##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Amendment No. 1 on

Form 10-K/A


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
    2003                                             
|  
|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                                                            



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

(617) 386-1000

(Registrants telephone number, including
area code)


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



---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ     No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
attachment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ     No o

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant was approximately $112,548,000 based on the closing
price of the registrants common stock on the Nasdaq
National Market on June 30, 2003.

The number of shares of the registrants
common stock outstanding as of March 11, 2004, was
73,145,185.



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ART TECHNOLOGY GROUP, INC.

INDEX TO FORM 10-K

|                                       |  |                                                                                           |  |      |    | 
|-------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                       |  |                                                                                           |  | Page
|                                       |  |                                                                                           |  |     
|PART I                                
|Item 1.                                |  | Business                                                                                  |  |      | 2  | 
|PART II                               
|Item 7.                                |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 21 | 
|Item 8.                                |  | Consolidated Financial
    Statements and Supplementary Data                              |  |      | 41 | 
|PART IV                               
|Item 15.                               |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |      | 76 | 
|SIGNATURES                            
|                                       |  | Signatures                                                                                |  |      | 79 | 
|EX-23.1 CONSENT OF ERNST AND YOUNG LLP
|EX-31.1 CERTIFICATION OF CEO          
|EX-31.2 CERTIFICATION OF CFO          
|EX-32.1 CERTIFICATION OF CEO          
|EX-32.2 CERTIFICATION OF CFO          



ATG, Art Technology Group and Dynamo are our
registered trademarks, and ATG Scenario Personalization and ATG
Data Anywhere Architecture are our service marks. This report
also includes trademarks, service marks and trade names of other
companies.

This Amendment No. 1 on Form 10-K/A
amends Items 1, 7, 8 and 15 of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003,
and is being filed principally to expand the description of our
sales coverage model, to clarify the description of our working
capital facility, to present purchases and maturities of
marketable securities separately on our Consolidated Statements
of Cash Flows and to provide additional information regarding
our restructuring activities. Except as set forth above, no
other items in the Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 are amended or restated
by this Amendment No. 1.

Our expanded description of our sales coverage
model is set forth under the headings Item 1.
Business  Sales Coverage Model and
Item 1. Business  Risk
Factors  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. The changes relating to
our working capital facility are set forth under the headings
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of
Operations  Liquidity and Capital
Resources and Item 8. Art Technology Group,
Inc. Notes to Consolidated Financial
Statements  Note 3. The separate
presentation of purchases and maturities of marketable
securities is set forth under the headings Item 8.
Consolidated Statements of Cash Flows and
Item 8. Art Technology Group, Inc. Notes to
Consolidated Financial
Statements  Note 1(u). The additional
information regarding our restructuring activities is set forth
under the headings Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Results of Operations 
Restructuring (Benefit) Charges and Item 8. Art
Technology Group, Inc. Notes to Consolidated Financial
Statements  Note 12.

1



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##### Table of Contents






PART I






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

Overview

We deliver software solutions to help
consumer-facing organizations create an interactive experience
for their customers and partners via the Internet and other
channels. Our software helps our clients market, sell and
provide self-service opportunities to their customers and
partners, which can enhance our clients revenues, reduce
their costs and improve their customers satisfaction. We
also offer related services, including support, education and
professional services.

Businesses and governments can use our solutions
to provide a more productive and satisfying experience to users
of their online services. By capturing and maintaining
information about those online users personal preferences
and online history, our software enables our clients to provide
customers or customer segments with solutions specifically
tailored to the customers needs. We seek to differentiate
ourselves by designing applications that make it simpler to
develop and maintain user profile information across multiple
complex data sources, easier to model and influence desired user
behavior, and faster to develop and maintain dynamic web content
with a smaller investment than otherwise required. We provide
tools to enable our clients to analyze the behavior of their
customers and to improve the effectiveness of our clients
merchandising. We also address our clients desire to
provide a unified experience for their customers regardless of
the channel through which they interact: online, in-store, or
via a kiosk, mobile device or call center.

Our principal target markets are Global 2000
companies, government organizations, and other businesses that
have large numbers of online users and utilize the Internet as a
primary business channel. In the past, we have focused on
providing our software and services to businesses in financial
services, retail, media and entertainment, telecommunications,
consumer products and services industries. We have delivered
online solutions to companies such as Aetna Services, Alcatel,
American Airlines, Barclays Global Investors, Best Buy, BMG
Direct, Deutsche Post, Eastman Kodak, Ford Motor Credit, France
Telecom, HSBC, J. Crew, Philips, Sun Microsystems, Walgreens and
Wells Fargo.

We historically have provided Internet commerce
and software solutions, including an application server and
application products. We believe that the development of
infrastructure products, including our application server, has
become increasingly standards driven and that in the future
there will be limited opportunities to differentiate ourselves
based on our application server. As a result, while we intend to
meet the standards requirements for our application server, we
are focusing principally on developing application products,
including several new application products that were introduced
in 2004. We offer application products in the following three
functional areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 tools to
    integrate their online marketing activities with related sales
    and self-service initiatives. Our tools are designed to allow
    businesses to increase marketing effectiveness by visually
    defining desired customer experience activities and events that
    will drive desirable customer behavior.
|
| |  | Our online sales applications are used by our
    clients to facilitate transactions with consumers and channel
    partners. These commerce offerings are designed for the
    development of large consumer-facing e-commerce sites and
    channel partner extranets. 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 self-service applications are designed to
    decrease call-center 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 call center inquiry.                                                                    

2



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Our Strategy

Our objective is to be the industry leader in
providing a comprehensive consumer-facing software platform for
companies striving to give their customers a superior online
experience. We intend to achieve this objective by implementing
the following key components of our strategy:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facilitate integrated life cycle experience
    for consumers.We believe that
    consumers want to cross seamlessly between the
    information-gathering, purchase and service phases of their
    online activity. During a single session, a consumer may
    research one purchase, modify another purchase and ask
    post-transaction questions about a third. We believe consumers
    will demand a consistent online experience from each of the
    businesses with which the consumers are interfacing through the
    Internet. 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 intend to
    differentiate ourselves through our application and
    administration products, including two new products that were
    introduced in the first quarter of 2004. We design our existing
    products and our products in development to operate on leading
    application server platforms from BEA and IBM, in addition to
    our proprietary server software. As a result, our application
    software can provide value to new and existing clients,
    regardless of the infrastructure products they select.                                                             
|
| |  | 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 with 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 Accenture, Cap Gemini Ernst & Young,
    EDS, HP Consulting and SAIC, as well as regional integrators
    such as Analysts International, E-Tree, McFadyen Consulting,
    Rikei, SBI and Thales-IS. 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. Through our Professional and Educational 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 allies and sales forces 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.                                                                                

Products

We provide a comprehensive software solution set
designed to allow application developers to develop customized
websites more effectively and efficiently. Our software is also
designed to provide content administrators and marketing
executives with greater flexibility in maintaining their website
content and in optimizing their consumers experience in
order to improve revenue and cost performance.

Our products include both application and
infrastructure components. We refer to our application
components collectively as the ATG Customer Experience Platform.
This product set includes:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ATG Adaptive Scenario
    Engine.This product, formerly known
    as ATG Relationship Management Platform, 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

3



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | data repository integration capability. Some of
    clients build custom applications directly on ATG Adaptive
    Scenario Engine, and all of our 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
    complex business-to-business order management.                                                                                                                                                                                                                                                                       
|
| |  | ATG Campaign
    Optimizer.This application,
    introduced in 2004, 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
    Assistance.Introduced in 2004, this
    application combines a natural language search 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,
    formerly known as ATG Publishing, enables marketing
    professionals and others to create, manage, preview, and deploy
    content while ensuring proper quality control. Leveraging ATG
    Adaptive Scenario Engine, ATG Content Administration provides
    the means to create product catalogs, post updates and design
    targeted e-mail marketing campaigns.                                                                                                                                                                                                                                                                                                                                                                                

Our applications are fully compatible with the
BEA WebLogic Application Server and the IBM WebSphere
Application Server, as well as our ATG Dynamo Application Server.

Our product license revenues were
$27.1 million, or 37% of total revenues, in 2003;
$48.8 million, or 48% of total revenues, in 2002; and
$76.6 million, or 55% of total revenues, in 2001.

Services

Our services organization provides a variety of
consulting, design, application development, integration,
training and support services in conjunction with our products.
These services are provided through our Professional Services,
Education, and Customer Support Service offerings.

Professional
Services.The primary goal of our
Professional Services organization is to increase customer
satisfaction with our application solutions. Our Professional
Services include four primary service offerings:



| |   |                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 ATG versions of existing products. We offer
    packaged offerings built to ease the implementation of new
    products such as Adaptive Customer                                                               

4



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Assistance. Our bundled implementation packages,
    which include best practices and methodologies, reduce the
    implementation risk and time of products such as Content
    Administration and Commerce.                                                                                                                                                                                                                                                                                            
|
| |  | Structured Enabling
    Services.Working with a client or a
    designated team, we offer Structured Enabling Services to
    facilitate project success. Engaging our Professional Services
    team gives 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 clients development 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.We
provide a broad selection of educational programs designed to
train customers and partners on our applications. This
curriculum addresses the educational needs of developers,
technical managers, business managers, and system
administrators. ATG Education also offers an online learning
program that complements our instructor-led training. Developers
can become certified on our base product or our commerce product
by taking a certification exam in a proctored environment. We
also measure partner quality using a partner accreditation
program that ensures ATG partners have the skills necessary to
effectively assist our clients with implementations. We provide
a full range of instructor-led solutions to assist clients with
these key initiatives.

Customer Support
Services.We offer five levels of
customer support ranging from our evaluation support program,
which is available for 30 days, to our Premium Support
Program, which includes access to technical support engineers
24 hours a day, seven days per week, for customers
deploying mission critical applications. For an annual
maintenance fee, customers are entitled to receive software
updates, maintenance releases, online documentation and
eServices including bug reports and unlimited technical support.

Our services revenues were $45.3 million, or
63% of total revenues, in 2003, $52.7 million, or 52% of
total revenues, in 2002 and $63.7 million, or 45% of total
revenues, in 2001.

5



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Markets

Our principal target markets are Global 2000
companies, government organizations, and other businesses that
have large number of online users and utilize the Internet as a
primary business channel. Our clients represent a broad spectrum
of enterprises within diverse industry sectors. The following is
a partial list:

Consumer Retail

Best Buy Companies, Inc


Cabelas


Eastman Kodak


J. Crew


Martha Stewart Living Omnimedia


Neiman Marcus


Restoration Hardware


Target Corporation


The Finish Line


Walgreens


Financial Services

A.G. Edwards


John Hancock Funds


KeyBank


Citibank


Deutsche Bank


Ford Motor Credit


Charles Schwab & Co., Inc.


HSBC


Barclays Global Investors


MFS Investment Management


Dreyfus Services Corporation


Merrill Lynch


Pioneer Investments


International

Benetton


Kingfisher


Direkt Anlage Bank


Pirelli


BBC Technology Service


Philips


Heidelberger Druckmaschinen


Lavazza


Hoffman la Roche


Premier Farnell


Royal Mail


Vodafone


France Telecom


Telefonica


Deutsche Post


LVMH


Manufacturing


Alcatel


Abbott Laboratories


Eastman Kodak


General Motors


Newell Rubbermaid


Procter & Gamble


Communications & Technology

Adobe


Alcatel


BellSouth


EMC


Handspring


Hewlett Packard


Intuit


Sun Microsystems


Travel Media and Entertainment

American Airlines


BMG Direct


Hilton Hotels


Hyatt


Intercontinental Hotels


Meredith Corporation


Nintendo


Readers Digest


Sega.com


The MTVi Group


Research and Development

Our research and development group is responsible
for core technology, product architecture, product development,
quality assurance, documentation and third-party software
integration. This group also assists

6



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with pre-sale, customer support activities and
quality assurance tasks supporting the Professional Services
group. Our research and development expenses were
$17.9 million in 2003, $22.0 million in 2002 and
$30.5 million in 2001.


Since we began focusing on selling software
products in 1996, the majority of our research and development
activities have been directed towards creating new versions of
our products, which extend and enhance competitive product
features. In 2003, we began to focus our efforts on developing
new and innovative applications, as well as integrating our
products with external enterprise data sources. In line with
these efforts, we have developed several new applications and
aligned our research and development resources accordingly.

Sales Coverage Model

Our principal target markets are leading
organizations with large constituencies who use the Internet as
a primary business channel. We target these potential customers
through our direct sales force and through channel partners,
including systems integrators and other technology partners. We
currently have approximately 100 business alliances throughout
the world.

We employ two groups of sales professionals. Our
direct sales force is compensated based on product and services
sales made directly to end-users and through business partners.
These employees generally attend centralized internal or
external training every quarter.

The second group of sales professionals is
dedicated to recruiting, training, developing business plans,
and joint selling and marketing with business alliances such as
systems integrators and value added resellers. The objective of
the second group is to motivate systems integrators to adopt our
suite of products for commerce and self-service projects for
their customers. We derive two classes of revenue from the
efforts of the second group of sales professionals: co-sale
revenues, which are generated through our relationships with
systems integrators and consulting firms that serve the market
for information system products and services, and resale
revenues, which are generated when we license our products
directly to our business partners who then resell our software
to end-user customers.

We provide our channel partners with sales and
technical training in order to encourage them to create demand
for our products and to extend our presence globally and
regionally. Our sales training includes an introduction to our
company and an overview of our products functionality,
competitive advantages, packaging and pricing. We provide this
training to business development personnel, project managers,
alliance managers and sales representatives employed by our
channel partners. We typically provide an initial sales training
program at a channel partners premises within 60 days
of the execution of an agreement establishing the relationship.
We provide supplemental sales training to our channel partners
on a quarterly basis and upon new product launches.

We provide technical training to developers,
architects and project managers at our learning centers or
on-site at channel partners premises. This training
typically extends for a minimum of two-weeks. During 2003, the
Company trained over 1,000 third-party developers. In addition,
we encourage our channel partners to enroll in our accreditation
and certification programs:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ATG Certified Professional
    Program consists of two exams. The first tests the
    developers expertise on our Adaptive Scenario Engine,
    including Dynamo Application Framework and ATG 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.   
|
| |  | 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, 2003, we had five
    accredited partners and several more in the process of becoming
    accredited.

7



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Set forth below is a partial list of
organizations with which we have selling and marketing
relationships:

North America

Accenture 
 Allstream


Analysts International


Bell Canada


Blast Radius


Cap Gemini Ernst & Young


Critical Mass


EDS


GTSI (federal government)


IBM


Immix Technology (federal government)


McFayden Consulting


Meritage


Professional Access


RTGX (federal government)


SAIC (federal government)


SBI & Company


Unisys (federal government)


WhittmanHart


International


Europe, Middle East and Africa


Accenture


Avinci AG


Cap Gemini
Ernst & Young


CSC Computer
Sciences Limited


Conexus


Degetel


Develon


Dimension Data


EDS


E-Tree ETC


GFI Informatica


Inferentia Dnm


Kora


Materna


Progiweb


SDG Consulting


Sequenza SPA


Thales IS


Unilog


Valoris


Asia and Pacific Rim

HP Japan


Rikei Corporation
(Japan)


XM Sydney


We design our existing products and our products
in development to operate on leading application server
platforms from BEA and IBM, in addition to our proprietary
server software. In certain instances we may work with companies
that sell products that compete with our proprietary server
software, including BEA and IBM, to sell our software as part of
a larger solution being implemented by a customer utilizing our
competitors server software. The products that we attempt
to sell that utilize our competitors server software
include our commerce software, which allows companies to
transact business over the internet, our relationship management
software, which allows companies to enable online marketing,
sales and service solutions, and our self service software,
which allows customers to develop, deploy and manage business
relationships.

As of December 31, 2003, in addition to
offices throughout the United States, we had offices located in
the United Kingdom, France, Germany and Italy and sales
personnel located in Spain. Our revenues from sources outside
the United States were $25.3 million, or 35% of total
revenue, in 2003, $30.1 million, or 30% of total revenue,
in 2002 and $47.6 million, or 34% of total revenue, in
2001. During the past year, we have established relationships
with new international partners and have added key international
accounts.

Competition

The market for online sales, marketing and
self-service software is intensely competitive, subject to rapid
technological change, and significantly affected by new product
introductions and other market activities. We expect competition
to persist and intensify in the future. We currently have five
primary sources of competition:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | platform vendors such as BEA Systems and IBM, who
    are also our partners;                           
|
| |  | Microsoft, with whom we compete in commerce
    applications and, less directly, in the platform arena;

8



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| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | commerce-oriented vendors, such as Blue Martini
    and BroadVision, which compete on various levels including
    portals and e-commerce;    
|
| |  | marketing and customer-service vendors such as
    Chordiant, E.piphany and Kana, which may or may not have a
    vertical industry focus; and
|
| |  | in-house development efforts by potential
    customers or partners.                                                                          

We compete against these alternative solutions by
focusing on an integrated customer experience for online sales,
marketing and self-service applications for consumer-facing
businesses. We believe our solutions provide our clients with a
rapid time to return on investment, attractive long-term total
cost of ownership, a way to present a single view of themselves
to their customers, the ability to improve the productivity and
effectiveness of customer interactions, and the flexibility to
adapt to rapidly changing and often unpredictable market needs.

