   |         |  
|Comprehensive Loss:                                                                    |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |   |  |   |         |   |  |   |         |  
|Net loss                                                                               |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               | (29,490  | )             |  |   |       |   |  |   | (29,490 | ) |  | $ | (29,490 | )
|Foreign currency translation adjustments                                               |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  |   | (1,271 | ) |  |   | (1,271  | ) |  |   | (1,271  | )
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Comprehensive loss                                                                     |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   |        |   |  | $ | (30,761 | )
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2002                                                             |  |                                                        | 70,941,478  |  |            |   | 709   |         |  |   | 217,288      |       |  |             | (394   | ) |               |               | (199,869 | )             |  |   | (1,711 | ) |  |   | 16,023  |   |  |   |         |  
|Exercise of stock options                                                              |  |                                                        | 786,020     |  |            |   | 8     |         |  |   | 744          |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 752     |   |  |   |         |  
|Issuance of common stock in connection with employee stock
    purchase plan           |  |                                                        | 1,208,667   |  |            |   | 12    |         |  |   | 1,083        |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 1,095   |   |  |   |         |  
|Amortization of deferred compensation                                                  |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             | 136    |   |               |               |         |               |  |   |       |   |  |   | 136     |   |  |   |         |  
|Reversal of deferred compensation                                                      |  |                                                        |            |  |            |   |      |         |  |   | (188         | )     |  |             | 247    |   |               |               |         |               |  |   | (70    | ) |  |   | (11     | ) |  |   |         |  
|Comprehensive Loss:                                                                    |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |   |  |   |         |   |  |   |         |  
|Net income                                                                             |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               | 4,178    |               |  |   |       |   |  |   | 4,178   |   |  | $ | 4,178   |  
|Foreign currency translation adjustments                                               |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  |   | (1,236 | ) |  |   | (1,236  | ) |  |   | (1,236  | )
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Comprehensive income                                                                   |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   |        |   |  | $ | 2,942   |  
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2003                                                             |  |                                                        | 72,936,165  |  |            | $ | 729   |         |  | $ | 218,927      |       |  | $           | (11    | ) |               | $             | (195,691 | )             |  | $ | (3,017 | ) |  | $ | 20,937  |   |  |   |         |  
|Exercise of stock options                                                              |  |                                                        | 718,126     |  |            |   | 7     |         |  |   | 525          |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 532     |   |  |   |         |  
|Issuance of common stock in connection with employee stock
    purchase plan           |  |                                                        | 1,016,419   |  |            |   | 10    |         |  |   | 926          |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   | 936     |   |  |   |         |  
|Issuances of common stock and valuation of options related to
    business combination |  |                                                        | 33,471,256  |  |            |   | 335   |         |  |   | 29,087       |       |  |             |        |   |               |               |          |               |  |   |        |   |  |   | 29,422  |   |  |   |         |  
|Amortization of deferred compensation                                                  |  |                                                        |            |  |            |   |      |         |  |   |              |       |  |             | 11     |   |               |               |         |               |  |   |       |   |  |   | 11      |   |  |   |         |  
|Comprehensive Loss:                                                                    |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |   |  |   |         |   |  |   |         |  
|Net loss                                                                               |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               | (9,544   | )             |  |   |       |   |  |   | (9,544  | ) |  | $ | (9,544  | )
|Foreign currency translation adjustments                                               |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  | $ | (109   | ) |  |   | (109    | ) |  |   | (109    | )
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Comprehensive loss                                                                     |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |       |   |               |               |         |               |  |   |       |   |  |   |        |   |  | $ | (9,653  | )
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2004                                                             |  |                                                        | 108,141,966 |  |            | $ | 1,081 |         |  | $ | 249,465      |       |  | $           |       |   |               | $             | (205,235 | )             |  | $ | (3,126 | ) |  | $ | 42,185  |   |  |   |         |  
|                                                                                       |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |        |   |               |               |          |               |  |   |        |  



54



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |         |        |         |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------ | ------- | -
|                                                                           |                                                                                          | Years Ended December 31,                                       |                                      
|                                                                           |                                                                                          |                                                                |                                      
|                                                                           |                                                                                          | 2004                                                           |                                       |         | 2003   |         |         | 2002    |        
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|                                                                           |                                                                                          | (In thousands)                                                 |                                      
|Cash Flows from Operating Activities:                                      |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |        
|                                                                           | Net (loss) income                                                                        |                                                                | $                                     | (9,544  | )      |         | $       | 4,178   |         |         | $      | (29,490 | )     
|                                                                           | Adjustments to reconcile net (loss) income to net cash used in
    operating activities: |                                                                |                                       |         |        |         |         |         |         |         |        |         |       
|                                                                           |                                                                                          | Stock-based compensation                                       |                                       |         | 11     |         |         |         | 136     |         |        |         | 942    |        
|                                                                           |                                                                                          | Depreciation and amortization                                  |                                       |         | 2,957  |         |         |         | 3,897   |         |        |         | 7,147  |        
|                                                                           |                                                                                          | Non-cash restructuring charge                                  |                                       |         | 667    |         |         |         | 1,144   |         |        |         | 2,613  |        
|                                                                           |                                                                                          | Loss on disposal of fixed assets, net                          |                                       |         | 33     |         |         |         | 121     |         |        |         | 198    |        
|                                                                           | Changes in operating assets and liabilities:                                             |                                                                |                                       |         |        |         |         |         |         |         |        |         |       
|                                                                           |                                                                                          | Accounts receivable, net                                       |                                       |         | (7,147 | )       |         |         | 9,857   |         |        |         | 5,311  |        
|                                                                           |                                                                                          | Unbilled services                                              |                                       |         |       |         |         |         |        |         |        |         | 269    |        
|                                                                           |                                                                                          | Prepaid expenses and other current assets                      |                                       |         | 671    |         |         |         | 371     |         |        |         | 3,057  |        
|                                                                           |                                                                                          | Deferred rent                                                  |                                       |         | 978    |         |         |         | (3,772  | )       |        |         |       |        
|                                                                           |                                                                                          | Accounts payable                                               |                                       |         | 519    |         |         |         | (1,417  | )       |        |         | (1,597 | )      
|                                                                           |                                                                                          | Accrued expenses                                               |                                       |         | (3,364 | )       |         |         | (5,856  | )       |        |         | (6,499 | )      
|                                                                           |                                                                                          | Deferred revenue                                               |                                       |         | 6,957  |         |         |         | (759    | )       |        |         | (1,954 | )      
|                                                                           |                                                                                          | Accrued restructuring                                          |                                       |         | (6,841 | )       |         |         | (34,446 | )       |        |         | 6,779  |        
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|                                                                           |                                                                                          |                                                                | Net cash used in operating activities |         |        | (14,103 | )       |         |         | (26,546 | )      |         |        | (13,224 | )
|Cash Flows from Investing Activities:                                      |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |        
|                                                                           | Purchases of marketable securities                                                       |                                                                |                                       | (11,426 | )      |         |         | (12,138 | )       |         |        | (41,360 | )     
|                                                                           | Maturities of marketable securities                                                      |                                                                |                                       | 11,878  |        |         |         | 25,217  |         |         |        | 32,688  |       
|                                                                           | Restricted cash                                                                          |                                                                |                                       |        |        |         |         |        |         |         |        | 16,757  |       
|                                                                           | Purchases of property and equipment                                                      |                                                                |                                       | (763    | )      |         |         | (993    | )       |         |        | (945    | )     
|                                                                           | Proceeds from sales of equipment                                                         |                                                                |                                       |        |        |         |         | 91      |         |         |        |        |       
|                                                                           | Cash acquired in acquisition, net of acquisition costs paid                              |                                                                |                                       | 2,730   |        |         |         |        |         |         |        |        |       
|                                                                           | (Increase) decrease in other assets                                                      |                                                                |                                       | (12     | )      |         |         | 98      |         |         |        | 3,094   |       
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|                                                                           |                                                                                          | Net cash provided by investing activities                      |                                       |         | 2,407  |         |         |         | 12,275  |         |        |         | 10,234 |        
|Cash Flows from Financing Activities:                                      |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |        
|                                                                           | Tudor settlement                                                                         |                                                                |                                       |        |        |         |         |        |         |         |        | 1,050   |       
|                                                                           | Principal payments on notes payable                                                      |                                                                |                                       | (502    | )      |         |         |        |         |         |        |        |       
|                                                                           | Proceeds from exercise of stock options                                                  |                                                                |                                       | 532     |        |         |         | 752     |         |         |        | 112     |       
|                                                                           | Proceeds from employee stock purchase plan                                               |                                                                |                                       | 936     |        |         |         | 1,095   |         |         |        | 1,771   |       
|                                                                           | Payments on capital leases                                                               |                                                                |                                       | (7      | )      |         |         |        |         |         |        | (2,000  | )     
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|                                                                           |                                                                                          | Net cash provided by financing activities                      |                                       |         | 959    |         |         |         | 1,847   |         |        |         | 933    |        
|Effects of Foreign Exchange Rate Changes On Cash and Cash
    Equivalents  |                                                                                          |                                                                | 113                                   |         |        |         | (1,471  | )       |         |         | (1,607 | )      
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|Net Decrease in Cash and Cash Equivalents                                  |                                                                                          |                                                                | (10,624                               | )       |        |         | (13,895 | )       |         |         | (3,664 | )      
|Cash and Cash Equivalents, Beginning of Period                             |                                                                                          |                                                                | 31,934                                |         |        |         | 45,829  |         |         |         | 49,493 |        
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|Cash and Cash Equivalents, End of Period                                   |                                                                                          | $                                                              | 21,310                                |         |        | $       | 31,934  |         |         | $       | 45,829 |        
|                                                                           |                                                                                          |                                                                |                                       |         |        |         |         |         |        
|Supplemental Disclosure of Cash Flow Information:                          |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |        
|                                                                           | Cash paid during the period for interest                                                 |                                                                | $                                     | 4       |        |         | $       |        |         |         | $      |        |       
|                                                                           | Cash paid during the period for income taxes                                             |                                                                | $                                     | 38      |        |         | $       | 140     |         |         | $      | 447     |       
|Supplemental Disclosure of Noncash Investing and Financing
    Activities: |                                                                                          |                                                                |                                       |         |        |         |         |         |         |         |        |        
|                                                                           | Reversal of deferred compensation                                                        |                                                                | $                                     |        |        |         | $       | 247     |         |         | $      | 222     |       
|                                                                           |                                                                                          | Reversal of provision for income taxes                         |                                       | $       | 158    |         |         | $       | 332     |         |        | $       |       |        
|                                                                           |                                                                                          | Issuance of stock and options related to acquisition of Primus |                                       | $       | 29,422 |         |         | $       |        |         |        | $       |       |        