We seek to provide our clients with a rapid time
to return on investment through strong out-of-the-box
functionality for online sales, marketing and self-service built
on a flexible, component architecture that is practical and
cost-effective to customize. These capabilities can enable our
clients to get to market quickly in a manner that exploits their
competitive advantages  which helps drive their
return on investment.

Our products allow companies to present a single
view of themselves to their customers through our repository
integration. This integration technology allows companies to
easily access and utilize data in the enterprise regardless of
the data storage format or location. The data can be leveraged
in their native form without having to move, duplicate or
convert them. By enabling these capabilities in a cost-effective
manner, we believe our products can help companies protect their
brand and keep their customers from becoming confused or
frustrated  all of which positively impact customer
satisfaction and loyalty.

Our adaptive scenario capability is designed to
help companies make each interaction with their customers more
productive and effective. These personalization capabilities
help ensure that consumers are presented with the most relevant
information. By avoiding information overload, consumers are
more likely to have their needs met through the low cost online
channel  increasing the speed at which customer needs
are met and decreasing the likelihood the consumer will use a
more expensive channel such as a call center. Adaptive scenario
capabilities can also make interactions with consumers more
effective for our clients. It allows a business user to visually
design a sequence of behaviors that our customer would like to
encourage a consumer to undertake  which can lead to
a specific goal such as a site registration or transaction. Our
capabilities automatically monitor and encourage consumers to
follow these pre-defined behavior patterns  enabling
our customer to maximize the effectiveness of each interaction
with the consumer.

Finally, we believe the combination of our
out-of-the-box functionality, our component architecture and our
repository integration helps companies that use our products to
adapt quickly and economically to rapidly changing and
unanticipated market needs.

We support the adoption of open application
server infrastructure by our old and new customers and plan to
work closely with other platform vendors to increase the value
customers receive from our products regardless of the platform
they select. We intend to focus our future development and
marketing efforts on applications rather than on our platform,
and as a result we expect our business and operating results
will be less affected by competition with platform vendors such
as BEA Systems and IBM.

Proprietary Rights and Licensing

Our success and ability to compete depends on our
ability to develop and protect the proprietary aspects of our
technology and to operate without infringing on the proprietary
rights of others. We rely on a combination of trademark, trade
secret and copyright law and contractual restrictions to protect
our proprietary technology. These legal protections afford only
limited protection for our technology. We seek to protect our
source code for our software, documentation and other written
materials under trade secret and copyright laws. We license our
software pursuant to signed license, click through
or shrink wrap agreements, which impose restrictions
on the licensees ability to use the software, such as
prohibiting reverse

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engineering and limiting the use of copies. We
also seek to avoid disclosure of our intellectual property by
requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements
and by restricting access to our source code. Due to rapid
technological change, we believe that factors such as the
technological and creative skills of our personnel, new product
developments and enhancements to existing products are more
important than legal protections to establish and maintain a
technology leadership position.


Employees

As of December 31, 2003, we had a total of
361 employees. Of our employees, 118 were in research
and development, 92 in sales and marketing, 98 in
services and 53 in general and administrative. Our future
success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management
personnel, for whom competition is intense. From time to time,
we also employ independent contractors to support our
professional services, product development, sales, marketing and
business development organizations. Our employees are not
represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe our relations with our
employees are good.

Internet Address and SEC Reports

We maintain a website with the address
www.atg.com. We are not including the information contained on
our website as a part of, or incorporating it by reference into,
this Annual Report on Form 10-K. We make available free of
charge through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as
reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. We also
include on our website our corporate governance guidelines and
the charters for each of the major committees of our board of
directors. In addition, we intend to disclose on our website any
amendments to, or waivers from, our code of business conduct and
ethics that are required to be publicly disclosed pursuant to
rules of the SEC and Nasdaq.

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RISK FACTORS THAT MAY AFFECT RESULTS

This annual report contains forward-looking
statements, including statements about our growth and future
operating results. For this purpose, any statement that is not a
statement of historical fact should be considered a
forward-looking statement. We often use the words
believes, anticipates,
plans, expects, intends and
similar expressions to help identify forward-looking statements.

There are a number of important factors that
could cause our actual results to differ materially from those
indicated or implied by forward-looking statements. Factors that
could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this
annual report.

Risks Related To Our Business



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

We incurred a loss in the first and third
quarters of 2003 and in each quarter of fiscal 2002. As of
December 31, 2003, we had an accumulated deficit of
$195.7 million. Our revenues decreased 29% to
$72.5 million for 2003 compared with $101.5 million
for 2002. We believe the recent economic downturn within the
software industry could continue to have an adverse effect on
demand for our products and services, and therefore adversely
affect our revenues as well. Because we operate in a rapidly
evolving industry, we have difficulty predicting our future
operating results and we cannot be certain that our revenues
will grow or our expenses will decrease at rates that will allow
us to achieve profitability on a quarterly or annual basis.
Additionally, in recent years the slowdown in the software
industry and the decrease in spending by companies in our target
markets have reduced the rate of growth of the Internet as a
channel for consumer branded retail and financial services
companies. If current economic conditions continue for an
extended period of time or worsen, we may experience additional
adverse effects on our revenue, net income and cash flows, which
could result in a decline in the price of our common stock.



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
    results are lower than the expectations of securities
    analysts.

Our revenues and operating results have varied
from quarter to quarter in the past, and are likely to vary
significantly from quarter to quarter in the foreseeable future.
If our quarterly results fall below our expectations and those
of securities analysts, the price of our common stock is likely
to fall. A number of factors are likely to cause variations in
our operating results, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuating economic conditions, particularly as
    they affect our customers willingness to implement new
    e-commerce solutions;
|
| |  | the timing of sales of our products and services;                                                                                     
|
| |  | the timing of customer orders and product
    implementations;                                                                        
|
| |  | delays in introducing new products and services;                                                                                      
|
| |  | increased expenses, whether related to sales and
    marketing, product development or administration;                                
|
| |  | 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; and                                                                                  
|
| |  | costs related to possible acquisitions of
    technologies or businesses.                                                             

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Accordingly, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily
meaningful. The results of one quarter or a series of quarters
should not be relied upon as an indication of our future
performance.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Turnover in our management, sales and
    engineering 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.

Members of our senior management team, including
our two founders, our former Chief Executive Officer and
President, and several senior managers, have left us during the
past three years for a variety of reasons, and we cannot assure
you that there will not be additional departures. As a result of
this management turnover, our current management team has had
limited experience working together and may be unsuccessful in
developing or executing a business strategy for us. These
changes in management, and any future similar changes, may be
disruptive to our operations. In addition, equity incentives
such as stock options constitute an important part of our total
compensation program for management, and the volatility or lack
of positive performance of our stock price may from time to time
adversely affect our ability to retain our management team.

We rely heavily on our direct sales force. We
have recently restructured and reduced the size of our sales
force. Changes in the structure of the sales force have
generally resulted in temporary lack of focus and reduced
productivity.

In addition, we recently restructured our
research and development group, which could result in
interruptions in product development and reduced productivity.



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

Our long sales cycle, which can range from
several weeks to several months or more, makes it difficult to
predict the quarter in which sales may occur. We have a long
sales cycle because we generally need to educate potential
customers regarding the use and benefits of our products and
services. Our sales cycle varies depending on the size and type
of customer contemplating a purchase and whether we have
conducted business with a potential customer in the past. In
addition, we believe the recent economic downturn in the United
States has contributed to an increased in the average length of
our sales cycle as customers deferred implementing new
e-commerce solutions.

We may incur significant sales and marketing
expenses in anticipation of licensing our products, and if we do
not achieve the level of revenues we expected, our operating
results will suffer and our stock price may decline. These
potential customers frequently need to obtain approvals from
multiple decision makers prior to making purchase decisions.
Delays in sales could cause significant variability in our
revenues and operating results for any particular period.

Competition could materially and adversely affect
our ability to obtain revenues from license fees from new or
existing customers and professional services revenues from
existing customers. While the list price for our software
generally has been maintained over the past three years,
competitive pressures could require us to reduce the price of
our software products. In either case, our business, operating
results and financial condition would be materially and
adversely affected.



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

The market for online marketing, sales and
services applications is intensely competitive, and we expect
competition to intensify in the future. This level of
competition could reduce our revenues and result in increased
losses or reduced profits. Our primary competition currently
comes from in-house development

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efforts by potential customers or partners, as
well as from other vendors of Web-based application software. We
currently compete with Internet application software vendors
such as BroadVision and commerce, marketing and self-service
vendors such as Chordiant, E.piphany and Kana. We also compete
with platform application server products and vendors such as
BEA Systems IBM, and Microsoft, among others. In addition, we
compete indirectly with portal software vendors such as Vignette
(through its acquisition of Epicentric), SAP Portals, a
subsidiary of SAP, and Plumtree and customer relationship
management vendors such as Siebel and PeopleSoft.


Many of our competitors have longer operating
histories and significantly greater financial, technical,
marketing and other resources than we do and may be able to
respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more
extensive customer bases that they can use to gain market share.
These competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies
and offer more attractive terms to purchasers than we can.
Moreover, our current and potential competitors, such as
Microsoft, may bundle their products in a manner that may
discourage users from purchasing our products. In addition,
current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties to enhance their products and expand their
markets. Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.

Competition could materially and adversely affect
our ability to obtain revenues from license fees from new or
existing customers and professional services revenue from
existing customers. Further, competitive pressures could require
us to reduce the price of our software products. In either case,
our business, operating results and financial condition would be
materially and adversely affected.



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

Historically, we have derived a significant
portion of our revenues from existing customers that purchase
our support and maintenance services and enhanced versions of
our products. Retention of our existing customer base requires
that we provide high levels of customer service and product
support to help our customers maximize the benefits that they
derive from our products. To compete, we must introduce
enhancements and new versions of our products that provide
additional functionality. Further, we must manage the transition
from our older products so as to minimize the disruption to our
customers caused by such migration and integration with the
customers information technology platform. If we are
unable to continue to obtain significant revenues from our
existing customer base, our ability to grow our business would
be harmed and our competitors could achieve greater market share.



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

On June 27, 2003, we entered into an
original equipment manufacturer, or OEM, agreement with IBM
under which we agreed to offer IBMs WebSphere Internet
infrastructure software as part of our packaged software
offerings. Market acceptance of our new relationship with IBM is
important to our future success and is subject to a number of
significant risks, many of which are outside our control. These
risks include:



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

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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | Our arrangement with IBM may cause confusion
    among current and prospective customers as to our product focus
    and direction.

If our new relationship with IBM does not achieve
market acceptance, our business and operating results may 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.

Since our potential customers often rely on
third-party systems integrators to develop, deploy and manage
Web sites for conducting commerce on the Internet, we cultivate
relationships with systems integrators to encourage them to
support our products. We do not, however, have written
agreements with our systems integrators, and they are not
required to implement solutions that include our products or to
maintain minimum sales levels of our products. Our revenues
would be reduced if we fail to train a sufficient number of
systems integrators adequately or if systems integrators devote
their efforts to integrating or co-selling products of other
companies. Any such reduction in revenue would not be
accompanied by a significant offset in our expenses. As a
result, our operating results would suffer and the price of our
common stock probably would fall.

In 2003, approximately 50% of our product license
revenues related to our relationships with systems integrators
and value added resellers. Since a substantial portion of our
product license revenues are related to our relationships with
systems integrators and our potential customers often rely on
third-parties to develop, deploy and manage Web sites for
conducting commerce on the Internet, we cultivate relationships
with systems integrators and value added resellers to encourage
them to create demand for and support our products.

Our systems integrators and value added resellers
are not required to implement solutions that include our
products or to maintain minimum sales levels of our products. If
we fail to train our systems integrators or value added
resellers, including a sufficient number of accredited partners
and certified professionals, we believe that the product license
revenues resulting from our relationships with these channel
partners will decrease. In addition, if systems integrators or
value added resellers devote their efforts to integrating or
reselling competitors products our product revenues would
decline. Any such reduction in revenue would not be accompanied
by a significant offset in our expenses. As a result, our
operating results would suffer and the price of our common stock
probably would fall.



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

We sell products through resellers and original
equipment manufacturers. In some instances, we target our direct
selling efforts toward markets that are also served by some of
these resellers. This competition may limit our ability to sell
our products and services directly in these markets and may
jeopardize, or result in the termination of, these relationships.



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

Our professional services often involve the
development of custom software applications for specific
customers. In some cases, customers retain ownership or impose
restrictions on our ability to use the technologies developed
from these projects. Issues relating to the ownership of
software can be complicated, and disputes could arise that
affect our ability to resell or reuse applications we develop
for customers.

We seek to protect the source code for our
proprietary software both as a trade secret and as a copyrighted
work. However, because we make the source code available to some
customers, third parties may be more likely to misappropriate
it. Our policy is to enter into confidentiality agreements with
our employees, consultants, vendors and customers and to control
access to our software, documentation and other proprietary
information. Despite these precautions, it may be possible for
someone to copy our software or other proprietary information
without authorization or to develop similar software
independently.

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In recent years, there has been significant
litigation in the United States involving patents and other
intellectual property rights. We could incur substantial costs
in prosecuting or defending any intellectual property
litigation. If we sue to enforce our rights or are sued by a
third party that claims that our technology infringes its
rights, the litigation could be expensive and could divert our
management resources. In February 2000, we settled a lawsuit
filed by BroadVision, which alleged that we were infringing on a
patent for a method of conducting e-commerce. As part of the
settlement, we paid BroadVision a total of $15.0 million in
license fees over a three-year period ending in 2002.

Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to
which piracy of our software exists, software piracy can be
expected to be a persistent problem. Litigation may be necessary
in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope
of the proprietary rights of others or to defend against claims
of infringement or invalidity. However, the laws of many
countries do not protect proprietary rights to as great an
extent as the laws of the United States. Any such resulting
litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our
business, operating results and financial condition. There can
be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to
meaningfully protect our intellectual property could have a
material adverse effect on our business, operating results and
financial condition.

In addition, we have agreed to indemnify
customers against claims that our products infringe the
intellectual property rights of third parties. The results of
any intellectual property litigation to which we might become a
party may force us to do one or more of the following:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | cease selling or using products or services that
    incorporate the challenged intellectual property;          
|
| |  | obtain a license, which may not be available on
    reasonable terms, to sell or use the relevant technology; or
|
| |  | redesign those products or services to avoid
    infringement.                                                  



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

The market for our products is marked by rapid
technological change, frequent new product introductions and
Internet-related technology enhancements, uncertain product life
cycles, changes in customer demands, coalescence of product
differentiators, product commoditization and evolving industry
standards. We may not be able to develop and market or acquire
new products or product enhancements that comply with present or
emerging Internet technology standards and to differentiate our
products based on functionality and performance. In addition, we
may not be able to establish strategic alliances with operating
system and infrastructure vendors that will permit migration
opportunities for our current user base. New products based on
new technologies or new industry standards could render our
existing products obsolete and unmarketable. For example,
functionality that once differentiated our products over time
has been incorporated into products offered by the major
operating system and infrastructure providers.

To succeed, we will need to enhance our current
products, develop new products on a timely basis to keep pace
with developments related to Internet technology and to satisfy
the increasingly sophisticated requirements of customers and
leverage strategic alliances with third parties in the
e-commerce field who have complementary or competing products.
E-commerce technology is complex and new products and product
enhancements can require long development and testing periods.
Any delays in developing and releasing new or enhanced products
could cause us to lose revenue opportunities and customers.

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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.

As of December 31, 2003 we had offices in
the United Kingdom, France, Germany and Italy, and additionally
had sales personnel in Spain. We derived 35% of our total
revenues in 2003 from customers outside the United States. In
December 2002, we initiated a restructuring plan, which included
the closing of our offices in Australia, Canada, and the
Netherlands at varying times during the first quarter of 2003.
Our operations outside North America are subject to additional
risks, including:



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

The impact of future exchange rate fluctuations
on our operating results cannot be accurately predicted. We may
increase the extent to which we denominate arrangements with
international customers in the currencies of the countries in
which the software or services are provided. From time to time
we may engage in hedges of a significant portion of contracts
denominated in foreign currencies. Any hedging policies
implemented by us may not be successful, and the cost of these
hedging techniques may have a significant negative impact on our
operating results. 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.

Complex software products such as ours often
contain errors or defects, particularly when first introduced or
when new versions or enhancements are released. We began
shipping the latest version of the ATG 6.2 suite of products in
the fourth quarter of 2003. Despite internal testing and testing
by customers, our current and future products may contain
serious defects. Serious defects or errors could result in lost
revenues or a delay in market acceptance.