55



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Organization, Business and Summary of Significant Accounting
    Policies











|    |                            
|--- | ---------------------------
|(a) | Principles of Consolidation





|    |                 
|--- | ----------------
|(b) | Use of Estimates





|    |                    
|--- | -------------------
|(c) | Revenue Recognition

,
Software Revenue Recognition Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions




57



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                                 
|--- | --------------------------------
|(d) | Cost of Product License Revenues





|    |                          
|--- | -------------------------
|(e) | Cost of Services Revenues





|    |                            
|--- | ---------------------------
|(f) | Net Income (Loss) Per Share

Earnings Per Share.


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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                                 |  |                       |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                                 |  | 2004                  |        |   | 2003 |   |        | 2002 | 
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|                                                                                                                                 |  | (In thousands, except |       
|                                                                                                                                 |  | per share amounts)    |       
|Net income (loss)                                                                                                                |  | $                     | (9,544 | ) |      | $ | 4,178  |      |  | $ | (29,490 | )
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|Weighted average common shares outstanding used in computing
    basic net income (loss) per share                               |  |                       | 79,252 |   |      |   | 71,798 |      |  |   | 69,921  |  
|Weighted average common equivalent shares outstanding:                                                                           |  |                       |        |   |      |   |        |      |  |   |         |  
|Employee common stock options                                                                                                    |  |                       |       |   |      |   | 1,970  |      |  |   |        |  
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|Total weighted average common and common equivalent shares
    outstanding used in computing diluted net income (loss) per share |  |                       | 79,252 |   |      |   | 73,768 |      |  |   | 69,921  |  
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|Basic net income (loss) per share                                                                                                |  | $                     | (0.12  | ) |      | $ | 0.06   |      |  | $ | (0.42   | )
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|Diluted net income (loss) per share                                                                                              |  | $                     | (0.12  | ) |      | $ | 0.06   |      |  | $ | (0.42   | )
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 
|Anti-dilutive common stock equivalents                                                                                           |  |                       | 15,236 |   |      |   | 5,489  |      |  |   | 11,571  |  
|                                                                                                                                 |  |                       |        |   |      |   |        |      | 



|    |                                                 
|--- | ------------------------------------------------
|(g) | Cash, Cash Equivalents and Marketable Securities

Accounting for Certain Investments in Debt and
Equity Securities


|                           |                                                     |                                 |   |        |        |  |   |        |        | 
|-------------------------- | --------------------------------------------------- | ------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                           |                                                     | December 31,                    |  
|                           |                                                     |                                 |  
|                           |                                                     | 2004                            |   |        | 2003   | 
|                           |                                                     |                                 |   |        |        | 
|Cash and cash equivalents: |                                                     |                                 |   |        |        |  |   |       
|                           | Cash                                                |                                 | $ | 4,360  |        |  | $ | 11,767 |       
|                           | Money market accounts                               |                                 |   | 13,529 |        |  | $ | 20,167 |       
|                           | U.S. Treasury and U.S. Government Agency securities |                                 |   | 2,622  |        |  |   |       |       
|                           | Commercial paper                                    |                                 |   | 799    |        |  |   |       |       
|                           |                                                     |                                 |   |        |        | 
|                           |                                                     | Total cash and cash equivalents |   | $      | 21,310 |  |   | $      | 31,934 | 
|                           |                                                     |                                 |   |        |        | 
|Marketable securities:     |                                                     |                                 |   |        |        |  |   |       
|                           | U.S. Treasury and U.S. Government Agency securities |                                 | $ | 648    |        |  | $ | 1,008  |       
|                           | Commercial paper                                    |                                 |   | 796    |        |  |   |       |       
|                           | Corporate debt securities                           |                                 |   | 7,754  |        |  |   | 8,642  |       
|                           |                                                     |                                 |   |        |        | 
|                           |                                                     | Total marketable securities     |   | $      | 9,198  |  |   | $      | 9,650  | 
|                           |                                                     |                                 |   |        |        | 

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |             
|--- | ------------
|(h) | Other Assets





|    |                       
|--- | ----------------------
|(i) | Property and Equipment





|                                                 |  |                       |                       |              |      |   |        |      |  |   |        | 
|------------------------------------------------ |  | --------------------- | --------------------- | ------------ | ---- | - | ------ | ---- |  | - | ------ | 
|                                                 |  |                       |                       | December 31, |     
|                                                 |  |                       |                       |              |     
|Asset Classification                             |  | Estimated Useful Life |                       |              | 2004 |   |        | 2003 | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|Computer equipment                               |  |                       | 3 years               |              |      | $ | 10,985 |      |  | $ | 10,154 | 
|Leasehold improvements                           |  |                       | Lesser of useful      |              |      |   | 3,711  |      |  |   | 4,407  | 
|                                                 |  |                       | life or life of lease |              |      |   |        |      |  |   |        | 
|Furniture and fixtures                           |  |                       | 5 years               |              |      |   | 2,850  |      |  |   | 2,687  | 
|Computer software                                |  |                       | 3 years               |              |      |   | 4,400  |      |  |   | 4,207  | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|                                                 |  |                       |                       |              |      |   | 21,946 |      |  |   | 21,455 | 
|Less  accumulated depreciation and amortization |  |                       |                       |              |      |   | 18,826 |      |  |   | 17,704 | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|                                                 |  |                       |                       |              |      | $ | 3,120  |      |  | $ | 3,751  | 
|                                                 |  |                       |                       |              |      |   |        |      | 





|    |                                                            
|--- | -----------------------------------------------------------
|(j) | Research and Development Expenses for Software
    Products

Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.




|    |             
|--- | ------------
|(k) | Income Taxes

Accounting for Income Taxes.


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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                         
|--- | ------------------------
|(l) | Stock-Based Compensation

Accounting
for Stock Issued to Employees Accounting for Stock Based Compensation




|                                                                                                                    |                    |                          |         |         |      |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                    |                    | Years Ended December 31, |        
|                                                                                                                    |                    |                          |        
|                                                                                                                    |                    | 2004                     |         |         | 2003 |   |         | 2002    |  
|                                                                                                                    |                    |                          |         |         |      |   |         |         |  
|                                                                                                                    |                    | (In thousands, except    |        
|                                                                                                                    |                    | per-share information)   |        
|Net income (loss) as reported                                                                                       |                    | $                        | (9,544  | )       |      | $ | 4,178   |         |   | $ | (29,490 | )      
|Add: Stock-based employee compensation expense included in
    reported net income (loss)                           |                    |                          | 11      |         |      |   | 136     |         |   |   | 942     |        
|Deduct: Total stock based employee compensation expense
    determined under fair value based method for all awards |                    |                          | (15,659 | )       |      |   | (40,184 | )       |   |   | (39,913 | )      
|                                                                                                                    |                    |                          |         |         |      |   |         |         |  
|                                                                                                                    | Pro forma net loss |                          | $       | (25,192 | )    |   | $       | (35,870 | ) |   | $       | (68,461 | )
|                                                                                                                    |                    |                          |         |         |      |   |         |         |  
|Basic and diluted net income (loss) per share:                                                                      |                    |                          |         |         |      |   |         |         |   |   |         |        
|                                                                                                                    | As reported        |                          | $       | (0.12   | )    |   | $       | 0.06    |   |   | $       | (0.42   | )
|                                                                                                                    | Pro forma          |                          | $       | (0.32   | )    |   | $       | (0.50   | ) |   | $       | (0.98   | )



|    |                            
|--- | ---------------------------
|(m) | Comprehensive Income (Loss)

Reporting Comprehensive Income,




|    |                                    
|--- | -----------------------------------
|(n) | Fair Value of Financial Instruments





|    |                                            
|--- | -------------------------------------------
|(o) | Concentrations of Credit Risk and Bad Debts



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                              
|--- | ---------------------------------------------
|(p) | Long-Lived Asset, including Intangible Assets

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




|    |                   
|--- | ------------------
|(q) | Hedging Activities

Accounting for Derivative Instruments and Hedging
Activities,




|    |                             
|--- | ----------------------------
|(r) | Foreign Currency Translation

Foreign Currency Translation.