Since our customers use our products for critical
business applications such as e-commerce, errors, defects or
other performance problems could result in damage to our
customers. They could seek significant compensation from us for
the losses they suffer. Although our license agreements
typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitations. Even if not
successful, a product liability claim brought against us would
likely be time-consuming and costly.



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

In the future, we may pursue acquisitions to
obtain complementary businesses, products, services or
technologies. An acquisition may not produce the revenues,
earnings or business synergies that we anticipated, and an
acquired business, product, service or technology might not
perform as we expected. If we pursue an acquisition, our
management could spend a significant amount of time and effort
in identifying and completing the acquisition. If we complete an
acquisition, we may encounter significant difficulties and incur
substantial expenses in integrating the operations and personnel
of the acquired company into our operations while

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preserving the goodwill of the acquired company.
In particular, we may lose the services of key employees of the
acquired company and we may make changes in management that
impair the acquired companys relationships with employees
and customers.


Any of these outcomes could prevent us from
realizing the anticipated benefits of our acquisitions. To pay
for an acquisition, we might use stock or cash. Alternatively,
we might borrow money from a bank or other lender. If we use our
stock, our stockholders would experience dilution of their
ownership interests. If we use cash or debt financing, our
financial liquidity would be reduced. We may be required to
capitalize a significant amount of intangibles, including
goodwill, which may lead to significant amortization charges. In
addition, we may incur significant, one-time write-offs and
amortization charges. These amortization charges and write-offs
could decrease our future earnings or increase our future losses.



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

During the second and third quarters of 2003, we
had corporate restructurings involving workforce reductions and
closures of excess facilities. In addition, there were changes
in assumptions and estimates connected to prior restructuring
charges and the leases that were settled during the period.
These actions resulted in recording a net restructuring benefit
of $5.4 million. In January 2003, we publicly announced a
corporate restructuring involving a workforce reduction and the
closing and consolidation of office facilities in selected
locations. These actions resulted in recording a restructuring
charge of $19.1 million in the fourth quarter of 2002. In
addition, we recorded a restructuring charge of
$75.6 million in 2001. These restructuring activities
require that we close facilities, maintain sales efforts and
provide continuing customer support and service in regions where
the sales and support staff has been reduced or eliminated,
reallocate workload among continuing employees, and seek to
reduce liability for idle lease space. The outcomes of such
restructuring activities are difficult to predict. While we
believe our restructuring and consolidation activities will
reduce our cost structure, we may not achieve the cost
reductions that we are expecting. In addition, our restructuring
activities may result in lower revenues as a result of the
decreased staff in our sales and marketing and professional
services groups or other adverse impacts on productivity that we
did not anticipate.



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

We may need to raise additional funds in the
future, for example, to develop new technologies, support an
expansion, respond to competitive pressures, acquire
complementary businesses or respond to unanticipated situations.
We may try to raise additional funds through public or private
financings, strategic relationships or other arrangements. Our
ability to obtain debt or equity funding will depend on a number
of factors, including market conditions, our operating
performance and investor interest. Additional funding may not be
available to us on acceptable terms or at all. If adequate funds
are not available, we may be required to revise our business
plan to reduce expenditures, including curtailing our growth
strategies, foregoing acquisitions or reducing our product
development efforts. If we succeed in raising additional funds
through the issuance of equity or convertible securities, the
issuance could result in substantial dilution to existing
stockholders. If we raise additional funds through the issuance
of debt securities or preferred stock, these new securities
would have rights, preferences and privileges senior to those of
the holders of our common stock. The terms of these securities,
as well as any borrowings under our credit agreement, could
impose restrictions on our operations.



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

We write our software in the Java computer
programming language developed by Sun Microsystems and we
incorporate J2EE, Java Runtime Environment, Java Naming and
Directory Interface, Java Servlet Development Kit, Java
Foundation Classes, JavaMail and JavaBeans Activation Framework
into our products under licenses granted to us by Sun. Our
ATG 6.2 Relationship Management Platform has been designed
to support Suns J2EE standards. If Sun were to decline to
continue to allow us to use these technologies for any reason,
we would be required to (a) license the equivalent
technology from another source, (b) rewrite the

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technology ourselves or (c) rewrite portions
of our software to accommodate the change or no longer use the
technology.


While a number of companies have introduced Web
applications based on Java, Java could fall out of favor, and
support by Sun Microsystems or other companies could decline.
Moreover, our new ATG 6.2 Relationship Management Platform
is designed to support Suns Java 2 Platform, Enterprise
Edition, or J2EE, standards for developing modular Java programs
that can be accessed over a network. We have licensed the J2EE
brand and certification tests from Sun. There can be no
assurance that these standards will be widely adopted, that we
can continue to support J2EE standards established by Sun from
time to time or that the J2EE brand will continue to be made
available to us on commercially reasonable terms. If Java or
J2EE support decreased or we could not continue to use Java or
related Java technologies or to support J2EE, we might have to
rewrite the source code for our entire product line to enable
our products to run on other computer platforms. Also, changes
to Java or J2EE standards or the loss of our license to the J2EE
brand could require us to change our products and adversely
affect the perception of our products by our customers. If we
were unable to develop or implement appropriate modifications to
our products on a timely basis, we could lose revenue
opportunities and our business could be harmed.

Risks Related To the Internet
Industry



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

Our success will depend heavily on the continued
use of the Internet for e-commerce. The recent United States
economic downturn reduced demand for our products as customers
and potential customers delayed or cancelled the implementation
of online marketing, sales and service applications. If the
market for our products and services fails to mature, we will be
unable to execute our business plan. Adoption of electronic
commerce and online marketing, sales and service applications,
particularly by those companies that have historically relied
upon traditional means of commerce, will require a broad
acceptance of different methods of conducting business. Our
future revenues and profits will substantially depend on the
Internet being accepted and widely used for commerce and
communication. If Internet commerce does not continue to grow or
grows more slowly than expected, our future revenues and profits
may not meet our expectations or those of analysts. Similarly,
purchasers with established patterns of commerce may be
reluctant to alter those patterns or may otherwise resist
providing the personal data necessary to support our consumer
profiling capability.



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

As e-commerce evolves, federal, state and foreign
agencies could adopt regulations covering issues such as user
privacy, content and taxation of products and services. If
enacted, government regulations could limit the market for our
products and services or could impose burdensome requirements
that render our business unprofitable. Although many regulations
might not apply to our business directly, we expect that laws
regulating the solicitation, collection or processing of
personal and consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain
types of information and content from being transmitted over the
Internet. The prohibitions scope and the liability
associated with a violation are currently unsettled. In
addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld
in the future. It is possible that legislation could expose
companies involved in e-commerce to liability, which could limit
the growth of e-commerce generally. Legislation like the
Telecommunications Act and the Communications Decency Act could
dampen the growth in Web usage and decrease its acceptance as a
medium of communications and 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.

Businesses use our ATG Adaptive Scenario Engine
product to develop and maintain profiles to tailor the content
to be provided to Web site visitors. When a visitor first
arrives at a Web site, our software creates a

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profile for that visitor. If the visitor
registers or logs in, the visitors identity is added to
the profile, preserving any profile information that was
gathered up to that point. ATG Adaptive Scenario Engine product
tracks both explicit user profile data supplied by the user as
well as implicit profile attributes derived from the users
behavior on the Web site. Privacy concerns may cause visitors to
resist providing the personal data or to avoid Web sites that
track the Web behavioral information necessary to support our
profiling capability. More importantly, even the perception of
security and privacy concerns, whether or not valid, may
indirectly inhibit market acceptance of our products. In
addition, legislative or regulatory requirements may heighten
these concerns if businesses must notify Web site users that the
data captured after visiting Web sites may be used to direct
product promotion and advertising to that user. Other countries
and political entities, such as the European Economic Community,
have adopted such legislation or regulatory requirements. The
United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer
privacy concerns are not adequately addressed, our business,
financial condition and operating results could be harmed.


Our products use cookies to track
demographic information and user preferences. A
cookie is information keyed to a specific user that
is stored on a computers hard drive, typically without the
users knowledge. Cookies are generally removable by the
user, although removal could affect the content available on a
particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental
bodies in the United States and other countries have urged
passage of laws limiting or abolishing the use of cookies. If
such laws are passed or if users begin to delete or refuse
cookies as a common practice, demand for our personalization
products could be reduced.

Risks Related To The Securities Markets And
Our Stock



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

The market price of our common stock has
fluctuated in the past and is likely to continue to be highly
volatile. For example, the market price of our common stock has
ranged from $.58 per share to $126.88 per share since
our initial public offering in July 1999. Fluctuations in market
price and volume are particularly common among securities of
Internet and software companies. The market price of our common
stock may fluctuate significantly in response to the following
factors, some of which are beyond our control:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly operating results;                                                                                  
|
| |  | changes in market valuations of Internet and
    software companies;                                                            
|
| |  | our announcements of significant contracts,
    acquisitions, strategic partnerships, joint ventures or capital
    commitments;
|
| |  | our failure to complete 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.

We currently are the subject of securities class
action litigation. If a court awards damages to the plaintiffs,
the total amount could exceed the limit of our existing
insurance. This litigation also may divert managements
attention and resources. For a further description of the
pending litigation, see Part II, Item 1.
Legal Proceedings. We may be the target of similar
litigation in the future if the market for our stock becomes
volatile. While we believe that we have an appropriate amount of
insurance for class action lawsuits, we cannot be certain that
the insurance coverage will be available or, if available,
sufficient to cover our liability with respect to a specific
future action that may be brought.

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| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions in our charter
    documents and Delaware law could prevent or delay a change in
    control of our company.

Certain provisions of our charter and by-laws may
discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable, which could reduce the
market price of our common stock. These provisions include:



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 prohibiting stockholder action by
    written consent;                                                                         
|
| |  | establishing advance notice requirements for
    nominations for election to the board of directors or for
    proposing matters that can be acted on by stockholders at
    stockholder meetings; and
|
| |  | authorizing anti-takeover provisions.                                                                                                                                                                 

In addition, we adopted a shareholder rights plan
in 2001 and Delaware law may further discourage, delay or
prevent someone from acquiring or merging with us.

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

Overview

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and the
related notes contained in Item 8 of this Annual Report on
Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
number of factors, including those set forth under
Item 1. Business  Risk Factors that May
Affect Results and elsewhere in this report.

We were founded in December 1991. From 1991
through 1995, we devoted our efforts principally to building,
marketing and selling our professional services capabilities and
to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our
software products. To date, we have enhanced and released
several versions of our products. We market and sell our
products worldwide through our direct sales force, systems
integrators, technology alliances and original equipment
manufacturers.

We derive our revenues from the sale of software
product licenses and related services. Product license revenues
are derived from the sale of software licenses of our products.
Our software licenses are priced based on either the size of the
customer implementation or site license terms. Services revenues
are derived from fees for professional services, training and
software maintenance and support. Professional services include
implementation, custom application development and project and
technical consulting. We bill professional service fees
primarily on a time and materials basis or in some cases, on a
fixed-price schedule defined specifically in our contracts.
Software maintenance and support arrangements are priced based
on the level of services provided. Generally, customers are
entitled to receive software updates, maintenance releases as
well as on-line and telephone technical support for an annual
maintenance fee. Training is billed as services are provided.

As of December 31, 2003 we had offices in
the United Kingdom, France, Germany, Italy, and the United
States and sales personnel located in Spain. Revenues from
customers outside the United States accounted for 35% of our
total revenues in 2003, 30% in 2002 and 34% in 2001.

Critical Accounting Policies and
Estimates

This managements discussion and analysis of
financial condition and results of operations discusses our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and judgments, including
those related to revenue recognition, the allowance for doubtful
accounts, research and development costs, restructuring
expenses, the impairment of long-lived assets and income taxes.
Management bases its estimates and judgments on historical
experience, known trends or events and various other factors
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting
policies to be both those most important to the portrayal of our
financial condition and those that require the most subjective
judgment.



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

Not only is revenue recognition a key component
of our results of operations, the timing of our revenue
recognition also determines the timing of certain expenses, such
as commissions. In measuring revenues, we follow the specific
guidelines of SOP 97-2, Software Revenue Recognitionand SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2 requires that four

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basic criteria must be met before revenue can be
recognized: (1) persuasive evidence that an arrangement
exists via a signed license agreement; (2) physical or
electronic delivery has occurred including the availability of
license keys or services rendered; (3) the fee is fixed or
determinable representing amounts that are due unconditionally
with no future obligations under customary payment terms; and
(4) collectibility is probable. In addition, revenue
results are difficult to predict and any shortfall or delay in
recognizing revenue could cause our operational results to vary
significantly from quarter to quarter and could result in future
operating losses.


In accordance with SOP 97-2 and
SOP 98-9, revenues from software product license agreements
are recognized upon execution of a license agreement and
delivery of the software, provided that the fee is fixed or
determinable and deemed collectible by management. If conditions
for acceptance are required subsequent to delivery, revenues are
recognized upon customer acceptance if such acceptance is not
deemed to be perfunctory. In multiple element arrangements, we
use the residual value method in accordance with SOP 97-2
and SOP 98-9. Revenue earned on software arrangements
involving multiple elements which qualify for separate element
accounting treatment is allocated to each undelivered element
using the relative fair values of those elements based on vendor
specific objective evidence with the remaining value assigned to
the delivered element, the software license. Typically our
software licenses do not include significant post-delivery
obligations to be fulfilled by us and payments are due within a
three-month period from the date of delivery. Consequently,
license fee revenue is generally recognized when the product is
shipped. Revenues from software maintenance agreements are
recognized ratably over the term of the maintenance period,
which is typically one year. We enter into reseller arrangements
that typically provide for sublicense fees payable to us based
upon a percentage of our list price. Revenues are recognized
under reseller agreements as earned for guaranteed minimum
royalties, or based upon actual sales by the resellers. We do
not grant our resellers the right of return or price protection.

Revenues from professional service arrangements
are recognized as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed
collectible by management. Amounts collected prior to satisfying
the above revenue recognition criteria are reflected as deferred
revenue. Unbilled services represent service revenues that have
been earned by us in advance of billings. Deferred revenue
primarily consists of advance payments related to support and
maintenance and service agreements.

We principally recognize professional services
revenues on a time-and-material basis. From time to time we
enter into fixed-price service arrangements. In those
circumstances in which services are essential to the
functionality of the software, we apply the
percentage-of-completion method, and in those situations when
only professional services are provided, we apply the
proportional performance method. Both of these methods require
that we track the effort expended and the effort expected to
complete a project. The most significant assumption by
management in accounting for this type of arrangement is the
estimated time to complete the project. Significant deviations
in actual results from managements estimates with respect
to one or more projects could significantly impact the timing of
revenue recognition and could result in significant losses on
these projects. To date, our actual results in completing
projects have not deviated significantly from managements
estimates of the time to complete those projects.



| |                                     
| | ------------------------------------
| | Accounts Receivable and Bad
    Debt

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. We continuously monitor collections
and payments from our customers and determine the allowance for
doubtful accounts based upon historical experience and specific
customer collection issues. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances would be
required.



| |                                   
| | ----------------------------------
| | Research and Development
    Costs

We account for research and development costs in
accordance with Statement of Financial Accounting Standards
No. 2, Accounting for Research and Development Costs(FAS 2), and FAS 86, Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed(FAS 86), which specifies that costs

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incurred internally to develop computer software
products should be charged to expense as incurred until
technological feasibility is reached for the product. Once
technological feasibility is reached, all software costs should
be capitalized until the product is made available for general
release to customers. Judgment is required in determining when
technological feasibility is established. We believe that the
time period from reaching technological feasibility until the
time of general product release is very short. Costs incurred
after technological feasibility is reached are not material, and
accordingly, all such costs are charged to research and
development expense as incurred.




| |                       
| | ----------------------
| | Restructuring Expenses

During 2003, 2002 and 2001, we recorded net
restructuring (benefits)/ charges of $(10.5) million,
$19.0 million and $75.6 million, respectively,
pertaining to the closure and consolidation of excess
facilities, impairment of assets as discussed below, employee
severance benefits and settlement of certain contractual
obligations. These charges and benefits were recorded in
accordance with FAS 146, Accounting for Costs Associated
with Exit or Disposal Activities, FAS 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefitsand Staff Accounting Bulletin, and SAB, 100,
Restructuring and Impairment Charges. The 2002 and 2001
charges were recorded in accordance with Emerging Issues Task
Force, or EITF, Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring), FAS 88, and SAB 100. In determining
the charges to record, we made certain estimates and judgments
surrounding the amounts ultimately to be paid for the actions we
have taken. At December 31, 2003, there are various
accruals recorded for the costs to exit certain facilities and
lease obligations, which may be adjusted periodically for either
resolution of certain contractual commitments or changes in
estimates of sublease income or the period of time the
facilities will be vacant and subleased. Although we do not
anticipate additional significant changes to our restructuring
accruals, the actual costs may differ from those recorded in the
event that the subleasing assumptions require adjustment due to
changes in economic conditions surrounding the real estate
market or we terminate our lease obligations prior to the
scheduled termination dates. Such changes had a material impact
to our operating results in 2003 and could have a material
impact on our operating results in the future.

In order to estimate the costs related to our
restructuring efforts, management made its best estimates of the
most likely expected outcomes of the significant actions to
accomplish the restructuring. These estimates principally
related to charges for excess facilities and included estimates
of future sublease income, future net operating expenses of the
facilities, brokerage commissions and other expenses. The most
significant of these estimates related to the timing and extent
of future sublease income that would reduce our lease
obligations. Included in our accrued restructuring balance at
December 31, 2003 was estimated sublease income of
$.8 million, net of adjustments. We based our estimates of
sublease income on, among other things, (a) opinions of
independent real estate experts, (b) current market
conditions and rental rates, (c) an assessment of the time
period over which reasonable estimates could be made,
(d) the status of negotiations with potential subtenants
and (e) the locations of the facilities. These estimates,
together with other estimates made by us in connection with the
restructuring actions, may vary significantly from the actual
results, depending in part on factors beyond our control. For
example, the actual results will depend on our success in
negotiating with lessors, the time periods required for us to
locate and contract suitable subleases and the market rental
rates at the time of such subleases. Adjustments to the
facilities reserve may be required if actual lease settlement
costs or sublease income differ from the amounts previously
estimated. We review the status of our restructuring activities
on a quarterly basis and, if appropriate, record changes to our
restructuring obligations in our financial statements for such
quarter based on managements then-current estimates.



| |                                                
| | -----------------------------------------------
| | Impairment or Disposal of Long Lived
    Assets

We review our long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable. Recoverability of these
assets is measured by comparison of their carrying amount to
future undiscounted cash flows the assets are expected to
generate. If such assets are considered impaired, the impairment
to be recognized is equal to the amount by which the carrying
value of

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the assets exceed their fair market value
determined by either a quoted market price, if any, or a value
determined by utilizing a discounted cash flow technique. In
assessing recoverability, we must make assumptions regarding
estimated future cash flows and discount factors. If these
estimates or related assumptions change in the future, we may be
required to record impairment charges.


As a result of our restructuring activities in
2003, 2002 and 2001, we evaluated the realizability of our
long-lived assets including fixed assets and leasehold
improvements related to our restructured facility leases and
intangible assets consisting primarily of unamortized goodwill.
In 2003 and 2002, we determined that $78,000 and
$1.7 million, respectively, of furniture and fixtures,
computer equipment and software were impaired as a result of our
decision to abandon the assets because of the termination of
employees and related closures of offices in our 2003, 2002 and
2001 restructuring plans. These assets are no longer being used
or will not be used in the future upon completion of the
restructuring activities. In addition, in 2003 and 2002 we
deemed $232,000 and $909,000, respectively, of leasehold
improvements to be impaired due to exiting certain office
locations, and the estimated sublease income was not sufficient
to recover the assets carrying value. In 2001, we determined
that $7.7 million of leasehold improvements and
$2.2 million of furniture, fixtures and equipment were
impaired as a result of these restructured operating leases. In
addition we determined that approximately $169,000 and
$1.4 million in 2003 and 2001, respectively, of purchased
software was impaired due to our revised product development
strategy. Lastly we wrote-off the remaining unamortized goodwill
of $4.0 million due to the closure and abandonment of two
professional service acquisitions completed in fiscal year 2000.



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

We account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes(FAS 109) which requires
that deferred tax assets and liabilities be recognized using
enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and
liabilities. FAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. We evaluate quarterly the realizability of our
deferred tax assets and adjust the amount of such allowance, if
necessary. At December 31, 2003 and 2002, we have provided
a full valuation allowance against our net deferred tax assets
due to the uncertainty of their realizability.

In addition, we have provided for potential
amounts due in various foreign tax jurisdictions. Judgment is
required in determining our worldwide income tax expense
provision. In the ordinary course of global business, there are
many transactions and calculations where the ultimate tax
outcome is uncertain. Some of these uncertainties arise as a
consequence of cost reimbursement arrangements among related
entities. Although we believe our estimates are reasonable, no
assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in
our historical income tax provisions and accruals. Such
differences could have a material impact on our income tax
provision and operating results in the period in which such
determination is made. In the fourth quarter of 2003 we reversed
previously accrued taxes of $332,000 for foreign locations due
to a change in our estimates of potential amounts due in those
locations.

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Results of Operations

The following table sets forth statement of
operations data as percentages of total revenues for the periods
indicated:

|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |    |     | 
|------------------------------------------------------------- | ------------------------------- | ------------------------ | - | ---- | --- | ---- | --- | -- | --- |  | ---- | -- | --- | 
|                                                              |                                 |                         
|                                                              |                                 | Year Ended December 31, 
|                                                              |                                 |                         
|                                                              |                                 | 2003                     |   | 2002 |     | 2001
|                                                              |                                 |                          |   |      |     |     
|Revenues:                                                     |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              | Product license                 |                          |   | 37   | %   |      |     | 48 | %   |  |      | 55 | %  
|                                                              | Services                        |                          |   | 63   |     |      |     | 52 |     |  |      | 45 |    
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              |                                 | Total revenues           |   |      | 100 |      |     |    | 100 |  |      |    | 100 | 
|Cost of revenues:                                             |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              | Product license                 |                          |   | 3    |     |      |     | 4  |     |  |      | 4  |    
|                                                              | Services                        |                          |   | 27   |     |      |     | 33 |     |  |      | 34 |    
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              |                                 | Total cost of revenues   |   |      | 30  |      |     |    | 37  |  |      |    | 38  | 
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              | Gross margin                    |                          |   | 70   |     |      |     | 63 |     |  |      | 62 |    
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|Operating expenses:                                           |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              | Research and development        |                          |   | 25   |     |      |     | 22 |     |  |      | 22 |    
|                                                              | Sales and marketing             |                          |   | 43   |     |      |     | 42 |     |  |      | 67 |    
|                                                              | General and administrative      |                          |   | 13   |     |      |     | 11 |     |  |      | 17 |    
|                                                              | Restructuring (benefit) charges |                          |   | (14  | )   |      |     | 19 |     |  |      | 54 |    
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|                                                              |                                 | Total operating expenses |   |      | 66  |      |     |    | 94  |  |      |    | 159 | 
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|Income (loss) from operations                                 |                                 |                          | 3 |      |     |      | (31 | )  |     |  | (98  | ) 
|Interest and other income, net                                |                                 |                          | 2 |      |     |      | 2   |    |     |  | 4    |   
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|Income (loss) before (benefit) provision for
    income taxes |                                 |                          | 5 |      |     |      | (29 | )  |     |  | (94  | ) 
|(Benefit) provision for income taxes                          |                                 |                          |  |      |     |      |    |    |     |  | 17   |   
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   
|Net income (loss)                                             |                                 |                          | 6 | %    |     |      | (29 | )% |     |  | (111 | )%
|                                                              |                                 |                          |   |      |     |      |     |    |     |  |      |   

The following table sets forth, for the periods
indicated, the cost of product license revenues as a percentage
of product license revenues and the cost of services revenues as
a percentage of services revenues:

|                                 |                                          |                         |    |      |  |      |    |    |  |  |    |    | 
|-------------------------------- | ---------------------------------------- | ----------------------- | -- | ---- |  | ---- | -- | -- |  |  | -- | -- | 
|                                 |                                          |                        
|                                 |                                          | Year Ended December 31,
|                                 |                                          |                        
|                                 |                                          | 2003                    |    | 2002 |  | 2001
|                                 |                                          |                         |    |      |  |     
|Cost of product license revenues |                                          |                         | 8  | %    |  |      | 9  | %  |  |  | 8  | % 
|                                 | Gross margin on product license revenues |                         |    | 92   |  |      |    | 91 |  |  |    | 92 | 
|Cost of services revenues        |                                          |                         | 44 |      |  |      | 64 |    |  |  | 75 |   
|                                 | Gross margin on services revenues        |                         |    | 56   |  |      |    | 36 |  |  |    | 25 | 



| |                                                 
| | ------------------------------------------------
| | Years ended December 31, 2003, 2002
    and 2001



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

Total revenues decreased 29% to
$72.5 million in 2003 from $101.5 million in 2002. The
decrease was primarily attributable to a shift in our business
focus during 2003 from infrastructure products to application
products, particularly in the e-commerce and self service area.
As a result, we experienced a decrease in product license
revenues and services revenues relating to our infrastructure
products business. Further, in 2003 we began developing several
new application products that did not generate any revenues in
2003. Our focus going forward is principally on e-commerce and
self service applications that are expected to generate revenues
beginning in 2004. Revenues generated from international
customers decreased to $25.3 million, or

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35% of total revenues, in 2003, from
$30.1 million, or 30% of total revenues, in 2002. We expect
total revenues to increase in 2004 as we launch new products and
we expect international revenues as a percentage of total
revenues to remain at approximately 30-35%.


Total revenues decreased 28% to
$101.5 million in 2002 from $140.3 million in 2001.
The decrease was primarily attributable to the slowing economy,
uncertainty of the recovery of the global economy, reduced
information technology spending among our customer base and the
lengthening of the sales cycle. Revenues generated from
international customers decreased to $30.1 million, or 30%
of total revenues, in 2002 from $47.6 million, or 34% of
total revenues, in 2001.

No individual customer accounted for more than
10% of total revenues in 2003, 2002 or 2001.



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

Product license revenues decreased 44% to
$27.2 million in 2003 from $48.8 million in 2002. The
decrease was primarily attributable to a shift in our business
focus during 2003 from infrastructure products, to application
products particularly in the e-commerce and self service area.
As a result, we experienced a decrease in our infrastructure
products business. Further, in 2003 we began developing several
new application products that did not generate any revenues in
2003. Our focus going forward is principally on e-commerce and
self service applications that are expected to generate revenues
beginning in 2004. The decline in product license revenues in
2003 as compared to 2002 is attributable to reduced sales volume
in terms of both the number and size of transactions with
customers. Product license revenues generated from international
customers decreased to $11.6 million in 2003 from
$15.4 million in 2002. We expect product license revenues
to increase slightly in 2004 and to remain about the same as a
percentage of total revenues.

Product license revenues decreased 36% to
$48.8 million in 2002 from $76.6 million in 2001. The
decrease was primarily attributable to the slowing economy,
reduced information technology spending among our customer base
and the lengthening of the sales cycle. Product license revenues
generated from international customers decreased to
$15.4 million in 2002 from $26.4 million in 2001.

Product license revenues as a percentage of total
revenues for 2003, 2002 and 2001 were 37%, 48% and 55%,
respectively. We expect this percentage to increase to between
40% and 50% in 2004.

Our resellers generally receive a discount from
our list prices. The extent of any discount is based on
negotiated contractual agreements between us and the reseller.
We do not grant our resellers the right of return, price
protection or favorable terms. We rely upon resellers to market
and sell our products to governmental entities and to customers
in geographic regions where it is not cost effective for us to
reach end users directly. We have approximately 50 active
resellers. No single reseller generates a significant amount of
our total revenues.

The table below sets forth product revenues
recognized from reseller arrangements for the years ended 2003,
2002 and 2001:

|                      |  |      |       |      |  |      |       |   |  |   |       |  
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                      |  | 2003 |       | 2002 |  | 2001
|                      |  |      |       |      |  |     
|Reseller revenues     |  | $    | 6,537 |      |  | $    | 9,154 |   |  | $ | 7,261 |  
|% of product revenues |  |      | 24    | %    |  |      | 19    | % |  |   | 9     | %



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

Services revenues decreased 14% to
$45.3 million in 2003 from $52.7 million in 2002. The
decrease was attributable to decreased services volume
associated with decreased software license revenues as well as a
reduction in our services capacity as we reduced headcount in
professional services. We expect services revenues to be flat to
slightly higher in 2004 and to remain about the same as a
percentage of total revenues.

Support and maintenance revenues were 69% of
total services revenues in 2003 as compared to 61% in 2002.
Support revenues, in absolute dollars, were slightly lower
during 2003 due primarily to declining product revenues,
partially offset by successful maintenance renewal and
reinstatement efforts during 2003. We expect

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support and maintenance revenues to remain flat
in 2004. This is due to increases from new maintenance revenues
associated with expected increased 2004 product revenues offset
by a portion of existing customers terminating their support
coverage.


Services revenues decreased 17% to
$52.7 million in 2002 from $63.7 million in 2001. The
decrease was primarily attributable to the slowing economy,
reduced information technology spending, declining product
revenues and a reduction in our services capacity as we
increased our use of system integrators on service engagements.
Additionally, as a result of lower product sales, support and
maintenance revenues have decreased.

Support and maintenance revenues were 61% of
total service revenues in 2002 as compared to 51% in 2001.
However, the increase in absolute dollars from 2001 to 2002 was
only $700,000. Support revenues were higher during 2002 due to
additional support required by customers migrating to newer
versions of ATG products.

Services revenues as a percentage of total
revenues for 2003, 2002 and 2001 were 63%, 52% and 45%,
respectively.



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

Cost of product license revenues includes salary
and related benefits costs of fulfillment and engineering staff
dedicated to maintenance of products that are in general
release, the amortization of licenses purchased in support of
and used in the Companys products and royalties paid to
vendors whose technology is incorporated into our products.

Cost of product license revenues decreased 50% to
$2.1 million in 2003 from $4.3 million in 2002. This
decrease was primarily related to lower product revenues and a
decline in amortization of $2.3 million related to the
BroadVision settlement due to the expiration of amortization as
of December 31, 2002. In February 2000, we settled a
lawsuit filed by BroadVision in December 1998, which alleged
that we were infringing on a patent for a method of conducting
electronic commerce. In connection with the settlement
agreement, we agreed to pay BroadVision a total of
$15.0 million for a perpetual license. Of this amount, we
recognized $8.0 million in 1999 in cost of product license
revenues as a settlement for historical use of the technology,
and we recorded the remaining $7.0 million as a perpetual
license to use the patented technology in our products in the
future. We amortized this asset over an estimated remaining
useful life of three years. As a result, cost of product license
revenues includes amortization expense of approximately
$2.3 million in each of 2002 and 2001. The estimated useful
life of the perpetual license ended on December 31, 2002,
and we therefore did not record any cost of product license
revenues related to the BroadVision settlement in 2003. The
decline in cost of product license revenues was partially offset
by an increase in royalty fees of approximately $143,000 payable
to original equipment manufacturers and $169,000 to reduce the
carrying value of third-party software embedded into one of our
products based on expected net future cash flows to be generated
from this software. We expect cost of product license revenues
to remain flat or decrease slightly in 2004 as compared with
2003.

In 2003, we recorded a charge in cost of product
license of $169,000 to reduce the carrying value of third-party
software embedded into one of our products, which is a minor
component of our suite of products, to its net realizable value
of $210,000 based on managements best estimate of future
net cash flows to be generated from the sale of the software to
customers. We have discontinued marketing of this software and
have ceased future development work specifically related to this
third-party software. However, we have not changed our overall
product strategy for the purpose for which the software was
acquired. We are in discussions with other vendors, but do not
expect this change to impact our future product offering.

Cost of product license revenues decreased 28% to
$4.3 million in 2002 from $6.0 million in 2001. This
decrease is primarily related to an impairment charge of
approximately $1.4 million recorded in 2001 related to
purchased software to write the asset down to its net realizable
value of zero. The write-down was due to a change in our product
development strategy. The software had no alternative future
use. The remainder of the decrease in cost of product license
revenues was primarily attributable to lower product revenues.
For 2002,

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approximately half of our cost of product license
revenues related to the BroadVision settlement that was fully
paid as of December 31, 2002.


For 2003, 2002 and 2001, cost of product license
revenues as a percentage of total revenues was 3%, 4% and 4%,
respectively. We anticipate the cost of product license
revenues, as a percentage of total revenues, to be between 2%
and 4% in 2004.



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

For 2003, 2002 and 2001, gross margin on product
license revenues were 92%, or $25.0 million, 91%, or
$44.5 million, and 92%, or $70.7 million. The increase
in gross margin percentage from 2002 to 2003 was attributed to
the expiration of amortization related to the Broadvision
perpetual license, which was fully amortized by the end of 2002.
The decrease in gross margin from 2001 to 2002 was related
primarily to the impairment charge to write-down purchased
software of approximately $1.4 million and lower product
revenues.



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

Cost of services revenues includes salary and
other related costs for our professional services and technical
support staff, as well as third-party contractor expenses. Cost
of services revenues will vary significantly from year to year
depending on the level of professional services staffing, the
effective utilization rates of our professional services staff,
the mix of services performed, including product license
technical support services, the extent to which these services
are performed by us or by third-party contractors and the level
of third-party contractor fees.