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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |         
|--- | --------
|(s) | Goodwill

Business Combinations Goodwill and Other Intangible Assets










| |                                             
| | --------------------------------------------
| | (t)     Recent Accounting
    Pronouncements





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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                            
|--- | -------------------------------------------
|(2) | Disclosures About Segments of an Enterprise

Disclosures About Segments of an Enterprise
and Related Information






|                                              |  |              |     |   |      |  |     |      |  |  |     |  
|--------------------------------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                              |  | Years Ended  |    
|                                              |  | December 31, |    
|                                              |  |              |    
|                                              |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                                              |  |              |     |   |      |  |     |      | 
|United States                                 |  |              | 67  | % |      |  | 65  | %    |  |  | 70  | %
|Europe, Middle East and Africa (excluding UK) |  |              | 20  |   |      |  | 17  |      |  |  | 6   |  
|United Kingdom (UK)                           |  |              | 10  |   |      |  | 13  |      |  |  | 18  |  
|Asia Pacific                                  |  |              | 2   |   |      |  | 3   |      |  |  | 3   |  
|Other                                         |  |              | 1   |   |      |  | 2   |      |  |  | 3   |  
|                                              |  |              |     |   |      |  |     |      | 
|                                              |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |              |     |   |      |  |     |      | 



|    |                                  
|--- | ---------------------------------
|(3) | Credit Facility and Notes Payable



| |                
| | ---------------
| | Credit Facility



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For the months ending January 31, 2005, February 28,
    2005, April 30, 2005, and May 31, 2005, the greater of
    (i) $15.0 million or (ii) two times the amount of
    outstanding obligation, which includes letters of credit, under
    the loan agreement, and
|
| |  | For the months ending March 31, 2005 and June 30,
    2005, and as of the last day of each month thereafter,
    $20 million                                                                                                                                         







| |              
| | -------------
| | Notes Payable



65



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |             
|--- | ------------
|(4) | Income Taxes



|         |       |                          |        |        |      |   |        |       |  |   |         |         |  
|-------- | ----- | ------------------------ | ------ | ------ | ---- | - | ------ | ----- |  | - | ------- | ------- | -
|         |       | Years Ended December 31, |       
|         |       |                          |       
|         |       | 2004                     |        |        | 2003 |   |        | 2002  | 
|         |       |                          |        |        |      |   |        |       | 
|Domestic |       | $                        | (7,930 | )      |      | $ | 13,539 |       |  | $ | (22,197 | )      
|Foreign  |       |                          | (1,664 | )      |      |   | (9,616 | )     |  |   | (7,293  | )      
|         |       |                          |        |        |      |   |        |       | 
|         | Total |                          | $      | (9,594 | )    |   | $      | 3,923 |  |   | $       | (29,490 | )
|         |       |                          |        |        |      |   |        |       | 



|        |          |              |     |     |      |   |      |      |   |   |   |   | 
|------- | -------- | ------------ | --- | --- | ---- | - | ---- | ---- | - | - | - | - | 
|        |          | Years Ended 
|        |          | December 31,
|        |          |             
|        |          | 2004         |     |     | 2003 |   |      | 2002
|        |          |              |     |     |      |   |      |     
|Federal |          |              |     |     |      |   |      |      |   |   |   |  
|        | Current  |              | $   |    |      |   | $    |     |   |   | $ |  | 
|        | Deferred |              |     |    |      |   |      |     |   |   |   |   | 
|State   |          |              |     |     |      |   |      |      |   |   |   |  
|        | Current  |              |     | 30  |      |   |      |     |   |   |   |  | 
|        | Deferred |              |     |    |      |   |      |     |   |   |   |   | 
|Foreign |          |              |     |     |      |   |      |      |   |   |   |  
|        | Current  |              |     | (80 | )    |   |      | (255 | ) |   |   |  | 
|        | Deferred |              |     |    |      |   |      |     |   |   |   |  | 
|        |          |              |     |     |      |   |      |      |  
|        |          | $            | (50 | )   |      | $ | (255 | )    |   | $ |  |  
|        |          |              |     |     |      |   |      |      |  



|                                     |  |                          |       |    |      |  |       |      |  |  |       |   
|------------------------------------ |  | ------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                     |  | Years Ended December 31, |      
|                                     |  |                          |      
|                                     |  | 2004                     |       |    | 2003 |  |       | 2002 | 
|                                     |  |                          |       |    |      |  |       |      | 
|Federal tax at statutory rate        |  |                          | (35.0 | )% |      |  | 35.0  | %    |  |  | (35.0 | )%
|State taxes, net of federal benefit  |  |                          | .2    |    |      |  | 11.5  |      |  |  | (2.4  | ) 
|Meals and entertainment              |  |                          | 1.8   |    |      |  | 4.3   |      |  |  | 0.3   |   
|Reversal of previously accrued taxes |  |                          | (1.6  | )  |      |  | (8.5  | )    |  |  |      |   
|Other                                |  |                          |      |    |      |  | 0.8   |      |  |  | 1.4   |   
|                                     |  |                          |       |    |      |  |       |      | 
|Provision before valuation allowance |  |                          | (34.6 | )  |      |  | 43.1  |      |  |  | (35.7 | ) 
|                                     |  |                          |       |    |      |  |       |      | 
|Unbenefitted losses                  |  |                          | 34.1  |    |      |  | (49.6 | )    |  |  | 35.7  |   
|                                     |  |                          |       |    |      |  |       |      | 
|                                     |  |                          | (0.5  | )% |      |  | (6.5  | )%   |  |  |      | % 
|                                     |  |                          |       |    |      |  |       |      | 

66



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                              |                                 |              |          |         |      |   |         |        | 
|----------------------------- | ------------------------------- | ------------ | -------- | ------- | ---- | - | ------- | ------ | 
|                              |                                 | December 31, |         
|                              |                                 |              |         
|                              |                                 | 2004         |          |         | 2003 |  
|                              |                                 |              |          |         |      |  
|Deferred tax assets:          |                                 |              |          |         |      |   |         |       
|Restructuring                 |                                 | $            | 5,161    |         |      | $ | 6,727   |       
|Depreciation and Amortization |                                 |              | 1,154    |         |      |   | 1,183   |       
|Reserves and Accruals         |                                 |              | 1,320    |         |      |   | 351     |       
|Other                         |                                 |              | 1,637    |         |      |   | 12      |       
|Deferred Revenue              |                                 |              | 3,653    |         |      |   | 109     |       
|US Income tax credits         |                                 |              | 1,037    |         |      |   | 1,037   |       
|Net operating losses          |                                 |              | 102,602  |         |      |   | 79,200  |       
|                              |                                 |              |          |         |      |  
|                              | Total gross deferred tax assets |              |          | 116,564 |      |   |         | 88,619 | 
|Valuation allowance           |                                 |              | (113,693 | )       |      |   | (88,619 | )     
|                              |                                 |              |          |         |      |  
|                              | Total deferred tax assets       |              |          | 2,871   |      |   |         |       | 
|                              |                                 |              |          |         |      |  
|Deferred tax liabilities:     |                                 |              |          |         |      |   |         |       
|Intangible assets             |                                 |              | (2,871   | )       |      |   |        |       
|                              |                                 |              |          |         |      |  
|                              | Net deferred tax assets         |              | $        |        |      |   | $       |       | 
|                              |                                 |              |          |         |      |  









67



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                     
|--- | --------------------
|(5) | Stockholders Equity



|    |            
|--- | -----------
|(a) | Stock Plans



| |                       
| | ----------------------
| | 1996 Stock Option Plan







| |                                        
| | ---------------------------------------
| | 1999 Outside Director Stock Option Plan





68



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Primus Stock Option Plans





|                               |           |                                      |        |        |                |                 |                |   |       |         | 
|------------------------------ | --------- | ------------------------------------ | ------ | ------ | -------------- | --------------- | -------------- | - | ----- | ------- | 
|                               |           |                                      |        |        |                | Weighted        |               
|                               |           |                                      |        |        |                | Average         |               
|                               |           | Number                               |        |        |                |                 | Exercise       |  
|                               |           | of Shares                            |        |        | Exercise Price |                 | Price          |  
|                               |           |                                      |        |        |                |                 |                |  
|                               |           | (In thousands except per share data) |       
|Outstanding, December 31, 2001 |           |                                      | 13,038 |        |                | $0.06  $120.00 |                | $ | 21.25 |        
|                               | Granted   |                                      |        | 4,288  |                |                 | 0.90     4.3  |   |       | 1 2.39  | 
|                               | Exercised |                                      |        | (343   | )              |                 | 0.06     2.1  |   |       | 3 0.33  | 
|                               | Canceled  |                                      |        | (5,412 | )              |                 | 0.06   120.0  |   |       | 0 36.16 | 
|                               |           |                                      |        |        |                |                 |                |  
|Outstanding, December 31, 2002 |           |                                      | 11,571 |        |                | .06   120.00   |                |   | 7.91  |        
|                               | Granted   |                                      |        | 4,807  |                |                 | 0.84     2.8  |   |       | 2 1.26  | 
|                               | Exercised |                                      |        | (786   | )              |                 | 0.06     2.1  |   |       | 3 0.96  | 
|                               | Canceled  |                                      |        | (4,212 | )              |                 | 0.06   120.0  |   |       | 0 9.94  | 
|                               |           |                                      |        |        |                |                 |                |  
|Outstanding, December 31, 2003 |           |                                      | 11,380 |        |                | 0.06   120.00  |                |   | 4.56  |        
|                               | Granted   |                                      |        | 8,750  |                |                 | 0.33     2.02 |   |       | 1.06    | 
|                               | Exercised |                                      |        | (718   | )              |                 | 0.07     1.3  |   |       | 1 0.74  | 
|                               | Canceled  |                                      |        | (4,176 | )              |                 | 0.70     1.2  |   |       | 0 3.98  | 
|                               |           |                                      |        |        |                |                 |                |  
|Outstanding, December 31, 2004 |           |                                      | 15,236 |        |                | $0.06  $120.00 |                | $ | 2.96  |        
|                               |           |                                      |        |        |                |                 |                |  
|Exercisable December 31, 2004  |           |                                      | 8,980  |        |                | $0.06  $ 94.63 |                | $ | 4.08  |        
|Exercisable, December 31, 2003 |           |                                      | 6,018  |        |                | $ .06  $120.00 |                | $ | 6.53  |        
|Exercisable, December 31, 2002 |           |                                      | 5,523  |        |                | $ .06  $120.00 |                | $ | 9.78  |        