Cost of services revenues decreased 41% to
$19.8 million in 2003 from $33.7 million in 2002. The
decrease was primarily attributable to a reduction in our
professional services workforce as a result of lower product
license and services revenues. Approximately 60% of the decrease
was attributable to decreased compensation costs due to a
reduction in our work force. The remaining 40% of the decrease
was due to a decrease in operating expenses as a result of our
restructuring efforts and cost-containment initiatives.

Cost of services revenues decreased 29% to
$33.7 million in 2002 from $47.8 million in 2001. The
decrease was primarily attributable to a reduction in our
professional services workforce. Approximately 45% of the
decrease was attributable to decreased compensation costs due to
a reduction in our workforce. The remaining 55% of the decrease
was due to a decrease in operating expenses as a result of our
restructuring efforts and cost containment initiatives.

For 2003, 2002 and 2001, cost of services
revenues as a percentage of total revenues were 27%, 33% and
34%, respectively. We anticipate the cost of services revenues,
as a percentage of total revenues, to be in the 24% to 27% range
in 2004.



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

For 2003, 2002 and 2001, gross margin on services
revenues were 56%, or $25.5 million, 36%, or
$19.0 million and 25%, or $15.9 million. The increase
in gross margin is attributed primarily to the increase in
support and maintenance revenue as a percentage of total
services revenue, increased utilization rates and a decrease in
our professional services workforce and operating expenses.



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

Research and development expenses consist
primarily of salary and related costs to support product
development. To date, all software development costs have been
expensed as research and development in the period incurred.

Research and development expenses decreased 19%
to $17.9 million in 2003 from $22.0 million in 2002.
The decrease was primarily attributable to reductions in our
workforce. Approximately 55% of the decrease is related to
workforce-related expenditures. Approximately 10% of the
decrease was due to a reduction in the

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use of third-party contractors. The remaining 35%
of the decrease was due to a decrease in operating expenses as a
result of our restructuring efforts and cost-containment
initiatives.


Research and development expenses decreased 28%
to $22.0 million in 2002 from $30.5 million in 2001.
The decrease was primarily attributable to reductions in our
workforce. Approximately 51% of the decrease is related to
decreased salaries and related benefits. Approximately 12% of
the decrease was due to a reduction in the use of third party
contractors. The remaining 37% of the decrease was due to a
decrease in operating expenses as a result of our restructuring
efforts and cost-containment initiatives.

For 2003, 2002 and 2001, research and development
expenses as a percentage of total revenues were 25%, 22% and
22%, respectively. Due to cost-reduction initiatives we
anticipate that research and development expenses will trend
lower as a percentage of total revenues and in absolute dollars
in 2004.



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

Sales and marketing expenses consist primarily of
salaries, commissions and other related costs for sales and
marketing personnel, travel, public relations and marketing
materials and events.

Sales and marketing expenses decreased 28% to
$31.2 million in 2003 from $43.1 million in 2002. The
decrease is primarily attributable to cost saving initiatives
that resulted from a reduction of our sales and marketing group.
Approximately 63% of the decrease was related to a decrease in
compensation and benefits costs, and 9% of the decrease was
related to a reduction in our marketing and promotional
expenses. The remaining 28% was due to a decrease in operating
expenses as a result of our restructuring efforts and
cost-containment initiatives.

Sales and marketing expenses decreased 54% to
$43.1 million in 2002 from $93.4 million in 2001. The
decrease is primarily attributable to cost-saving initiatives
that resulted from a reduction of our sales and marketing group.
Approximately 37% of the decrease was related to a decrease in
compensation and benefit costs, and 27% of the decrease was
related to a reduction in our marketing and promotional
expenses. The remaining 36% was due to a decrease in operating
expenses as a result of our restructuring efforts and
cost-containment initiatives.

For 2003, 2002 and 2001, sales and marketing
expenses as a percentage of total revenues were 43%, 42% and
67%, respectively. We expect that sales and marketing expenses
in 2004 will be in the range of 37% to 40% as a percentage of
total revenues. However sales and marketing expenses can
fluctuate as a percentage of total revenues depending on
economic conditions, program spending, the rate at which new
sales personnel become productive and the level of revenue.



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

General and administrative expenses consist
primarily of salaries and other related costs for operations and
finance employees and legal and accounting fees.

General and administrative expenses decreased 14%
to $9.5 million in 2003 from $11.1 million in 2002.
Approximately 84% of the decrease was related to a decrease in
headcount and related expenses, with the remainder related to a
decrease in professional services partially offset by an
increase in recruiting, hiring and training. We expect general
and administrative expenses to decline as a percent of revenues
in 2004.

General and administrative expenses decreased 54%
to $11.1 million in 2002 from $24.1 million in 2001.
Approximately 38% of the decrease was related to decreases in
compensation and benefit costs, and 12% of the decrease was
related to a reduction in our professional fees. Approximately
26% of the decrease was attributed to a decrease in recruiting,
hiring, travel, training and direct office expenses while
approximately 24% of the decrease was related to a decrease in
our provision for doubtful accounts due to favorable collections
experience resulting in changes in our estimates of required
reserves.

For 2003, 2002 and 2001, general and
administrative expenses as a percentage of total revenues were
13%, 11% and 17%, respectively. Due to cost-reduction
initiatives we anticipate that general and administrative
expenses will trend lower as a percentage of total revenues and
in absolute dollars in 2004.

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

As of December 31, 2003, we had an accrued
restructuring liability of $18.0 million, of which
$10.4 million related to 2001 restructuring charges,
$5.9 million related to 2002 restructuring charges, and
$1.7 million related to 2003 restructuring charges. The
long-term portion of the accrued restructuring liability was
$8.6 million.

We believe our restructuring efforts have
resulted in a cost structure that aligns us with current market
opportunities and reflects changes in our product and geographic
focus. We expect to fund the payments for our restructuring
accruals by use of our current cash and marketable securities
and from resources generated from our future operations. We do
not believe that the restructuring actions have impaired our
ability to produce competitive products in a timely fashion. All
of our restructuring actions were completed by December 31,
2003. We expect the 2003 activities to result in aggregate
annual reductions in cost of revenues, sales and marketing,
research and development and general and administrative expenses
of $4.0 to $5.0 million.

During the years ended 2003, 2002 and 2001, we
recorded net restructuring charges/(benefits) of
$(10.5) million, $19.0 million and $75.6 million,
respectively, as a result of the global slowdown in information
technology spending. The significant drop in demand in 2001 for
technology oriented products, particularly internet related
technologies, caused us to significantly scale back our prior
growth plans, resulting in a significant reduction in our
workforce and consolidation of our facilities in 2001.
Throughout 2002, the continued softness of demand for technology
products, as well as near term revenue projections, caused us to
further evaluate our marketing, sales and service resource
capabilities as well as our overall general and administrative
cost structure, which resulted in additional restructuring
actions being taken in 2002. These actions resulted in a further
reduction in headcount and consolidation of additional
facilities. In 2003, as we continued to refine our business
strategy and to consider future revenue opportunities, we took
further restructuring actions to reduce costs, including product
development costs, in order to help move us towards
profitability. The charges referred to above primarily pertain
to the closure and consolidation of excess facilities,
impairment of assets, employee severance benefits and settling
of certain contractual obligations. The 2003 charges were
recorded in accordance with FAS 146, Accounting for
Costs Associated with Exit or Disposal Activities,
FAS 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits (FAS 88) and Staff Accounting
Bulletin (SAB) 100, Restructuring and Impairment
Charges. The 2002 and 2001 charges were recorded in
accordance with Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), FAS 88 and
SAB 100.

2001 Actions

Actions taken by us in 2001 included the
consolidation and closure of excess facilities, a worldwide
workforce reduction, the write-off of certain unrealizable
assets and the settlement of certain obligations that had no
future benefit. In the second quarter of 2001 we recorded a
restructuring charge of $44.2 million, and in the fourth
quarter of 2001 we recorded a restructuring charge of
$31.4 million. In connection with these actions, we also
recorded an impairment charge in cost of product licenses for
purchased software of $1.4 million. Total restructuring
charges for 2001 totaled $75.6 million.

30



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##### Table of Contents



A summary of the charges and subsequent
adjustments of the restructuring accruals is as follows (in
thousands):

|                                               |  |              |        |                    |  |              |       |                |  |                   |        |   |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ------------------ |  | ------------ | ----- | -------------- |  | ----------------- | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                               |  |              |        | 2001               |  | 2001         |       |                |  |                  
|                                               |  |              |        | Adjustments in     |  | Adjustments  |       |                |  | Accrued          
|                                               |  |              |        | Estimates          |  | in Estimates |       |                |  | Restructuring    
|                                               |  |              |        | Resulting in       |  | Resulting in |       | Write-offs and |  | Balance as of    
|                                               |  | 2001 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 in     |  | Adjustments  |       |                |  | Accrued          
|                                               |  | Restructuring     |        | Estimates          |  | in Estimates |       |                |  | Restructuring    
|                                               |  | Balance as of     |        | Resulting in       |  | Resulting in |       | Write-offs and |  | 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 in     |  | Adjustments  |       |                |  | Accrued          
|                                               |  | Restructuring     |        | Estimates          |  | in Estimates |       |                |  | Restructuring    
|                                               |  | Balance as of     |        | Resulting in       |  | Resulting in |       | Write-offs and |  | 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 | 
|                                               |  |                   |        |                    |  |              |       |                |  |                   |         |   |  |   |        |   |  |   |        | 



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

During 2001, we recorded facility-related charges
of $59.4 million of which $38.1 million was recorded
in the second quarter and $21.3 million was recorded in the
fourth quarter. The facilities-related charges comprise excess
rental space for offices worldwide, net of estimates for vacancy
periods and sublease income based on then-current real estate
market data, and related write-offs of abandoned leasehold
improvements and fixed assets of $7.7 million and
$2.2 million, respectively, which were directly related to
the excess office facilities. The estimated sublease income was
$25.9 million based on rental rates ranging from $18 to
$40 per

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square foot with estimated vacancy periods prior
to the expected sublease income ranging from 10 to
15 months. During the fourth quarter of 2001, we recorded
an adjustment to increase the facility-related costs for a
change in estimate of the lease obligations for two leases by
$9.7 million as a result of a market analysis indicating
lower sublease rates and longer vacancy periods due to the
continued weakening of the real estate market. The sublease
income was adjusted by decreasing anticipated sublease rates
from the range of $18 to $40 to the range of $18 to $35 per
square foot and extending the initial vacancy periods by
approximately 9 months. In addition, we reduced our lease
accruals by $8.2 million for a lease settlement in
consideration of a buy-out totaling $9.3 million, which is
being paid ratably over 4.5 years.


During 2002, we recorded an adjustment to
increase the facilities-related portion of the 2001 charge by an
additional $2.2 million for changes to sublease and vacancy
assumptions due to the continued weakening in the real estate
market. The sublease income was adjusted by decreasing two
anticipated sublease rates to $18 from $25 per square foot
and extending the initial vacancy periods by 7 months.
These changes resulted in an estimated reduction of sublease
income of $2.2 million. In addition, during 2002, we
executed sublease agreements for two locations and recorded a
reduction to our lease accruals of $853,000 due to favorable
sublease terms compared to our original estimates.

During 2003, we settled $51.1 million of
future lease obligations and related operating expenses for five
leases for aggregate payments of $17.1 million, resulting
in an aggregate reduction to our lease accruals relating to our
2001 restructuring activities of $11.5 million, net of
sublease and vacancy assumptions. We also recorded an additional
charge of $2.8 million for facilities-related costs,
comprising $2.3 million for updated management assumptions
of probable settlement outcomes based on the then-current
negotiations and $450,000 for updated sublease assumptions based
on current real estate market conditions extending the vacancy
period to 33 months from 12 months.

The leaseholds improvements, which will continue
to be in use, related to the facilities we vacated and are
subleasing or attempting to sublease, were written down to their
estimated fair value of zero because the estimated cash flows to
be generated by sublease income at those locations is not and
will not be sufficient to recover the carrying value of the
assets. Furniture and fixtures were written down to their fair
value based on the expected discounted cash flows they will
generate over their remaining economic life. Because these
assets ceased being used as of the end of the period in which
the write-downs were recorded, the fair value of these assets
was estimated to be zero. The assets were abandoned and disposed
of at the time of the charge.



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

As part of the 2001 restructuring actions, we
recorded charges of $7.9 million for the employee severance
cost component. We terminated the employment of 530 employees,
or 46% of our workforce, none of whom remained employed as of
June 30, 2002. Approximately 249 of these employees were
from sales and marketing, 117 from services, 101 from general
and administrative and 63 from research and development. In
addition, we settled 11,762 exchangeable shares with a certain
employee, who was terminated in connection with the
restructuring action and recorded $1.3 million as a charge
to restructuring for this settlement. During 2003, we recorded
additional charges of $229,000 for severance related to a
specific employee terminated as part of the 2001 restructuring
action.



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

The asset impairment charges included the
write-off of approximately $4.0 million of the remaining
unamortized goodwill related to the two professional service
organizations acquisitions completed in 2000. We closed these
operations and terminated the employees as part of the 2001
restructuring action, and as a result, the unamortized goodwill
was impaired and had no future value. In addition, we recorded
an impairment charge of approximately $1.4 million in cost
of product license revenues in the accompanying Consolidated
Statements of Operations related to purchased software to record
the software at its net realizable value of zero due to ATG
abandoning a certain product development strategy. The purchased
software had no future utility to us.

32



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

We recorded charges of $851,000 to write-off
certain prepaid costs for future marketing services to their
fair value of zero due to changes in our product development
strategy. As a result, the prepaid marketing cost had no future
utility to us. During 2002, we unexpectedly were able to recoup
$536,000 and record a credit for the amount received. During
2001, we also recorded $405,000 for legal and accounting
services incurred in connection with the 2001 restructuring
action.

The 2001 actions were substantially completed by
February 28, 2002.

2002 Actions

Actions taken by us in 2002 included the
consolidation and closure of excess facilities, a worldwide
workforce reduction and the write-off of certain idle assets. In
the fourth quarter of 2002, we recorded a restructuring charge
$18.2 million.

A summary of the charges and subsequent
adjustments of the restructuring accruals related to the 2002
restructuring actions is as follows (in thousands):

|                                               |  |              |        |                |  |                   |       |  |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | -------------- |  | ----------------- | ----- |  |  | - | ------ | 
|                                               |  |              |        |                |  | Accrued          
|                                               |  |              |        |                |  | Restructuring    
|                                               |  |              |        | Write-offs and |  | Balance as of    
|                                               |  | 2002 Charges |        | Payments       |  | December 31, 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 | 
|                                               |  |              |        |                |  |                   |       |  |  |   |        | 

|                                               |  |                   |        |                    |  |              |       |                |  |                   |        |   |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | ----------------- | ------ | ------------------ |  | ------------ | ----- | -------------- |  | ----------------- | ------ | - |  | - | ----- |  |  | - | ----- | 
|                                               |  |                   |        | 2003               |  | 2003         |       |                |  |                  
|                                               |  | Accrued           |        | Adjustments in     |  | Adjustments  |       |                |  | Accrued          
|                                               |  | Restructuring     |        | Estimates          |  | in Estimates |       |                |  | Restructuring    
|                                               |  | Balance as of     |        | Resulting in       |  | Resulting in |       | Write-offs and |  | Balance as of    
|                                               |  | December 31, 2002 |        | Additional Charges |  | Credits      |       | Payments       |  | December 31, 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 | 
|                                               |  |                   |        |                    |  |              |       |                |  |                   |        |   |  |   |       |  |  |   |       | 



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

During 2002, we recorded facilities-related
charges of $14.6 million. These charges included
$12.0 million for operating lease obligations, net of
assumptions for vacancy periods and sublease income based on
then-current real estate market data, for office space that was
either idle or vacated during the first quarter of 2003. This
action was completed by January 31, 2003. This charge also
included the write-off of leasehold improvements and furniture
and fixtures associated with these facilities of $948,000 and
$507,000, respectively, and computer equipment and software of
$1,158,000. The lease charge was for office space we vacated and
intend to sublease. The estimated sublease income was
$4.8 million and was based on rental rates ranging from $23
to $35 per square foot with estimated vacancy periods prior
to the expected sublease income ranging from 12 to
21 months.

During 2003, we recorded an adjustment of
$1.9 million primarily to increase our lease obligation
accrual at two locations for changes in the assumptions of the
vacancy period and sublease income. The sublease income was
adjusted by decreasing anticipated sublease rates to $18 from
$23 per square foot for one facility and from $35 to
$30 per square foot at the other location. We also extended
the initial vacancy periods from 12 to 21 months to 24
to 42 months.. These changes resulted in an estimated
reduction of sublease income of $1.8 million. In addition,
principally due to a favorable lease settlement relating to our
2002 restructuring

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activities, we reduced our lease obligations by
$7.2 million. The settlement resulted in us terminating
$10.9 million of future lease obligations and related
operating expenses for an aggregate payment of
$3.3 million, which was paid in January, 2004. As a result
of this transaction, we recorded prepaid rent of
$2.2 million increasing the accrual adjustments to
$4.1 million.