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |       |  |  |   |       | 
|------------------------ |  | ------------------------------------------------------ | ------ | ---------------- | ----------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | ----- |  |  | - | ----- | 
|                         |  | Outstanding                                            |        |                  | Exercisable | 
|                         |  |                                                        |        |                  |             | 
|                         |  |                                                        |        | Weighted         |             |  |          |          | 
|                         |  |                                                        |        | Average          |             |  |          |          | 
|                         |  |                                                        |        | Remaining        |             |  | Weighted |          |  |   |           | Weighted | 
|                         |  |                                                        |        | Contractual Life |             |  | Average  |          |  |   |           | Average  | 
|                         |  | Number of                                              |        |                  | Outstanding |  |          | Exercise |  |   | Number of |          |  | Exercise |      
|Range of Exercise Prices |  | Shares                                                 |        |                  | (Years)     |  |          | Price    |  |   | Shares    |          |  | Price    |      
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      
|                         |  | (In thousands, except years and per-share information) |       
|$ 0.06                   |  |                                                        | 2      |                  |             |  | 5.1      |          |  | $ | 0.06      |          |  |          | 2     |  |  | $ | 0.06  | 
|0.25                     |  |                                                        | 184    |                  |             |  | 3.4      |          |  | $ | 0.25      |          |  |          | 183   |  |  | $ | 0.25  | 
|0.38    0.56            |  |                                                        | 84     |                  |             |  | 7.3      |          |  | $ | 0.53      |          |  |          | 84    |  |  | $ | 0.53  | 
|0.58    0.86            |  |                                                        | 2,956  |                  |             |  | 6.0      |          |  | $ | 0.66      |          |  |          | 2,842 |  |  | $ | 0.65  | 
|0.88    1.31            |  |                                                        | 5,069  |                  |             |  | 8.4      |          |  | $ | 1.01      |          |  |          | 1,861 |  |  | $ | 1.02  | 
|1.33    2.00            |  |                                                        | 3,601  |                  |             |  | 8.4      |          |  | $ | 1.53      |          |  |          | 965   |  |  | $ | 1.54  | 
|2.01    3.01            |  |                                                        | 832    |                  |             |  | 5.3      |          |  | $ | 2.17      |          |  |          | 760   |  |  | $ | 2.16  | 
|3.06    4.05            |  |                                                        | 759    |                  |             |  | 6.0      |          |  | $ | 3.89      |          |  |          | 568   |  |  | $ | 3.89  | 
|4.78    6.19            |  |                                                        | 1,121  |                  |             |  | 4.7      |          |  | $ | 4.96      |          |  |          | 1,090 |  |  | $ | 4.97  | 
|8.27   12.00            |  |                                                        | 253    |                  |             |  | 4.7      |          |  | $ | 9.46      |          |  |          | 251   |  |  | $ | 9.44  | 
|13.41   19.03           |  |                                                        | 52     |                  |             |  | 3.2      |          |  | $ | 18.02     |          |  |          | 52    |  |  | $ | 18.02 | 
|22.94   32.44           |  |                                                        | 20     |                  |             |  | 5.6      |          |  | $ | 26.69     |          |  |          | 20    |  |  | $ | 26.79 | 
|34.75   51.69           |  |                                                        | 145    |                  |             |  | 5.1      |          |  | $ | 49.09     |          |  |          | 144   |  |  | $ | 49.12 | 
|52.50   78.00           |  |                                                        | 122    |                  |             |  | 4.0      |          |  | $ | 63.02     |          |  |          | 122   |  |  | $ | 63.02 | 
|87.00  120.00           |  |                                                        | 36     |                  |             |  | 5.6      |          |  |   | 94.63     |          |  |          | 36    |  |  |   | 94.63 | 
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      
|$ 0.06  120.00          |  |                                                        | 15,236 |                  |             |  | 7.2      |          |  | $ | 2.96      |          |  |          | 8,980 |  |  | $ | 4.08  | 
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      





| |                                  
| | ---------------------------------
| | 1999 Employee Stock Purchase Plan



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                         
| | ------------------------
| | Stock-Based Compensation





|                        |  |              |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | Years Ended  |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2004         |      |   | 2003 |  |      | 2002 | 
|                        |  |              |      |   |      |  |      |      | 
|Risk-free interest rate |  |              | 2.93 | % |      |  | 2.51 | %    |  |  | 3.43 | %
|Expected life (years)   |  |              | 4    |   |      |  | 4    |      |  |  | 4    |  
|Expected volatility     |  |              | 102  | % |      |  | 117  | %    |  |  | 125  | %
|Expected dividend yield |  |              |     |   |      |  |     |      |  |  |     |  

l




| |                                      
| | -------------------------------------
| | Adoption of Shareholders Rights Plan





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                        
| | -----------------------
| | Option Exchange Program







|    |             
|--- | ------------
|(6) | Acquisitions



| |                                                
| | -----------------------------------------------
| | Acquisition of Primus Knowledge Solutions, Inc.







| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the belief that the acquisition will better enable the Company
    to satisfy demand for a single, integrated application suite
    that includes functionality for online commerce and customer
    service and covers the full range of customer interactions
    including call centers, e-mail and the internet;
|
| |  | the fact that the two product offerings are largely
    complementary, with only limited functional overlap, and utilize
    compatible technology;                                                                                                                                                                 
|
| |  | the opportunity to increase revenues by combining Primus
    customers with ATGs customers, and by cross selling each
    companys product set to the customers of the other company;                                                                                                                            

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the belief that enlarging the Companys installed base and
    adding to its stream of maintenance and support revenue would
    benefit its results of operations;                                                                                                                                                                        
|
| |  | the opportunity to achieve expense reduction synergies through
    elimination of duplicative functions and expenses; and                                                                                                                                                                                                                  
|
| |  | the belief that the combined experience, research and
    development resources and sales and marketing capabilities of
    the two companies will better enable the Company to respond
    quickly and effectively to rapid changes in technology, customer
    requirements and competitive landscape which characterize our
    industry



|                         |  |  |      |  
|------------------------ |  |  | ---- | -
|Expected life (in years) |  |  | 1.42 |  
|Expected volatility      |  |  | 93.5 | %
|Risk free interest rate  |  |  | 2.52 | %



|                                                               |                                                                     |                         |        |        |       | 
|-------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------- | ------ | ------ | ----- | 
|Cash                                                           |                                                                     | $                       | 3,989  |       
|Accounts receivable                                            |                                                                     |                         | 1,919  |       
|Other current assets                                           |                                                                     |                         | 416    |       
|Property, plant & equipment                                    |                                                                     |                         | 944    |       
|Goodwill                                                       |                                                                     |                         | 27,458 |       
|Intangible assets:                                             |                                                                     |                         |        |       
|                                                               | Customer relationships (estimated useful life of 4 years)           |                         |        | 4,200  |      
|                                                               | Developed product technology (estimated useful life of
    5 years) |                         |        | 3,600  |      
|                                                               | Non-competition agreements (estimated useful life of
    3 years)   |                         |        | 400    |      
|                                                               |                                                                     |                         |       
|                                                               |                                                                     | Total intangible assets |        |        | 8,200 | 
|Other long-term assets                                         |                                                                     |                         | 189    |       
|Accounts payable                                               |                                                                     |                         | (2,511 | )     
|Deferred revenue                                               |                                                                     |                         | (3,483 | )     
|Notes payable and current portion of capital lease obligations |                                                                     |                         | (1,146 | )     
|Accrued and other expenses                                     |                                                                     |                         | (4,157 | )     
|Long-term liabilities                                          |                                                                     |                         | (126   | )     
|                                                               |                                                                     |                         |       
|                                                               | Total purchase price                                                |                         | $      | 31,692 |      
|                                                               |                                                                     |                         |       

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                 |       |            |       |       |          |        |      |         |   |   |       |       | 
|-------------------------------- | ----- | ---------- | ----- | ----- | -------- | ------ | ---- | ------- | - | - | ----- | ----- | 
|                                 |       |            |       |       |          | Ending |     
|Category                         |       | Obligation |       |       | Payments |        |      | Balance |  
|                                 |       |            |       |       |          |        |      |         |  
|Involuntary termination benefits |       | $          | 1,682 |       |          | $      | (464 | )       |   | $ | 1,218 |      
|Facilities-related costs         |       |            | 376   |       |          |        | (97  | )       |   |   | 279   |      
|                                 |       |            |       |       |          |        |      |         |  
|                                 | Total |            | $     | 2,058 |          |        | $    | (561    | ) |   | $     | 1,497 | 
|                                 |       |            |       |       |          |        |      |         |  





|                                                       |  |                         |         |   |      |   |        |  
|------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | -
|                                                       |  | Year Ended December 31, |        
|                                                       |  |                         |        
|                                                       |  | 2004                    |         |   | 2003 |  
|                                                       |  |                         |         |   |      |  
|                                                       |  | (Unaudited)             |        
|Revenue                                                |  | $                       | 86,135  |   |      | $ | 95,660 |  
|Net loss                                               |  | $                       | (23,105 | ) |      | $ | (3,519 | )
|Net loss per weighted average share, basic and diluted |  | $                       | (0.22   | ) |      | $ | (0.03  | )