As a result of this action and the actions taken
in 2001, we wrote-off certain computer equipment and software,
aggregating $1,158,000, and furniture and fixtures, aggregating
$507,000, which were no longer being used due to the reduction
in personnel and office locations. These assets were abandoned
and written down to their fair value based on the expected
discounted cash flows they would generate over their remaining
economic life. Due to the short remaining economic life and
current market conditions for such assets, the fair value of
these assets was estimated to be zero. These assets ceased being
used either as of December 31, 2002 or in the first quarter
of 2003 and were disposed of in the quarter ended March 31,
2003. In addition, we wrote-off leasehold improvements, which
will continue to be in use, related to the facilities we are
attempting to sublease to their estimated fair value of zero
because the estimated cash flows to be generated by sublease
income at those locations will not be sufficient to recover the
carrying value of the assets.



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

As part of the 2002 restructuring action, we
recorded a charge of $3.6 million for severance and benefit
costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 125 employees, or 23% of our workforce, none of whom
remained employed at June 30, 2003. Of the
125 employees, 53 of the employees were from sales and
marketing, 45 from services, 19 from general and administrative
and 8 from research and development. We accrued employee
benefits pursuant to ongoing benefits plans and statutory
minimum requirements in foreign locations. We began the
termination process on January 6, 2003 and all employees
had been terminated by June 30, 2003. During the second
quarter of 2003, we recorded an adjustment to increase the
severance accrual by $327,000 based on final severance
settlements with certain employees at our foreign locations.
During the fourth quarter of 2003, we reduced certain severance
accruals by $86,000, primarily at our foreign locations,
primarily as a result of amounts being settled below the
recorded amounts due to the impact of movements in foreign
currency.

2003 Actions

As a result of several reorganization decisions,
we undertook plans to restructure operations in the second and
third quarters of 2003. Actions taken by us included the closure
of excess facilities, a worldwide workforce reduction and the
write-off of certain idle assets.

A summary of the charges and related activity of
the restructuring accruals is as follows (in thousands):

|                                               |  |              |       |               |  |              |     |              |  |                |     |                   |  |   |     |   |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | ------------ | ----- | ------------- |  | ------------ | --- | ------------ |  | -------------- | --- | ----------------- |  | - | --- | - |  | - | ----- |  |  | - | ----- | 
|                                               |  |              |       |               |  | 2003         |     |              |  |                |     |                  
|                                               |  |              |       | Three         |  | Adjustments  |     | 2003         |  |                |     |                  
|                                               |  | Three Months |       | Months        |  | in Estimates |     | Adjustments  |  |                |     |                  
|                                               |  | Ended        |       | Ended         |  | Resulting in |     | in Estimates |  |                |     |                  
|                                               |  | June 30,     |       | September 30, |  | Additional   |     | Resulting in |  | Write-offs and |     | Balance at       
|                                               |  | 2003         |       | 2003          |  | Charges      |     | Credits      |  | Payments       |     | December 31, 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 | 
|                                               |  |              |       |               |  |              |     |              |  |                |     |                   |  |   |     |   |  |   |       |  |  |   |       | 



| |                           
| | --------------------------
| | Second Quarter 2003 Action

During the second quarter of 2003, we recorded a
restructuring charge of $2.0 million. We also recorded an
impairment charge in cost of product license revenues of
$169,000 related to certain purchased software.

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

During the second quarter of 2003, we recorded
facilities-related charges of $1.1 million comprising
$866,000 for an operating lease related to idle office space,
$144,000 of leasehold improvements and fixed assets written down
to their fair value and $61,000 for various office equipment
leases. The lease charge was for office space we vacated and
intend to sublease. The amount of the operating lease charge was
based on assumptions from current real estate market data for
sublease income rates and vacancy rates at the location. The
estimated sublease income was $500,000 and based on a rental
rate of $35 per square foot with an estimated vacancy
period prior to the expected sublease income of 24 months.
In the fourth quarter, as a result of updated market conditions,
the estimated sublet rental rate was lowered to $30 per
square foot from $35 per square foot and the vacancy period
was extended to 36 months from 24 months resulting in
an additional charge of $227,000. In accordance with
FAS 146, we recorded the present value of the net lease
obligation.

As a result of a reduction of employees and
closure of an office location, we wrote-down computer and office
equipment to their fair value based on the expected discounted
cash flows they would generate over their remaining economic
life. Due to the short remaining economic life and current
market conditions for such assets, the fair value of these
assets was estimated to be zero. These assets ceased being used
by June 30, 2003 and were disposed of by September 30,
2003. In addition, we wrote off leasehold improvements, which
continue to be in use, related to the facility we are attempting
to sublease, to their fair value of zero because the estimated
cash flows to be generated from that location will not be
sufficient to recover the carrying value of the assets.



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

As part of the second quarter 2003 restructuring
action, we recorded a charge of $927,000 for severance and
benefit costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 32 employees, or 7.4% of our workforce, consisting of
11 employees from sales and marketing, 3 from services, 3
from general and administrative and 15 from research and
development. We accrued employee benefits pursuant to our
ongoing benefit plans for domestic locations and under statutory
minimum requirements in foreign locations. All employees were
notified of their termination as of June 30, 2003. The
termination process was completed during the fourth quarter of
2003. During the third quarter of 2003, we accrued an additional
$69,000 for employees at our foreign locations based on
managements best estimate of the final payments for
severance. During the fourth quarter of 2003, we reduced certain
severance accruals by $84,000 at our international locations as
a result of final settlements.



| |                          
| | -------------------------
| | Third quarter 2003 Action

During the third quarter of 2003, we recorded a
restructuring charge of approximately $771,000.



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

We recorded facilities-related charges of
$393,000 comprising $227,000 for an operating lease related to
idle office space and $166,000 of leasehold improvements and
fixed assets written down to their fair value. The lease charge
was for office space we vacated and intend to sublease. The
amount of the operating lease charge was based on assumptions
from current real estate market data for sublease income rates
and vacancy rates at the location. The estimated sublease income
was $216,000 and based on a rental rate of $19 per square
foot with an estimated vacancy period prior to the expected
sublease income of 12 months. During the fourth quarter, as
a result of updated market conditions, we determined that it is
unlikely we will sublet this space before the lease expires
resulting in an additional charge of $198,000. In accordance
with FAS 146, we have recorded the present value of the net
lease obligation.

As a result of a reduction of employees and the
closure of one office location, we wrote off computer and office
equipment to their fair value based on the expected discounted
cash flows they would generate over their remaining economic
life. Due to the short remaining economic life and current
market conditions for such assets, the fair value of these
assets was estimated to be zero. These assets ceased being used
prior to September 30, 2003. In addition, we wrote-down
leasehold improvements to their fair value of zero because

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the estimated cash flows to be generated from
that location will not be sufficient to recover the carrying
value of the assets.




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

We recorded a charge of $309,000 for severance
and benefit costs related to cost reduction actions taken across
the worldwide employee base. The severance and benefit costs
were for 16 employees, or 4.3% of our workforce, consisting of
7 employees from sales and marketing, 4 from services and 5
from research and development. We accrued employee benefits
pursuant to our ongoing benefit plans. All employees were
notified of their termination as of September 30, 2003, and
the termination process was completed during the fourth quarter.

Lease Obligations Accrued as part of the 2001,
2002 and 2003 restructuring activities:

|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |     | 
|------------------------------------ | --------------------------- | ------------- | - | ---- |  | ---- | ------ | ----- |  | ---- | ----- | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ---- | --- | 
|                                     |                             |               |   | 2004 |  | 2005 |        | 2006  |  | 2007 |       | 2008  |  | 2009
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |     
|                                     |                             |               |   |     
|                                     |                             | (In millions) |   |     
|Cambridge, MA                        |                             |               | * |      |  | $    | 2,069  |       |  | $    | 2,069 |       |  | $    | 1,035  |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Cambridge, MA                        |                             |               | * |      |  |      | 4,215  |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Cambridge, MA                        |                             |               |   |      |  |      | 137    |       |  |      | 137   |       |  |      | 91     |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Waltham, MA                          |                             |               |   |      |  |      | 1,466  |       |  |      | 1,466 |       |  |      | 1,466  |       |  | $ | 1,466  |       |  | $ | 1,466  |       |  | $ | 366  |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Chicago, IL                          |                             |               |   |      |  |      | 524    |       |  |      | 524   |       |  |      | 393    |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|San Francisco, CA                    |                             |               |   |      |  |      | 111    |       |  |      | 111   |       |  |      | 111    |       |  |   | 111    |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Mountain View, CA                    |                             |               | * |      |  |      | 869    |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Reading, UK                          |                             |               |   |      |  |      | 579    |       |  |      | 579   |       |  |      | 579    |       |  |   | 579    |       |  |   | 579    |       |  |   | 181  |    
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     | Facility obligations, gross |               |   |      |  |      |        | 9,970 |  |      |       | 4,886 |  |      |        | 3,675 |  |   |        | 2,156 |  |   |        | 2,045 |  |   |      | 547 | 
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Contracted and assumed sublet income |                             |               |   |      |  |      | (1,221 | )     |  |      | (435  | )     |  |      | (1,104 | )     |  |   | (1,263 | )     |  |   | (1,218 | )     |  |   | (304 | )  
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     | Net cash obligations        |               |   |      |  |      | $      | 8,749 |  |      | $     | 4,451 |  |      | $      | 2,571 |  |   | $      | 893   |  |   | $      | 827   |  |   | $    | 243 | 
|                                     |                             |               |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Assumed sub-lease income             |                             |               |   |      |  | $    | 0.0    |       |  | $    | 0.0   |       |  | $    | 0.2    |       |  | $ | 0.3    |       |  | $ | 0.2    |       |  | $ | 0.1  |    



---



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

Rental rates vary from $15.00 per square
foot to $30.00 per square foot depending upon local market
rates. Remaining vacancy periods as of December 31, 2003
vary from 18 months to 33 months depending upon
rentable square feet in the local market and recent vacancy
histories.

Rental assumptions or sublease start dates may
vary considerably from the above assumptions, which could cause
us to take an additional charge. If the estimated sublease dates
were to be extended by six months, based on our current
estimates, we would potentially have to recognize an additional
$138,000 in our statement of operations for restructuring and
other related charges. In addition, we have a history of
settling lease obligations favorably as compared with the
amounts we have accrued, which could result in a benefit.



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

Interest and other income, net decreased 34% to
$1.5 million in 2003 from $2.3 million in 2002. The
decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2003 as compared to 2002,
coupled with lower earned interest rates. Included in interest
and other income, net in 2003 were gains of $785,000 from
foreign currency exchange transactions and the re-measurement of
foreign currency denominated assets and liabilities into the
functional currency of various subsidiaries. Foreign currency
related gains in 2003 decreased $165,000 from $950,000 in 2002.

Interest and other income, net decreased 54% to
$2.3 million in 2002 from $5.0 million in 2001. The
decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2002 as compared to 2001,
coupled with lower earned interest rates. Offsetting the
decrease in interest income in 2002

36



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##### Table of Contents



were gains of $950,000 from foreign currency
exchange transactions and the re-measurement of foreign currency
denominated assets and liabilities into the functional currency
of various subsidiaries. Foreign currency related gains in 2002
increased $892,000 from $58,000 in 2001.




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

As a result of net operating losses incurred in
2003, 2002 and 2001, and after evaluating our anticipated
performance over our normal planning horizon, we have provided a
full valuation allowance for our net operating loss
carryforwards and other net deferred tax assets. Due to the
uncertainty surrounding the utilization of our net deferred tax
assets, net operating losses and research credits carryforwards,
we have recorded a 100% valuation allowance. The provision in
2001 includes a $54.9 million charge recorded in the fourth
quarter to reverse income tax benefits recognized in the first
three quarters of 2001 and to establish a valuation allowance
against our net deferred tax assets due to a change in our
assessment of the realizability of these assets. In the fourth
quarter of 2003 we reversed previously accrued taxes of $332,000
for foreign locations due to a change in our estimates of
potential amounts due in those locations. In addition, we
accrued $77,000 for estimated current period foreign taxes.

Liquidity and Capital Resources

Our capital requirements relate primarily to
facilities, employee infrastructure and working capital
requirements. Historically, we have funded our cash requirements
primarily through the public and private sales of equity
securities, commercial credit facilities and capital leases. For
the past three years, we also funded our cash requirements in
part from operations. At February 29, 2004, we had
$16.5 million in cash and cash equivalents and
$15.1 million in marketable securities.

Cash used in operating activities was
$25.8 million in 2003. This consisted primarily of net
income of $4.2 million, depreciation and amortization of
$3.9 million, non-cash restructuring charges of
$1.1 million, and a decrease in accounts receivable of
$9.9 million, offset by a decrease in accrued restructuring
of $34.4 million, accrued expenses of $5.9 million,
accounts payable of $1.4 million and an increase in
deferred rent of $3.8 million related to lease settlements.

Cash used in operating activities was
$13.2 million in 2002. This consisted of operating losses
of $29.5 million, a decrease in accounts receivable of
$5.3 million, an increase in accrued restructuring of
$6.8 million and depreciation and amortization of
$7.1 million. Other changes in working capital items
consisted primarily of $8.5 million in cash used for
accrued expenses and a decrease in deferred revenues.

Our investing activities for 2003 consisted
primarily of capital expenditures of $1.0 million and net
proceeds from maturities of marketable securities of
$13.1 million. Our investing activities for 2002 consisted
primarily of capital expenditures of $945,000, net purchases of
marketable securities of $8.7 million offset by a reduction
in restricted cash of $16.8 million, and a reduction in
other assets of $3.1 million. Assets acquired in both 2003
and 2002 consisted principally of leasehold improvements,
computer hardware and software. We expect that capital
expenditures will total approximately $2.0 million over the
next twelve months.

Net cash provided by financing activities was
$1.8 million in 2003, consisting of proceeds from stock
option exercises and our employee stock purchase plan. Net cash
provided by financing activities was $933,000 in 2002,
principally representing proceeds from stock option exercises
and the employee stock purchase plan, offset in part by payments
on long-term obligations to BroadVision. Additionally,
$1.1 million was received in the Tudor settlement, related
to preferred stock litigation that was settled in May 2002.

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

Our accounts receivable balance and days sales
outstanding, or DSO, as of December 31, 2003, 2002 and 2001
were as follows:

|                    |  |                                  |        |      |  |      |         |  |  |   |         | 
|------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                    |  | 2003                             |        | 2002 |  | 2001
|                    |  |                                  |        |      |  |     
|                    |  |                                 
|                    |  | (In thousands (except DSO data))
|DSO                 |  |                                  | 77     |      |  |      | 91      |  |  |   | 79      | 
|Revenue             |  | $                                | 72,492 |      |  | $    | 101,493 |  |  | $ | 140,338 | 
|Accounts Receivable |  | $                                | 15,364 |      |  | $    | 25,221  |  |  | $ | 30,532  | 

We note that our DSO has generally improved or
trended lower over the last 3 years due to improved
internal processes and economic changes in our customer base,
both as discussed below. The increase for December, 2002 was due
to a large payment that was due in the fourth quarter of 2002
not being received until January 2003.

Beginning in January 2002, we reorganized our
collections process globally with centralized management in the
United States. Three employees were added to the collections
function principally to focus on collections. In addition,
bi-weekly global collections and credit evaluation meetings were
implemented by management. Finally, our customer base has grown
stronger in overall quality because much of our customer base
prior to 2002 included smaller, early-stage companies, while in
2002 and 2003 our overall customer base includes a greater
percentage of larger, well-established companies.

Effective June 13, 2002, we entered into a
$15.0 million revolving line of credit with Silicon Valley
Bank, or the Bank, which provided for borrowings of up to the
lesser of $15.0 million or 80% of eligible accounts
receivable. The line of credit bore interest at the Banks
prime rate. Effective December 24, 2002 the revolving line
of credit increased to $20.0 million. The line of credit is
secured by all of our tangible and intangible intellectual and
personal property and is subject to financial covenants
including liquidity coverage and profitability.

Effective November 25, 2003, we modified our
existing working capital facility with the Bank. The line of
credit is secured by all of our tangible and intangible
intellectual and personal property and is subject to financial
covenants including liquidity coverage and profitability. The
liquidity covenant mandates we maintain $25.0 million in
cash, which includes cash equivalents and marketable securities,
at the end of each month throughout the duration of the
facility. The profitability covenant allows for net losses not
to exceed; $3.5 million for the fourth quarter of 2003,
$3.0 million for the first quarter of 2004,
$2.0 million for the second and third quarters of 2004, and
$1.0 million for the fourth quarter of 2004. We are
required to maintain $25.0 million in unrestricted cash,
which includes cash equivalents and marketable securities, at
the Bank. In the event our cash balances at the Bank fall below
$25.0 million, we will be required to pay fees and expenses
to compensate the Bank for lost income. At December 31,
2003, we were in compliance with all related financial
covenants. In the event that we do not comply with any of the
financial covenants within the line of credit or we default on
any of its provisions, the Banks significant remedies
include (1) declaring all obligations immediately due and
payable; (2) ceasing to advance money or extend credit for
our benefit; (3) applying to the obligations any balances
and deposits held by us or any amount held by the Bank owing to
or for the credit of our account; and, (4) putting a hold
on any deposit account held as collateral. If the agreement
expires or is not extended, the Bank will require outstanding
Letters of Credit, or LCs, at that time to be cash secured
on terms acceptable to the Bank. The revolving line of credit
expires on November 25, 2004.

While there were no outstanding borrowings under
the facility at December 31, 2003, we have LCs
totaling $12.0 million, which are supported by this
facility. The LCs have been issued in favor of various
landlords to secure obligations under our facility leases
pursuant to lease expiring from August, 2004 through August,
2009. The line of credit bears interest at the Banks prime
rate, which was 4.00% at December 31, 2003. As of
December 31, 2003, approximately $8.0 million was
available under the facility.

We lease our facilities and a small amount of
equipment under operating leases that expire between 2004 and
2009. The aggregate minimum annual payments under these leases
is $23.5 million, which includes

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approximately $7.3 million payable in 2004.
Of the $23.5 million, $15.2 million is for leases that
are included in restructuring. In accrued restructuring at
December 31, 2003, the $15.2 million, which excludes
settlements due in less than one year, was reduced to
$12.7 million after taking into consideration estimated
operating costs, estimated sublease income, contracted sublease
income, and vacancy periods. Of the $23.5 million in lease
payments, $22.9 million is for facility leases and
$0.6 million is for equipment leases. For additional
information relating to our commercial and contractual
commitments, see Notes 7 and 11 to our Consolidated
Financial Statements contained in Item 8 of this Annual
Report on Form 10-K.




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

At December 31, 2003, our contractual cash
obligations, which consist solely of operating leases, were as
follows (in thousands):

|                        |  |                        |        |           |  |           |       |           |  |         |        |  |  |   |       |  |  |   |     | 
|----------------------- |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ------ |  |  | - | ----- |  |  | - | --- | 
|                        |  |                       
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  |                        |        | Less than |  |           |       | After    
|Contractual Obligations |  | Total                  |        | 1 Year    |  | 1-3 Years |       | 4-5 Years |  | 5 Years
|                        |  |                        |        |           |  |           |       |           |  |        
|Lease Commitments       |  | $                      | 23,523 |           |  | $         | 7,337 |           |  | $       | 11,580 |  |  | $ | 4,145 |  |  | $ | 461 | 

In addition to these lease commitments, at
December 31, 2003, we had commitments to pay
$4.5 million related to negotiated real estate lease
settlements, primarily for the Cambridge, Massachusetts
location. Of that total, $4.2 million has been paid in 2004
and a final payment of $300,000 is scheduled to be made on
April 1, 2004. We believe that there will not be any
material real estate lease settlements beyond those completed to
date. As such, we believe that our balance of $42.4 million
in cash and cash equivalents and marketable securities at
December 31, 2003, along with other working capital and
cash generated by our operations will allow us to meet our
liquidity needs over the next twelve months. However, our actual
cash requirements will depend on many factors, including
particularly, overall economic conditions both domestically and
abroad. We may seek additional external funds through public or
private securities offerings, strategic alliances or other
financing sources. There can be no assurance that if we seek
external funding, it will be available on favorable terms, if at
all.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others(FIN 45), which requires certain guarantees
to be recorded at fair value as opposed to the current practice
of recording a liability only when a loss is probable and
reasonably estimable FIN 45 also requires a guarantor to
make significant new guaranty disclosures, even when the
likelihood of making any payments under the guarantee is remote.
FIN 45s initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure
requirements are effective for interim or annual periods ending
after December 15, 2002. The Company is not aware of any
guarantees that require disclosure as of December 31, 2003
or 2002.

In November 2002, the FASB Emerging Issue Task
Force, or EITF, reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides guidance for determining whether an
arrangement involving multiple elements contains more than one
unit of accounting. EITF 00-21 does not, however, apply to
elements that are subject to other accounting literature that
provides guidance on whether and/or how to separate
multiple-deliverable arrangements and how to allocate value
among those separate units of accounting, including software
licensing arrangements and related services agreements subject
to SOP 97-2. The provisions of EITF 00-21 apply to
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of Issue 00-21 did
not have a material effect on the Companys consolidated
financial position or results of operations.

In January 2003, the FASB issued Interpretation
No. 46 Consolidation of Variable Interest Entities,
or FIN 46, which is an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements. FIN 46 addresses consolidation by business
enterprises of variable interest entities and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest
entities that effectively disperse risks are not to be
consolidated unless a single party holds an interest or
combination of interests that effectively

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recombines risks that were previously dispersed.
FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period
ending after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003, if certain criteria
are met. FIN 46 applies to public enterprises as of the
beginning of the applicable interim or annual period. The
adoption of FIN 46 as it relates to variable interest
entities created before February 1, 2003 is not expected to
have a material effect on our financial condition or results of
operations.


In April 2003, the FASB released FAS 149,
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, which clarifies the accounting for derivatives,
amending the previously issued FAS 133, Accounting for
Derivative Instruments and Hedging Activities. FAS 149
clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative, amends
the definition of an underlying contract, and clarifies when a
derivative contains a financing component in order to increase
the comparability of accounting practices under FAS 133.
FAS 149 is effective for contracts entered into or modified
after September 30, 2003. The adoption of FAS 149 did
not have a material impact on our financial position or results
of operations.

In May 2003 the FASB issued FAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity(FAS 150). FAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity.
FAS 150 applies specifically to a number of financial
instruments that companies have historically presented within
their financial statements either as equity or between the
liabilities section and the equity section, rather than as
liabilities. FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of FAS 150
did not have a material impact on our financial position or
results of operations.

In August 2003, the EITF reached a consensus on
Issue 03-05, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software.
EITF 03-05 addresses the applicability of SOP 97-2 to
non-software deliverables in an arrangement containing
more-than-incidental software. In an arrangement that includes
software that is more than incidental to the products or
services as a whole, software and software-related elements are
included within the scope of SOP 97-2. Software-related
elements include software products and services, as well as any
non-software deliverables for which a software deliverable is
essential to its functionality. The adoption of EITF 03-05
did not have a material impact on our consolidated financial
results.

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



Report of Independent Registered Public
Accounting Firm

The Board of Directors and Stockholders

Art Technology Group, Inc.


We have audited the accompanying consolidated
balance sheets of Art Technology Group, Inc. as of
December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the two
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. The
financial statements of Art Technology Group, Inc. for the year
ended December 31, 2001 were audited by other auditors who
have ceased operations and whose report dated January 22, 2002
expressed an unqualified opinion on those statements before the
reclassification adjustments and disclosures described in
Note 1.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Art Technology
Group, Inc. as of December 31, 2003 and 2002 and the
consolidated results of its operations and its cash flows for
each of the two years in the period ended December 31,
2003, in conformity with U.S. generally accepted accounting
principles.

As discussed in Note 1(s), effective
January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

As discussed above, the consolidated financial
statements of Art Technology Group, Inc. as of December 31,
2001 and for the year then ended were audited by other auditors
who have ceased operations. As described in Note 1(u),
these consolidated financial statements have been revised to
reflect restricted cash and gross cash flows from maturities and
purchases of marketable securities classified as
held-to-maturity in the statement of cash flows for the year
ended December 31, 2001, and the statement of operations
for the year ended December 31, 2001 has been revised to
(a) conform to the 2003 and 2002 presentation of
reclassifying reimbursed expenses in revenue and cost of
services revenues in accordance with Emerging Issues Task Force
01-14, Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred,
(b) include stock-based compensation expense, previously
reported as a separate line item in the statement of operations,
in cost of services revenues, research and development expenses,
sales and marketing expenses and general and administrative
expenses, and (c) reclassify an impairment charge for
purchased software, previously recorded in restructuring
(benefit) charges, in cost of product license revenues. We
audited the reclassifications that were applied to revise the
statement of cash flows and the statement of operations for the
year ended December 31, 2001. Our procedures included
(a) agreeing the adjusted amounts for restricted cash,
gross maturities and purchases of marketable securities
classified as held-to-maturity, revenue, cost of services
revenues, research and development expenses, sales and marketing
expenses, general and administrative expenses, restructuring
(benefit) charges and cost of product license revenues to the
Companys underlying records obtained from management, and
(b) testing the mathematical accuracy in computing the
restated consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied in
all material respects. Further, as described in Note 1(s),
these financial statements have been revised to include the
transitional disclosures required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as

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of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 1(s) with respect
to 2001 included (a) agreeing the previously reported net
loss in 2001 to the previously issued financial statements and
the adjustments to reported net loss in 2001 representing
amortization expense (including any tax effects) recognized in
that period related to goodwill to the Companys underlying
records obtained from management, and (b) testing the
mathematical accuracy of the reconciliation of adjusted net loss
in 2001 to reported net loss in 2001, and the related
loss-per-share amounts. In our opinion, the disclosures for 2001
in Note 1(s) are appropriate. However, we were not engaged
to audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to such
adjustments as described in Note 1 and, accordingly, we do
not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole.




| |                      
| | ---------------------
| | /S/ ERNST & YOUNG LLP

Boston, Massachusetts

January 26, 2004


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REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP
(ANDERSEN) IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY
ANDERSEN ON JANUARY 22, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO
RULE 2-02(E) OF REGULATION S-X. THE COMPANY HAS NOT
BEEN ABLE TO OBTAIN A REISSUED REPORT FROM ANDERSEN. ANDERSEN
HAS NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL
REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT CONSENTED TO
THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY
BE DIFFICULT TO SEEK REMEDIES AGAINST ANDERSEN AND THE ABILITY
TO SEEK REMEDIES AGAINST ANDERSEN MAY BE IMPAIRED.

To the Stockholders and Board of Directors of

Art Technology Group, Inc.:


We have audited the accompanying consolidated
balance sheets of Art Technology Group, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2000 and
2001, and the related consolidated statements of operations,
stockholders equity (deficit) and comprehensive income
(loss) and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Art Technology
Group, Inc. and subsidiaries as of December 31, 2000
and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles
generally accepted in the United States.



| |                        
| | -----------------------
| | /S/ ARTHUR ANDERSEN LLP

Boston, Massachusetts

January 22, 2002


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ART TECHNOLOGY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per-share
information)


|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |          |        | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------ | -------- | ------ | - | ------- | -------- | ------ | 
|                                                                        |                                                                                                                                                                                            |                           
|                                                                        |                                                                                                                                                                                            | December 31,              
|                                                                        |                                                                                                                                                                                            |                           
|                                                                        |                                                                                                                                                                                            | 2003                       |        | 2002    
|                                                                        |                                                                                                                                                                                            |                            |        |         
|ASSETS                                                                 
|Current Assets:                                                         |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        | Cash and cash equivalents                                                                                                                                                                  |                            | $      | 32,703   |        |   | $       | 45,829   |       
|                                                                        | Marketable securities                                                                                                                                                                      |                            |        | 9,650    |        |   |         | 22,729   |       
|                                                                        | Accounts receivable, net of reserves of $799
    ($1,941 in 2002)                                                                                                                          |                            |        | 15,364   |        |   |         | 25,221   |       
|                                                                        | Prepaid expenses and other current assets                                                                                                                                                  |                            |        | 1,180    |        |   |         | 2,489    |       
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        |                                                                                                                                                                                            | Total current assets       |        |          | 58,897 |   |         |          | 96,268 | 
|Property and equipment, net                                             |                                                                                                                                                                                            |                            | 3,751  |          |        |   | 6,998   |         
|Other assets                                                            |                                                                                                                                                                                            |                            | 4,712  |          |        |   | 1,569   |         
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        |                                                                                                                                                                                            | $                          | 67,360 |          |        | $ | 104,835 |         
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY                               
|Current Liabilities:                                                    |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        | Accounts payable                                                                                                                                                                           |                            | $      | 1,146    |        |   | $       | 2,563    |       
|                                                                        | Accrued expenses                                                                                                                                                                           |                            |        | 12,363   |        |   |         | 18,219   |       
|                                                                        | Deferred revenue                                                                                                                                                                           |                            |        | 14,915   |        |   |         | 15,674   |       
|                                                                        | Accrued restructuring, short-term                                                                                                                                                          |                            |        | 9,427    |        |   |         | 19,819   |       
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        |                                                                                                                                                                                            | Total current liabilities  |        |          | 37,851 |   |         |          | 56,275 | 
|Accrued restructuring, less current portion                             |                                                                                                                                                                                            |                            | 8,572  |          |        |   | 32,537  |         
|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  72,936,165 shares and
    70,941,478 shares at December 31, 2003 and 2002,
    respectively |                            |        | 729      |        |   |         | 709      |       
|                                                                        | Additional paid-in capital                                                                                                                                                                 |                            |        | 218,927  |        |   |         | 217,288  |       
|                                                                        | Deferred compensation                                                                                                                                                                      |                            |        | (11      | )      |   |         | (394     | )     
|                                                                        | Accumulated deficit                                                                                                                                                                        |                            |        | (195,691 | )      |   |         | (199,869 | )     
|                                                                        | Accumulated other comprehensive loss                                                                                                                                                       |                            |        | (3,017   | )      |   |         | (1,711   | )     
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        |                                                                                                                                                                                            | Total Stockholders Equity |        |          | 20,937 |   |         |          | 16,023 | 
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         
|                                                                        |                                                                                                                                                                                            | $                          | 67,360 |          |        | $ | 104,835 |         
|                                                                        |                                                                                                                                                                                            |                            |        |          |        |   |         |         

The accompanying notes are an integral part of
these consolidated financial statements.

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ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per-share
information)


|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |          |          |  
|------------------------------------------------------------- | -------------------------------------------------- | ----------------------------- | ----- | ------- | ------ | ---- | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|                                                              |                                                    |                              
|                                                              |                                                    | Year Ended December 31,      
|                                                              |                                                    |                              
|                                                              |                                                    | 2003                          |       | 2002    |        | 2001
|                                                              |                                                    |                               |       |         |        |     
|Revenues:                                                     |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Product license                                    |                               | $     | 27,159  |        |      | $       | 48,796  |         |   | $        | 76,631   |         
|                                                              | Services                                           |                               |       | 45,333  |        |      |         | 52,697  |         |   |          | 63,707   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              |                                                    | Total revenues                |       |         | 72,492 |      |         |         | 101,493 |   |          |          | 140,338  |  
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|Cost of Revenues:                                             |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Product license                                    |                               |       | 2,118   |        |      |         | 4,278   |         |   |          | 5,981    |         
|                                                              | Services                                           |                               |       | 19,808  |        |      |         | 33,745  |         |   |          | 47,827   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              |                                                    | Total cost of revenues        |       |         | 21,926 |      |         |         | 38,023  |   |          |          | 53,808   |  
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              |                                                    | Gross profit                  |       |         | 50,566 |      |         |         | 63,470  |   |          |          | 86,530   |  
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|Operating Expenses:                                           |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Research and development                           |                               |       | 17,928  |        |      |         | 22,046  |         |   |          | 30,518   |         
|                                                              | Sales and marketing                                |                               |       | 31,174  |        |      |         | 43,122  |         |   |          | 93,437   |         
|                                                              | General and administrative                         |                               |       | 9,538   |        |      |         | 11,087  |         |   |          | 24,116   |         
|                                                              | Restructuring (benefit) charges                    |                               |       | (10,476 | )      |      |         | 19,005  |         |   |          | 75,580   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              |                                                    | Total operating expenses      |       |         | 48,164 |      |         |         | 95,260  |   |          |          | 223,651  |  
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              |                                                    | Income (loss) from operations |       |         | 2,402  |      |         |         | (31,790 | ) |          |          | (137,121 | )
|Interest and other income, net                                |                                                    |                               | 1,521 |         |        |      | 2,300   |         |         |   | 4,967    |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|Income (loss) before (benefit) provision for
    income taxes |                                                    |                               | 3,923 |         |        |      | (29,490 | )       |         |   | (132,154 | )       
|(Benefit) provision for income taxes                          |                                                    |                               | (255  | )       |        |      |        |         |         |   | 23,851   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Net income (loss)                                  |                               | $     | 4,178   |        |      | $       | (29,490 | )       |   | $        | (156,005 | )       
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Basic net income (loss) per share                  |                               | $     | 0.06    |        |      | $       | (0.42   | )       |   | $        | (2.27    | )       
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Diluted net income (loss) per share                |                               | $     | 0.06    |        |      | $       | (0.42   | )       |   | $        | (2.27    | )       
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Basic weighted average common shares outstanding   |                               |       | 71,798  |        |      |         | 69,921  |         |   |          | 68,603   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         
|                                                              | Diluted weighted average common shares outstanding |                               |       | 73,768  |        |      |         | 69,921  |         |   |          | 68,603   |         
|                                                              |                                                    |                               |       |         |        |      |         |         |         |   |          |         

The accompanying notes are an integral part of
these consolidated financial statements.