Goodwill and Other Intangible Asset


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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                       |                                             |                |       |       |              |   |      |          |   |   |       |       | 
|---------------------- | ------------------------------------------- | -------------- | ----- | ----- | ------------ | - | ---- | -------- | - | - | ----- | ----- | 
|2004                   |                                             | Gross Carrying |       |       | Accumulated  |   |      | Net Book |  
|Category               |                                             | Amount         |       |       | Amortization |   |      | Value    |  
|                       |                                             |                |       |       |              |   |      |          |  
|Purchased technology   |                                             | $              | 3,600 |       |              | $ | (441 | )        |   | $ | 3,159 |      
|Customer relationships |                                             |                | 4,200 |       |              |   | (559 | )        |   |   | 3,641 |      
|Non-compete agreements |                                             |                | 400   |       |              |   | (23  | )        |   |   | 377   |      
|                       |                                             |                |       |       |              |   |      |          |  
|                       | Total intangible assets, excluding goodwill |                | $     | 8,200 |              |   | $    | (1,023   | ) |   | $     | 7,177 | 
|                       |                                             |                |       |       |              |   |      |          |  



|     |       |   |       |       | 
|---- | ----- | - | ----- | ----- | 
|2005 |       | $ | 2,318 |      
|2006 |       |   | 2,055 |      
|2007 |       |   | 1,740 |      
|2008 |       |   | 848   |      
|2009 |       |   | 216   |      
|     |       |   |      
|     | Total |   | $     | 7,177 | 
|     |       |   |      



|    |                              
|--- | -----------------------------
|(7) | Commitments and Contingencies



| |       
| | ------
| | Leases







|                          |                                     |        |       |        | 
|------------------------- | ----------------------------------- | ------ | ----- | ------ | 
|Years Ending December 31, |                                     | Leases |      
|                          |                                     |        |      
|2005                      |                                     | $      | 8,842 |       
|2006                      |                                     |        | 6,268 |       
|2007                      |                                     |        | 3,134 |       
|2008                      |                                     |        | 2,625 |       
|2009                      |                                     |        | 626   |       
|Thereafter                |                                     |        |      |       
|                          |                                     |        |      
|                          | Total future minimum lease payments |        | $     | 21,495 | 
|                          |                                     |        |      



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                 
| | ----------------
| | Indemnifications









| |                       
| | ----------------------
| | BroadVision Settlement





|    |                      
|--- | ---------------------
|(8) | Employee Benefit Plan



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                 
|--- | ----------------
|(9) | Accrued Expenses



|                          |  |      |        |  |      |   |        | 
|------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                          |  | 2004 |        |  | 2003 |  
|                          |  |      |        |  |      |  
|Payroll and related costs |  | $    | 5,294  |  |      | $ | 3,894  | 
|Accrued accounts payable  |  |      | 439    |  |      |   | 1,190  | 
|Taxes                     |  |      | 4,022  |  |      |   | 3,796  | 
|Other                     |  |      | 3,401  |  |      |   | 3,483  | 
|                          |  |      |        |  |      |  
|                          |  | $    | 13,156 |  |      | $ | 12,363 | 
|                          |  |      |        |  |      |  



|     |             
|---- | ------------
|(10) | Other Assets



|                                                             |  |              |       |  |      |   |       | 
|------------------------------------------------------------ |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                             |  | December 31, |      
|                                                             |  |              |      
|                                                             |  | 2004         |       |  | 2003 |  
|                                                             |  |              |       |  |      |  
|Deferred rent resulting from lease settlements (see Note 12) |  | $            | 2,275 |  |      | $ | 3,772 | 
|Other assets                                                 |  |              | 1,141 |  |      |   | 940   | 
|                                                             |  |              |       |  |      |  
|                                                             |  | $            | 3,416 |  |      | $ | 4,712 | 
|                                                             |  |              |       |  |      |  



|     |                                  
|---- | ---------------------------------
|(11) | Valuation and Qualifying Accounts



|                             |  |              |       |            |         |   |     |             |  |   |                |   |  |   |       | 
|---------------------------- |  | ------------ | ----- | ---------- | ------- | - | --- | ----------- |  | - | -------------- | - |  | - | ----- | 
|                             |  |              |       | Additions/ |         |   |     |             | 
|                             |  |              |       | Charges    |         |   |     |             | 
|                             |  | Beginning of |       |            | to      |   |     | Deductions/ |  |   | Balance at End |  
|                             |  | Period       |       |            | Expense |   |     | Write-Offs  |  |   | of Period      |  
|                             |  |              |       |            |         |   |     |             |  |   |                |  
|Year Ended December 31, 2002 |  | $            | 3,539 |            |         | $ | 694 |             |  | $ | (2,292         | ) |  | $ | 1,941 | 
|                             |  |              |       |            |         |   |     |             |  |   |                |  
|Year Ended December 31, 2003 |  | $            | 1,941 |            |         | $ | 210 |             |  | $ | (1,352         | ) |  | $ | 799   | 
|                             |  |              |       |            |         |   |     |             |  |   |                |  
|Year Ended December 31, 2004 |  | $            | 799   |            |         | $ | 259 |             |  | $ | (378           | ) |  | $ | 680   | 
|                             |  |              |       |            |         |   |     |             |  |   |                |  



|     |              
|---- | -------------
|(12) | Restructuring



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




2001 Actions






|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |        |  |  |   |        | 
|---------------------------------------------- |  | ------- | ------ | ------------ | ------------------ | - | ------------ | ------------ |  | - | -------------- | ------------- |  | ----------------- | ------ |  |  | - | ------ | 
|                                               |  |         |        | 2001         |                    |   | 2001         |              |  |   |                |              
|                                               |  |         |        | Adjustments  |                    |   | Adjustments  |              |  |   |                | Accrued       | 
|                                               |  |         |        | in Estimates |                    |   | in Estimates |              |  |   |                | Restructuring | 
|                                               |  | 2001    |        |              | Resulting in       |   |              | Resulting in |  |   | Write-Offs and |               |  | Balance as of     |       
|                                               |  | Charges |        |              | Additional Charges |   |              | Credits      |  |   | Payments       |               |  | December 31, 2001 |       
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       
|Facilities-related costs and impairments       |  | $       | 59,418 |              |                    | $ | 9,700        |              |  | $ | (8,200         | )             |  | $                 | 16,208 |  |  | $ | 44,710 | 
|Employee severance, benefits and related costs |  |         | 7,938  |              |                    |   |             |              |  |   |               |               |  |                   | 6,748  |  |  |   | 1,190  | 
|Asset impairments                              |  |         | 4,205  |              |                    |   |             |              |  |   |               |               |  |                   | 4,205  |  |  |   |       | 
|Exchangeable share settlement                  |  |         | 1,263  |              |                    |   |             |              |  |   |               |               |  |                   | 1,263  |  |  |   |       | 
|Marketing costs                                |  |         | 851    |              |                    |   |             |              |  |   |               |               |  |                   | 851    |  |  |   |       | 
|Legal and accounting                           |  |         | 405    |              |                    |   |             |              |  |   |               |               |  |                   | 232    |  |  |   | 173    | 
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       
|Total                                          |  | $       | 74,080 |              |                    | $ | 9,700        |              |  | $ | (8,200         | )             |  | $                 | 29,507 |  |  | $ | 46,073 | 
|                                               |  |         |        |              |                    |   |              |              |  |   |                |               |  |                   |       

|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |        |  |  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ----- | ------------ |  | - | -------- | - | ------------- | ----------------- | ------ |  |  | - | ------ | -
|                                               |  |                   |        | 2002 |                    |   | 2002  |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |       | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |       | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |       | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2001 |        |      | Additional Charges |   |       | Credits      |  |   | Payments |   |               | December 31, 2002 |       
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Facilities-related costs and impairments       |  | $                 | 44,710 |      |                    | $ | 2,207 |              |  | $ | (853     | ) |               | $                 | 9,016  |  |  | $ | 37,048 |  
|Employee severance, benefits and related costs |  |                   | 1,190  |      |                    |   |      |              |  |   |         |   |               |                   | 920    |  |  |   | 270    |  
|Marketing costs                                |  |                   |       |      |                    |   |      |              |  |   | (536     | ) |               |                   |       |  |  |   | (536   | )
|Legal and accounting                           |  |                   | 173    |      |                    |   |      |              |  |   |         |   |               |                   | 173    |  |  |   |       |  
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Total                                          |  | $                 | 46,073 |      |                    | $ | 2,207 |              |  | $ | (1,389   | ) |               | $                 | 10,109 |  |  | $ | 36,782 |  
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |        |   |  |   |        | 
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ----- | ------------ |  | - | -------- | - | ------------- | ----------------- | ------ | - |  | - | ------ | 
|                                               |  |                   |        | 2003 |                    |   | 2003  |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |       | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |       | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |       | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2002 |        |      | Additional Charges |   |       | Credits      |  |   | Payments |   |               | December 31, 2003 |       
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Facilities-related costs and impairments       |  | $                 | 37,048 |      |                    | $ | 2,769 |              |  | $ | (11,466  | ) |               | $                 | 18,143 |   |  | $ | 10,208 | 
|Employee severance, benefits and related costs |  |                   | 270    |      |                    |   | 229   |              |  |   |         |   |               |                   | 270    |   |  |   | 229    | 
|Marketing costs                                |  |                   | (536   | )    |                    |   |      |              |  |   |         |   |               |                   | (536   | ) |  |   |       | 
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       
|Total                                          |  | $                 | 36,782 |      |                    | $ | 2,998 |              |  | $ | (11,466  | ) |               | $                 | 17,877 |   |  | $ | 10,437 | 
|                                               |  |                   |        |      |                    |   |       |              |  |   |          |   |               |                   |       

|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |       |  |  |   |       | 
|---------------------------------------------- |  | ----------------- | ------ | ---- | ------------------ | - | ---- | ------------ |  | - | -------- | - | ------------- | ----------------- | ----- |  |  | - | ----- | 
|                                               |  |                   |        | 2004 |                    |   | 2004 |              |  |   |          |  
|                                               |  | Accrued           |        |      | Adjustments        |   |      | Adjustments  |  |   |          |   | Accrued       |                  
|                                               |  | Restructuring     |        |      | in Estimates       |   |      | in Estimates |  |   |          |   | Restructuring |                  
|                                               |  | Balance as of     |        |      | Resulting in       |   |      | Resulting in |  |   |          |   | Balance as of |                  
|                                               |  | December 31, 2003 |        |      | Additional Charges |   |      | Credits      |  |   | Payments |   |               | December 31, 2004 |      
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      
|Facilities-related costs and impairments       |  | $                 | 10,208 |      |                    | $ | 112  |              |  | $ |         |   |               | $                 | 4,066 |  |  | $ | 6,254 | 
|Employee severance, benefits and related costs |  |                   | 229    |      |                    |   |     |              |  |   | (172     | ) |               |                   |      |  |  |   | 57    | 
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      
|Total                                          |  | $                 | 10,437 |      |                    | $ | 112  |              |  | $ | (172     | ) |               | $                 | 4,066 |  |  | $ | 6,311 | 
|                                               |  |                   |        |      |                    |   |      |              |  |   |          |   |               |                   |      



| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                                                           
| | --------------------------------------------------------------------------
| | Employee Severance, Benefits and Related Costs and
    Exchangeable Shares





| |                  
| | -----------------
| | Asset Impairments





| |                                      
| | -------------------------------------
| | Marketing Costs, Legal and Accounting





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2002 Actions






|                                               |  |              |        |                |          |               |              |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | -------------- | -------- | ------------- | ------------ | ---- |  | - | ------ | 
|                                               |  |              |        |                |          | Accrued       |             
|                                               |  |              |        |                |          | Restructuring |             
|                                               |  |              |        |                |          | Balance as of |             
|                                               |  |              |        | Write-Offs and |          |               | December 31, |     
|                                               |  | 2002 Charges |        |                | Payments |               |              | 2002 | 
|                                               |  |              |        |                |          |               |              |      | 
|Facilities-related costs and impairments       |  | $            | 14,634 |                |          | $             | 2,613        |      |  | $ | 12,021 | 
|Employee severance, benefits and related costs |  |              | 3,553  |                |          |               |             |      |  |   | 3,553  | 
|                                               |  |              |        |                |          |               |              |      | 
|Total                                          |  | $            | 18,187 |                |          | $             | 2,613        |      |  | $ | 15,574 | 
|                                               |  |              |        |                |          |               |              |      | 

|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |       |  |  |   |       | 
|---------------------------------------------- |  | ------------- | ------ |  | ------------ | - | ----------- | ------------ |  | - | -------- | ------------- | ------------- | ---- | ----- |  |  | - | ----- | 
|                                               |  | Accrued       |        |  |              |   | 2003        |              |  |   |          | Accrued       |              
|                                               |  | Restructuring |        |  |              |   | Adjustments |              |  |   |          | Restructuring |              
|                                               |  | Balance as of |        |  | 2003         |   |             | in Estimates |  |   |          |               | Balance as of |     
|                                               |  | December 31,  |        |  | Adjustments  |   |             | Resulting in |  |   |          |               | December 31,  |     
|                                               |  | 2002          |        |  | in Estimates |   |             | Credits      |  |   | Payments |               |               | 2003 |      
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      
|Facilities-related costs and impairments       |  | $             | 12,021 |  |              | $ | 4,094       |              |  | $ | (7,235   | )             |               | $    | 2,993 |  |  | $ | 5,887 | 
|Employee severance, benefits and related costs |  |               | 3,553  |  |              |   | 327         |              |  |   | (86      | )             |               |      | 3,794 |  |  |   |      | 
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      
|Total                                          |  | $             | 15,574 |  |              | $ | 4,421       |              |  | $ | (7,321   | )             |               | $    | 6,787 |  |  | $ | 5,887 | 
|                                               |  |               |        |  |              |   |             |              |  |   |          |               |               |      |      

|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |       |  |  |   |       | 
|---------------------------------------- |  | ------------- | ----- |  | ------------ | - | ------------ |  |  | -------- | ---- | ------------- | ---- | - | ----- |  |  | - | ----- | 
|                                         |  | Accrued       |       |  |              |   | 2004         |  |  |          |      | Accrued       |     
|                                         |  | Restructuring |       |  |              |   | Adjustments  |  |  |          |      | Restructuring |     
|                                         |  | Balance as of |       |  | 2004         |   | in Estimates |  |  |          |      | Balance as of |     
|                                         |  | December 31,  |       |  | Adjustments  |   | Resulting in |  |  |          |      | December 31,  |     
|                                         |  | 2003          |       |  | in Estimates |   | Credits      |  |  | Payments |      |               | 2004 |  
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |  
|Facilities-related costs and impairments |  | $             | 5,887 |  |              | $ |             |  |  | $        | (242 | )             |      | $ | 4,490 |  |  | $ | 1,155 | 
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |      
|Total                                    |  | $             | 5,887 |  |              | $ |             |  |  | $        | (242 | )             |      | $ | 4,490 |  |  | $ | 1,155 | 
|                                         |  |               |       |  |              |   |              |  |  |          |      |               |      |   |      



| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs



2003 Actions




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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |  |                |       |  |                    |             |     |              |             |   |              |  |  |              |     |            |              |   |       |  |  |   |       | 
|---------------------------------------------- |  | -------------- | ----- |  | ------------------ | ----------- | --- | ------------ | ----------- | - | ------------ |  |  | ------------ | --- | ---------- | ------------ | - | ----- |  |  | - | ----- | 
|                                               |  |                |       |  |                    | 2003        |     |              | 2003        |   |              |  |  |             
|                                               |  |                |       |  |                    | Adjustments |     |              | Adjustments |   |              |  |  |             
|                                               |  | Three Months   |       |  | Three Months       |             |     | in Estimates |             |   | in Estimates |  |  |              |     | Balance at |             
|                                               |  | Ended June 30, |       |  | Ended September 30 |             |     | Resulting in |             |   | Resulting in |  |  | Write-Offs   |     |            | December 31, |  
|                                               |  | 2003           |       |  | 2003               |             |     | Charges      |             |   | Credits      |  |  | and Payments |     |            | 2003         |  
|                                               |  |                |       |  |                    |             |     |              |             |   |              |  |  |              |     |            |              |  
|Facilities-related costs and impairments       |  | $              | 1,071 |  |                    | $           | 393 |              |             | $ | 425          |  |  | $            |    |            |              | $ | 275   |  |  | $ | 1,614 | 
|Employee severance, benefits and related costs |  |                | 927   |  |                    |             | 309 |              |             |   | 69           |  |  |              | (84 | )          |              |   | 1,160 |  |  |   | 61    | 
|                                               |  |                |       |  |                    |             |     |              |             |   |              |  |  |              |     |            |              |  
|Total                                          |  | $              | 1,998 |  |                    | $           | 702 |              |             | $ | 494          |  |  | $            | (84 | )          |              | $ | 1,435 |  |  | $ | 1,675 | 
|                                               |  |                |       |  |                    |             |     |              |             |   |              |  |  |              |     |            |              |  

|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |     |  |  |   |       | 
|---------------------------------------------- |  | ------------ | ----- | ------------ | ------------ | ----------- | ------------ |  |  | -------- | --- | ------------ | ---- | - | --- |  |  | - | ----- | 
|                                               |  |              |       | 2004         |              |             |              |  |  |         
|                                               |  |              |       | Adjustments  |              | 2004        |              |  |  |          |    
|                                               |  |              |       | in Estimates |              | Adjustments |              |  |  |          |    
|                                               |  | Balance at   |       |              | Resulting in |             | in Estimates |  |  |          |     | Balance at   |     
|                                               |  | December 31, |       |              | Additional   |             | Resulting in |  |  |          |     | December 31, |     
|                                               |  | 2003         |       |              | Charges      |             | Credits      |  |  | Payments |     |              | 2004 |  
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |  
|Facilities-related costs and impairments       |  | $            | 1,614 |              |              |             |             |  |  | $        | (62 | )            |      | $ | 179 |  |  | $ | 1,373 | 
|Employee severance, benefits and related costs |  |              | 61    |              |              |             |             |  |  |          | (15 | )            |      |   | 46  |  |  |   |      | 
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |    
|Total                                          |  | $            | 1,675 |              |              | $           |             |  |  | $        | (77 | )            |      | $ | 225 |  |  | $ | 1,373 | 
|                                               |  |              |       |              |              |             |              |  |  |          |     |              |      |   |    

Second Quarter 2003 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs





| |                  
| | -----------------
| | Asset Impairments



Third Quarter 2003 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments





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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs





2004 Action






| |                                         
| | ----------------------------------------
| | Facilities-Related Costs and Impairments







| |                                               
| | ----------------------------------------------
| | Employee Severance, Benefits and Related Costs



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                               |  |         |       |  |              |            |       |              |  |   |       | 
|---------------------------------------------- |  | ------- | ----- |  | ------------ | ---------- | ----- | ------------ |  | - | ----- | 
|                                               |  |         |       |  |              | Balance at |      
|                                               |  | 2004    |       |  | Write-Offs   |            |       | December 31, | 
|                                               |  | Charges |       |  | and Payments |            |       | 2004         | 
|                                               |  |         |       |  |              |            |       |              | 
|Facilities-related costs and impairments       |  | $       | 1,488 |  |              | $          | 738   |              |  | $ | 750   | 
|Employee severance, benefits and related costs |  |         | 2,461 |  |              |            | 892   |              |  |   | 1,569 | 
|                                               |  |         |       |  |              |            |       |              | 
|Total                                          |  | $       | 3,949 |  |              | $          | 1,630 |              |  | $ | 2,319 | 
|                                               |  |         |       |  |              |            |       |              | 



Abandoned Facilities Obligations




|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   |        |        | 
|------------------------------------ | --------------------------- | ---- | ----- | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | ---- | ------ | ----- | ----- | - | ---- | --- |  | - | ------ | ------ | 
|Lease Locations                      |                             | 2005 |       |       | 2006 |   |        | 2007  |  |   | 2008   |       |  | 2009 |        |       | Total |  
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|Cambridge, MA*                       |                             | $    | 2,069 |       |      | $ | 1,035  |       |  |   |        |       |  |      |        |       |       |   |      |     |  | $ | 3,104  |       
|Cambridge, MA                        |                             |      | 137   |       |      |   | 91     |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 228    |       
|Cambridge, MA                        |                             |      | 531   |       |      |   | 531    |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 1,062  |       
|Waltham, MA                          |                             |      | 1,466 |       |      |   | 1,466  |       |  | $ | 1,466  |       |  | $    | 1,466  |       |       | $ | 122  |     |  |   | 5,986  |       
|Chicago, IL                          |                             |      | 652   |       |      |   | 435    |       |  |   |        |       |  |      |        |       |       |   |      |     |  |   | 1,087  |       
|San Francisco, CA                    |                             |      | 111   |       |      |   | 111    |       |  |   | 111    |       |  |      |        |       |       |   |      |     |  |   | 333    |       
|Reading, UK                          |                             |      | 570   |       |      |   | 570    |       |  |   | 570    |       |  |      | 570    |       |       |   | 142  |     |  |   | 2,422  |       
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|                                     | Facility obligations, gross |      |       | 5,536 |      |   |        | 4,239 |  |   |        | 2,147 |  |      |        | 2,036 |       |   |      | 264 |  |   |        | 14,222 | 
|Contracted and assumed sublet income |                             |      | (700  | )     |      |   | (1,438 | )     |  |   | (1,302 | )     |  |      | (1,256 | )     |       |   | (150 | )   |  |   | (4,846 | )     
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|                                     | Net cash obligations        |      | $     | 4,836 |      |   | $      | 2,801 |  |   | $      | 845   |  |      | $      | 780   |       |   | $    | 114 |  |   | $      | 9,376  | 
|                                     |                             |      |       |       |      |   |        |       |  |   |        |       |  |      |        |       |       |  
|Assumed sub-lease income             |                             | $    | 74    |       |      | $ | 320    |       |  | $ | 315    |       |  | $    | 270    |       |       | $ | 67   |     |  | $ | 1,046  |       






|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|* | represents a location for which the Company has executed a lease
    settlement agreement



|     |           
|---- | ----------
|(13) | Litigation



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|     |                                            
|---- | -------------------------------------------
|(14) | Quarterly Results of Operations (Unaudited)



|                            |         |                              |        |       |         |   |        |         |   |   |            |      |  |   |        |       |  
|--------------------------- | ------- | ---------------------------- | ------ | ----- | ------- | - | ------ | ------- | - | - | ---------- | ---- |  | - | ------ | ----- | -
|                            |         | Year Ended December 31, 2004 |       
|                            |         |                              |       
|                            |         | First                        |        |       | Second  |   |        | Third   |   |   | Fourth     |     
|                            |         | Quarter                      |        |       | Quarter |   |        | Quarter |   |   | Quarter(1) |     
|                            |         |                              |        |       |         |   |        |         |   |   |            |     
|Total revenues              |         | $                            | 16,810 |       |         | $ | 14,332 |         |   | $ | 17,481     |      |  | $ | 20,596 |      
|Gross profit                |         |                              | 11,626 |       |         |   | 8,876  |         |   |   | 12,118     |      |  |   | 14,514 |      
|Net income (loss)           |         |                              | (1,787 | )     |         |   | (4,247 | )       |   |   | 51         |      |  |   | (3,561 | )    
|Net income (loss) per share |         |                              |        |       |         |   |        |         |   |   |            |      |  |   |        |      
|                            | Basic   |                              |        | (0.02 | )       |   |        | (0.06   | ) |   |            | 0.00 |  |   |        | (0.04 | )
|                            | Diluted |                              |        | (0.02 | )       |   |        | (0.06   | ) |   |            | 0.00 |  |   |        | (0.04 | )

|                            |         |                              |        |       |            |   |        |            |  |   |            |       |   |   |        |      | 
|--------------------------- | ------- | ---------------------------- | ------ | ----- | ---------- | - | ------ | ---------- |  | - | ---------- | ----- | - | - | ------ | ---- | 
|                            |         | Year Ended December 31, 2003 |       
|                            |         |                              |       
|                            |         | First                        |        |       | Second     |   |        | Third      |  |   | Fourth     |      
|                            |         | Quarter                      |        |       | Quarter(1) |   |        | Quarter(1) |  |   | Quarter(1) |      
|                            |         |                              |        |       |            |   |        |            |  |   |            |      
|Total revenues              |         | $                            | 19,425 |       |            | $ | 21,306 |            |  | $ | 16,009     |       |   | $ | 15,752 |     
|Gross profit                |         |                              | 13,201 |       |            |   | 15,555 |            |  |   | 10,863     |       |   |   | 10,947 |     
|Net income (loss)           |         |                              | (2,754 | )     |            |   | 6,050  |            |  |   | (3,195     | )     |   |   | 4,077  |     
|Net income (loss) per share |         |                              |        |       |            |   |        |            |  |   |            |       |   |   |        |     
|                            | Basic   |                              |        | (0.04 | )          |   |        | 0.08       |  |   |            | (0.04 | ) |   |        | 0.06 | 
|                            | Diluted |                              |        | (0.04 | )          |   |        | 0.08       |  |   |            | (0.04 | ) |   |        | 0.05 | 






|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | Restructuring charges (benefits) were taken during these
    quarters, see Note 12 for complete information.

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



|   |                                   
|-- | ----------------------------------
|1. | Disclosure Controls and Procedures









|   |                                          
|-- | -----------------------------------------
|2. | Internal Control over Financial Reporting

(a)Managements Annual Report on Internal
Control Over Financial Reporting






| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the company;                                                                                                                                                                                          
|
| |  | Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with authorizations of management and
    directors of the company; and
|
| |  | Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on the
    financial statements.                                                                                                                                       



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Report of Independent Registered Public Accounting Firm


















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| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant












|         |                                         
|-------- | ----------------------------------------
|Item 11. | Information about Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules, and Reports on
    Form 8-K

Financial Statements






| |   |                                                             
| | - | ------------------------------------------------------------
| |  | Report of Independent Registered Public Accounting Firm     
|
| |  | Consolidated Balance Sheets as of December 31, 2004 and 2003

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| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003 and 2002                                              
|
| |  | Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2004, 2003 and 2002
|
| |  | Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002                                              
|
| |  | Notes to Consolidated Financial Statements                                                                                                  

Financial Statement Schedule




Exhibits




|        |    |             |  |                                                                                                                                 |  |                           |   |             |  |     |      |  |  |  |                  |  |  |  |       | 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | - | ----------- |  | --- | ---- |  |  |  | ---------------- |  |  |  | ----- | 
|        |    |             |  | Filed with                                                                                                                      |  | Incorporated by Reference
|        |    |             |  | This                                                                                                                            |  |                          
|Exhibit |    |             |  | Form                                                                                                                            |  |                           |   | Exhibit    
|No.     |    | Description |  | 10-K                                                                                                                            |  | Form                      |   | Filing Date |  | No.
|        |    |             |  |                                                                                                                                 |  |                           |   |             |  |    
|        | 2  | .1          |  | Agreement and Plan of Merger dated August 10, 2004 with
    Autobahn Acquisition, Inc. and Primus Knowledge Solutions,
    Inc. |  |                           |   |             |  |     | 8-K  |  |  |  | August 18, 2004  |  |  |  | 99.1  | 
|       
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation                                                                               |  |                           |   |             |  |     | S-8  |  |  |  | June 12, 2003    |  |  |  | 4.1   | 
|       
|        | 3  | .2          |  | Amended and Restated By-Laws                                                                                                    |  |                           |   |             |  |     | S-3  |  |  |  | July 6, 2001     |  |  |  | 4.2   | 
|       
|        | 4  | .1          |  | Rights Agreement dated September 26, 2001 with EquiServe
    Trust Company, N.A                                                 |  |                           |   |             |  |     | 8-K  |  |  |  | October 2, 2001  |  |  |  | 4.1   | 
|       
|        | 10 | .1          |  | 1996 Stock Option Plan, as amended                                                                                              |  |                           | X |             |  |     |      |  |  |  |                  |  |  |  |       | 
|       
|        | 10 | .2*         |  | 1999 Outside Director Stock Option Plan, as amended                                                                             |  |                           | X |             |  |     |      |  |  |  |                  |  |  |  |       | 
|       
|        | 10 | .3          |  | 1999 Employee Stock Purchase Plan                                                                                               |  |                           |   |             |  |     | S-1  |  |  |  | June 21, 1999    |  |  |  | 10.3  | 
|       
|        | 10 | .4          |  | Primus 1999 Non-Officer Stock Option Plan                                                                                       |  |                           | X |             |  |     |      |  |  |  |                  |  |  |  |       | 
|       
|        | 10 | .5          |  | Primus 1999 Stock Incentive Compensation Plan                                                                                   |  |                           | X |             |  |     |      |  |  |  |                  |  |  |  |       | 
|       
|        | 10 | .6*         |  | Nonstatutory Option Agreement dated October 23, 2001 with
    Paul Shorthouse                                                   |  |                           |   |             |  |     | 10-K |  |  |  | March 27, 2002   |  |  |  | 10.16 | 
|       
|        | 10 | .7          |  | Promissory Note dated October 23, 2001 issued by Edward
    Terino to the registrant                                            |  |                           |   |             |  |     | 10-K |  |  |  | March 27, 2002   |  |  |  | 10.14 | 
|       
|        | 10 | .8          |  | Edward Terino Change-in-Control Agreement dated December 1,
    2002                                                            |  |                           |   |             |  |     | 10-K |  |  |  | March 28, 2003   |  |  |  | 10.18 | 
|       
|        | 10 | .9          |  | Change-in-Control Policy for Employees                                                                                          |  |                           |   |             |  |     | 10-Q |  |  |  | November 9, 2004 |  |  |  | 10.21 | 
|       
|        | 10 | .10*        |  | Amended and Restated Employment Agreement dated November 8,
    2004 with Robert Burke                                          |  |                           |   |             |  |     | 10-Q |  |  |  | November 9, 2004 |  |  |  | 10.22 | 
|       
|        | 10 | .11         |  | Lease dated January 2004 with Davenport Building Limited
    Partnership                                                        |  |                           |   |             |  |     | 10-K |  |  |  | March 15, 2004   |  |  |  | 10.4  | 

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##### Table of Contents



|        |    |     |             |                                                                                                   |      |  |                           |      |  |         |             |  |  |     |                   |  |  |  |       | 
|------- | -- | --- | ----------- | ------------------------------------------------------------------------------------------------- | ---- |  | ------------------------- | ---- |  | ------- | ----------- |  |  | --- | ----------------- |  |  |  | ----- | 
|        |    |     |             | Filed with                                                                                        |      |  | Incorporated by Reference |     
|        |    |     |             | This                                                                                              |      |  |                           |     
|Exhibit |    |     |             |                                                                                                   | Form |  |                           |      |  | Exhibit |            
|No.     |    |     | Description |                                                                                                   | 10-K |  |                           | Form |  |         | Filing Date |  |  | No. |                  
|        |    |     |             |                                                                                                   |      |  |                           |      |  |         |             |  |  |     |                  
|       
|        | 10 | .12 |             | Lease Termination Agreement dated January 2004 with Davenport
    Building Limited Partnership    |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.5  | 
|       
|        | 10 | .13 |             | Lease dated October 6, 1999 with Pine Street
    Investors I, LLC                                 |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.5  | 
|       
|        | 10 | .14 |             | First Amendment to Lease dated December 30, 1999 with Pine
    Street Investors I, LLC            |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.6  | 
|       
|        | 10 | .15 |             | Second Amendment to Lease dated August 20, 2000 with Pine
    Street Investors I, LLC             |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.7  | 
|       
|        | 10 | .16 |             | Third Amendment to Lease dated December 22, 2000 with Pine
    Street Investors I, LLC            |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.8  | 
|       
|        | 10 | .17 |             | Fourth Amendment to Lease dated July 15, 2001 with Pine
    Street Investors I, LLC               |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.10 | 
|       
|        | 10 | .18 |             | Fifth Amendment to Lease dated March 31, 2003 with Pine
    Street Investors I, LLC               |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.11 | 
|       
|        | 10 | .19 |             | Lease dated March 19, 2001 with DIFA Deutsche Immobilien
    Fonds AG                             |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.9  | 
|       
|        | 10 | .20 |             | Lease Termination with DIFA Deutsche Immobilien Fonds AG                                          |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.13 | 
|       
|        | 10 | .21 |             | Amended and Restated Loan and Security Agreement dated
    June 13, 2002 with Silicon Valley Bank |      |  |                           |      |  |         | 10-Q        |  |  |     | August 14, 2002   |  |  |  | 10.1  | 
|       
|        | 10 | .22 |             | First Loan Modification Agreement dated September 30, 2002
    with Silicon Valley Bank           |      |  |                           |      |  |         | 10-Q        |  |  |     | November 14, 2002 |  |  |  | 10.1  | 
|       
|        | 10 | .23 |             | Amendment Agreement dated October 4, 2002 with Silicon
    Valley Bank                            |      |  |                           |      |  |         | 10-Q        |  |  |     | November 14, 2002 |  |  |  | 10.2  | 
|       
|        | 10 | .24 |             | Second Loan Modification Agreement dated December  20,
    2002 with Silicon Valley Bank          |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.21 | 
|       
|        | 10 | .25 |             | Fourth Loan Modification Agreement dated November  26,
    2003 with Silicon Valley Bank          |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.25 | 
|       
|        | 10 | .26 |             | Fifth Loan Modification Agreement dated June 2004 with Silicon
    Valley Bank                    |      |  |                           |      |  |         | 10-Q        |  |  |     | August 9, 2004    |  |  |  | 10.26 | 
|       
|        | 10 | .27 |             | Letter Agreement re: loan dated June 16, 2004 with Silicon
    Valley Bank                        |      |  |                           |      |  |         | 10-Q        |  |  |     | August 9, 2004    |  |  |  | 10.25 | 
|       
|        | 10 | .28 |             | Sixth Loan Modification Agreement dated November 24, 2004
    with Silicon Valley Bank            |      |  | X                         |      |  |         |             |  |  |     |                   |  |  |  |       | 
|       
|        | 10 | .29 |             | Seventh Loan Modification Agreement dated December 21, 2004
    with Silicon Valley Bank          |      |  | X                         |      |  |         |             |  |  |     |                   |  |  |  |       | 
|       
|        | 10 | .30 |             | Securities Account Control Agreement dated
    December 20, 2002 with Silicon Valley Bank         |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.20 | 

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##### Table of Contents



|        |    |     |             |                                                                                                                              |      |  |                           |      |  |         |             |  |  |     |                |  |  |  |       | 
|------- | -- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------- | ---- |  | ------------------------- | ---- |  | ------- | ----------- |  |  | --- | -------------- |  |  |  | ----- | 
|        |    |     |             | Filed with                                                                                                                   |      |  | Incorporated by Reference |     
|        |    |     |             | This                                                                                                                         |      |  |                           |     
|Exhibit |    |     |             |                                                                                                                              | Form |  |                           |      |  | Exhibit |            
|No.     |    |     | Description |                                                                                                                              | 10-K |  |                           | Form |  |         | Filing Date |  |  | No. |               
|        |    |     |             |                                                                                                                              |      |  |                           |      |  |         |             |  |  |     |               
|       
|        | 10 | .31 |             | Amended and Restated Intellectual Property Agreement dated
    January 2004                                                  |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004 |  |  |  | 10.26 | 
|       
|        | 10 | .32 |             | Settlement Agreement dated November 1, 2004 with
    ServiceWare Technologies, Inc.                                          |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|       
|        | 21 | .1  |             | Subsidiaries                                                                                                                 |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|       
|        | 23 | .1  |             | Consent of Ernst & Young LLP                                                                                                 |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|       
|        | 31 | .1  |             | Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
    of the Exchange Act of 1934 of the principal executive officer |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|       
|        | 31 | .2  |             | Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
    of the Exchange Act of 1934 of the principal financial officer |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|       
|        | 32 | .1  |             | Certificate pursuant to 18 U.S.C. Section 1350 of the
    principal executive officer                                        |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 32 | .2  |             | Certificate pursuant to 18 U.S.C. Section 1350 of the
    principal financial officer                                        |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 






|  |                                          
|- | -----------------------------------------
|* | Management contract or compensatory plan.

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##### Table of Contents






SIGNATURES






| |                           
| | --------------------------
| | ART TECHNOLOGY GROUP, INC.
| | (Registrant)              



| |     |                    
| | --- | -------------------
| | By: | /s/ ROBERT D. BURKE

| |                        
| | -----------------------
| |                        
| | 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/ EDWARD TERINOEdward
    Terino           |  | Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
|                                            
|/s/ PAUL G. SHORTHOSEPaul
    G. Shorthose   |  | 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/ DANIEL C. REGISDaniel
    C. Regis       |  | Director                                                                                     
|                                            
|/s/ DAVID B. ELSBREEDavid
    B. Elsbree     |  | Director                                                                                     
|                                            
|/s/ PHYLLIS S. SWERSKYPhyllis
    S. Swersky |  | Director                                                                                     

97