45



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND

COMPREHENSIVE INCOME (LOSS)


(In thousands, except share and per-share
information)


|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | --- | ------------ |  | ----------- | ------- | ------------- |  | ------------- | ------ | ------ |  | - | -------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |              
|                                                                                                  |  | Common Stock |            |            |  |         |     |              |  | Accumulated |         |               |  |              
|                                                                                                  |  |              |            | Additional |  |         |     |              |  | Other       |         | Total         |  | Comprehensive
|                                                                                                  |  | Number       |            | Par        |  | Paid-in |     | Deferred     |  | Accumulated |         | Comprehensive |  | Stockholders |        | Income
|                                                                                                  |  | of Shares    |            | Value      |  | Capital |     | Compensation |  | Deficit     |         | Loss          |  | Equity        |        | (Loss)
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |       
|Balance, December 31, 2000                                                                        |  |              | 67,894,357 |            |  | $       | 679 |              |  | $           | 209,338 |               |  | $             | (3,670 | )      |  | $ | (14,374  | ) |  |   |       |   |  | $ | 191,973  |   |  |   |          |  
|Exercise of stock options                                                                         |  |              | 937,220    |            |  |         | 9   |              |  |             | 1,162   |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   | 1,171    |   |  |   |          |  
|Issuance of common stock in connection with
    employee stock purchase plan                      |  |              | 131,708    |            |  |         | 1   |              |  |             | 1,534   |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   | 1,535    |   |  |   |          |  
|Shares and options issued in connection with the
    acquisition of Toronto Technology Group, Inc |  |              | 18,745     |            |  |         |    |              |  |             | 2,132   |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   | 2,132    |   |  |   |          |  
|Settlement of exchangeable shares                                                                 |  |              |           |            |  |         |    |              |  |             | 1,263   |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   | 1,263    |   |  |   |          |  
|Amortization of deferred compensation                                                             |  |              |           |            |  |         |    |              |  |             |        |               |  |               | 1,280  |        |  |   |         |   |  |   |       |   |  |   | 1,280    |   |  |   |          |  
|Reversal of deferred compensation                                                                 |  |              |           |            |  |         |    |              |  |             | (832    | )             |  |               | 832    |        |  |   |         |   |  |   |       |   |  |   |         |   |  |   |          |  
|Comprehensive Loss:                                                                               |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Net loss                                                                                          |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   | (156,005 | ) |  |   |       |   |  |   | (156,005 | ) |  | $ | (156,005 | )
|Foreign currency translation adjustments                                                          |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   |         |   |  | $ | (440   | ) |  |   | (440     | ) |  |   | (440     | )
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   |         |   |  | $ | (156,445 | )
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2001                                                                        |  |              | 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 (loss)                                                                                 |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   | 4,178    |   |  |   |       |   |  |   | 4,178    |   |  | $ | 4,178    |  
|Foreign currency translation adjustments                                                          |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   |         |   |  |   | (1,236 | ) |  |   | (1,236   | ) |  |   | (1,236   | )
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                |  |              |           |            |  |         |    |              |  |             |        |               |  |               |       |        |  |   |         |   |  |   |       |   |  |   |         |   |  | $ | (2,942   | )
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2003                                                                        |  |              | 72,936,165 |            |  | $       | 729 |              |  | $           | 218,927 |               |  | $             | (11    | )      |  | $ | (195,691 | ) |  | $ | (3,017 | ) |  | $ | 20,937   |   |  |   |          |  
|                                                                                                  |  |              |            |            |  |         |     |              |  |             |         |               |  |               |        |        |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  

The accompanying notes are an integral part of
these consolidated financial statements.

46



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |          |        |         |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------- | ------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------ | ------- | ------ | -------- | ------ | ------- | -
|                                                                           |                                                                                      |                                          
|                                                                           |                                                                                      | Years Ended December 31,                 
|                                                                           |                                                                                      |                                          
|                                                                           |                                                                                      | 2003                                      |                                       | 2002    |         | 2001   
|                                                                           |                                                                                      |                                           |                                       |         |         |        
|Cash Flows from Operating Activities:                                      |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Net income (loss)                                                                    |                                           | $                                     | 4,178   |         |         | $      | (29,490 | )      |         | $      | (156,005 | )     
|                                                                           | Adjustments to reconcile net income (loss) to net
    used in operating activities  |                                           |                                       |         |         |         |        |         |        |         |        |          |       
|                                                                           |                                                                                      | Stock-based compensation                  |                                       |         | 136     |         |        |         | 942    |         |        |          | 1,280  |        
|                                                                           |                                                                                      | Depreciation and amortization             |                                       |         | 3,897   |         |        |         | 7,147  |         |        |          | 9,414  |        
|                                                                           |                                                                                      | Non-cash restructuring charge             |                                       |         | 1,144   |         |        |         | 2,613  |         |        |          | 16,733 |        
|                                                                           |                                                                                      | Loss on disposal of fixed assets, net     |                                       |         | 121     |         |        |         | 198    |         |        |          | 801    |        
|                                                                           | Changes in operating assets and
    liabilities                                     |                                           |                                       |         |         |         |        |         |        |         |        |          |       
|                                                                           |                                                                                      | Accounts receivable, net                  |                                       |         | 9,857   |         |        |         | 5,311  |         |        |          | 21,907 |        
|                                                                           |                                                                                      | Unbilled services                         |                                       |         |        |         |        |         | 269    |         |        |          | 998    |        
|                                                                           |                                                                                      | Prepaid expenses and other current assets |                                       |         | 1,140   |         |        |         | 3,057  |         |        |          | (1,318 | )      
|                                                                           |                                                                                      | Deferred tax assets                       |                                       |         |        |         |        |         |       |         |        |          | 23,851 |        
|                                                                           |                                                                                      | Deferred rent                             |                                       |         | (3,772  | )       |        |         |       |         |        |          |       |        
|                                                                           |                                                                                      | Accounts payable                          |                                       |         | (1,417  | )       |        |         | (1,597 | )       |        |          | (7,417 | )      
|                                                                           |                                                                                      | Accrued expenses                          |                                       |         | (5,856  | )       |        |         | (6,499 | )       |        |          | (2,358 | )      
|                                                                           |                                                                                      | Deferred revenue                          |                                       |         | (759    | )       |        |         | (1,954 | )       |        |          | (5,136 | )      
|                                                                           |                                                                                      | Accrued restructuring                     |                                       |         | (34,446 | )       |        |         | 6,779  |         |        |          | 42,689 |        
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           |                                                                                      |                                           | Net cash used in operating activities |         |         | (25,777 | )      |         |        | (13,224 | )      |          |        | (54,561 | )
|Cash Flows from Investing Activities:                                      |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Purchases of marketable securities                                                   |                                           |                                       | (12,138 | )       |         |        | (41,360 | )      |         |        | (35,055  | )     
|                                                                           | Maturities of marketable securities                                                  |                                           |                                       | 25,217  |         |         |        | 32,688  |        |         |        | 111,950  |       
|                                                                           | Restricted cash                                                                      |                                           |                                       |        |         |         |        | 16,757  |        |         |        | (16,757  | )     
|                                                                           | Purchases of property and equipment                                                  |                                           |                                       | (993    | )       |         |        | (945    | )      |         |        | (12,616  | )     
|                                                                           | Proceeds from sales of equipment                                                     |                                           |                                       | 91      |         |         |        |        |        |         |        |         |       
|                                                                           | (Increase) decrease in other assets                                                  |                                           |                                       | 98      |         |         |        | 3,094   |        |         |        | 2,789    |       
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           |                                                                                      | Net cash provided by investing activities |                                       |         | 12,275  |         |        |         | 10,234 |         |        |          | 50,311 |        
|Cash Flows from Financing Activities:                                      |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Tudor settlement                                                                     |                                           |                                       |        |         |         |        | 1,050   |        |         |        |         |       
|                                                                           | Proceeds from exercise of stock options                                              |                                           |                                       | 752     |         |         |        | 112     |        |         |        | 1,171    |       
|                                                                           | Proceeds from employee stock purchase plan                                           |                                           |                                       | 1,095   |         |         |        | 1,771   |        |         |        | 1,535    |       
|                                                                           | Payments on long-term obligations                                                    |                                           |                                       |        |         |         |        | (2,000  | )      |         |        | (2,000   | )     
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           |                                                                                      | Net cash provided by financing activities |                                       |         | 1,847   |         |        |         | 933    |         |        |          | 706    |        
|Effects of Foreign Exchange Rate Changes On Cash
    and Cash Equivalents  |                                                                                      |                                           | (1,471                                | )       |         |         | (1,607 | )       |        |         | (218   | )       
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|Net Decrease in Cash and Cash Equivalents                                  |                                                                                      |                                           | (13,126                               | )       |         |         | (3,664 | )       |        |         | (3,762 | )       
|Cash and Cash Equivalents, Beginning of Period                             |                                                                                      |                                           | 45,829                                |         |         |         | 49,493 |         |        |         | 53,255 |         
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|Cash and Cash Equivalents, End of Period                                   |                                                                                      | $                                         | 32,703                                |         |         | $       | 45,829 |         |        | $       | 49,493 |         
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|Supplemental Disclosure of Cash Flow Information:                          |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Cash paid during the period for interest                                             |                                           | $                                     |        |         |         | $      |        |        |         | $      | 135      |       
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Cash paid during the period for income taxes                                         |                                           | $                                     | 140     |         |         | $      | 447     |        |         | $      | 330      |       
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|Supplemental Disclosure of Noncash Investing and
    Financing Activities: |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           | Reversal of deferred compensation                                                    |                                           | $                                     | 247     |         |         | $      | 222     |        |         | $      | 832      |       
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         
|                                                                           |                                                                                      | Reversal of provision for income taxes    |                                       | $       | 332     |         |        | $       |       |         |        | $        |       |        
|                                                                           |                                                                                      |                                           |                                       |         |         |         |        |         |        |         |        |         

The accompanying notes are an integral part of
these consolidated financial statements.

47



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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

Art Technology Group, Inc. (ATG or the
Company) develops and markets software that enables consumer,
retail and financial services companies to dynamically market,
sell and provide services to their customers online. The Company
offers proven, flexible online marketing, sales and self-service
software applications for consumer facing e-commerce sites. ATG
also offers its clients related professional services including
support, education and implementation services.

The accompanying consolidated financial
statements reflect the application of certain significant
accounting policies as described below and elsewhere in the
accompanying notes to the consolidated financial statements.

(a) Principles
of Consolidation

The accompanying consolidated financial
statements include the accounts of ATG and its wholly owned
subsidiaries. All significant intercompany balances have been
eliminated in consolidation.

(b) Use
of Estimates

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

(c) Revenue
Recognition

ATG recognizes product license revenues from
licensing the rights to use its software to end-users. ATG also
generates service revenues from integrating its software with
its customers operating environments, the sale of
maintenance services and the sale of certain other consulting
and development services. ATG generally has separate agreements
with its customers which govern the terms and conditions of its
software license, consulting and support and maintenance
services. These separate agreements, along with ATGs price
list and business practices of selling services separately,
provide the basis for establishing vendor-specific objective
evidence of fair value. This allows ATG to appropriately
allocate fair value among the multiple elements in an
arrangement and apply the residual method under Statement of
Position (SOP) No. 97-2, Software Revenue
Recognition(SOP 97-2) and SOP 98-9,Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions(SOP 98-9).

ATG recognizes revenue in accordance with
SOP 97-2 and SOP 98-9. Revenues from software product
license agreements are recognized upon execution of a license
agreement and delivery of the software, provided that the fee is
fixed or determinable and deemed collectible by management. If
conditions for acceptance are required subsequent to delivery,
revenues are recognized upon customer acceptance if such
acceptance is not deemed to be perfunctory. In multiple element
arrangements, ATG uses the residual value method in accordance
with SOP 97-2 and SOP 98-9. Revenue earned on software
arrangements involving multiple elements which qualify for
separate element accounting treatment is allocated to each
undelivered element using the relative fair values of those
elements based on vendor-specific objective evidence with the
remaining value assigned to the delivered element, the software
license. Typically, the Companys software licenses do not
include significant post-delivery obligations to be fulfilled by
the Company and payments are due within a three-month period
from the date of delivery. Consequently, license fee revenue is
generally recognized when the product is shipped. Revenues from
software maintenance agreements are recognized ratably over the
term of the maintenance period, which is typically one year. ATG
enters into reseller arrangements that typically provide for
sublicense fees payable to ATG based upon a percentage of
ATGs list

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

price. Revenues are recognized under reseller
agreements as earned for guaranteed minimum royalties, or based
upon actual sales by the resellers. ATG does not grant its
resellers the right of return or price protection.

Revenues from professional service arrangements
are recognized on either a time-and-materials, proportional
performance method or percentage-of-completion basis as the
services are performed, provided that amounts due from customers
are fixed or determinable and deemed collectible by management.
From time to time the Company enters into fixed price service
arrangements. In those circumstances in which services are
essential to the functionality of the software, the Company
applies the percentage-of-completion method, and in those
situations when only professional services are provided, the
Company applies the proportional performance method. Both of
these methods require that the Company track the effort expended
and the effort expected to complete a project. Amounts collected
or billed prior to satisfying the above revenue recognition
criteria are reflected as deferred revenue. Deferred revenue
primarily consists of advance payments related to support and
maintenance and service agreements.

(d) Cost
of Product License Revenues

Cost of product license revenues includes salary
and related benefits costs of fulfillment, external shipping
costs, and engineering staff dedicated to maintenance of
products that are in general release, the amortization of
licenses purchased in support of and used in the Companys
products and royalties paid to vendors whose technology is
incorporated into the Companys products.

(e) Cost
of Services Revenues

Cost of services revenues includes salary and
related benefits costs and other costs for the Companys
professional services and technical support staff, as well as
third-party contractor expenses.

(f) Net
Income (Loss) Per Share

Net income (loss) per share is computed in
accordance with Statement of Financial Accounting Standards
(FAS) No. 128, Earnings Per Share. Basic net
income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted net income (loss) per
share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding plus the
dilutive effect of common stock equivalents using the treasury
stock method. Common stock equivalents consist of stock options.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the computation of
basic and diluted net income (loss) per share for the years
ended December 31, 2003, 2002 and 2001:

|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------- | ------ | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                                                                                                                     |  | 2003                  |        | 2002 |  | 2001
|                                                                                                                                     |  |                       |        |      |  |     
|                                                                                                                                     |  |                      
|                                                                                                                                     |  | (In thousands, except
|                                                                                                                                     |  | per share amounts)   
|Net income (loss)                                                                                                                    |  | $                     | 4,178  |      |  | $    | (29,490 | ) |  | $ | (156,005 | )
|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  
|Weighted average common shares outstanding used
    in computing basic net income (loss) per share                                   |  |                       | 71,798 |      |  |      | 69,921  |   |  |   | 68,603   |  
|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 |  |                       | 73,768 |      |  |      | 69,921  |   |  |   | 68,603   |  
|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  
|Basic net income (loss) per share                                                                                                    |  | $                     | 0.06   |      |  | $    | (0.42   | ) |  | $ | (2.27    | )
|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  
|Diluted net income (loss) per share                                                                                                  |  | $                     | 0.06   |      |  | $    | (0.42   | ) |  | $ | (2.27    | )
|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  
|Anti-dilutive common stock equivalents                                                                                               |  |                       | 5,489  |      |  |      | 11,571  |   |  |   | 13,038   |  
|                                                                                                                                     |  |                       |        |      |  |      |         |   |  |   |          |  

(g) Cash,
Cash Equivalents and Marketable Securities

ATG accounts for investments in marketable
securities under FAS 115, Accounting for Certain
Investments in Debt and Equity Securities(FAS 115).
Under FAS 115, investments for which ATG has the positive
intent and the ability to hold to maturity, consisting of cash
equivalents and marketable securities, are reported at amortized
cost, which approximates fair market value. Cash equivalents are
highly liquid investments with maturities at the date of
acquisition of less than 90 days. Marketable securities are
investment grade debt securities with maturities at the date of
acquisition of greater than ninety days. At December 31,
2003 and 2002, all of ATGs marketable securities were
classified as held-to-maturity and have maturities that are less
than one year. The average maturity of ATGs marketable
securities was approximately 3.5 months and 3.6 months
at December 31, 2003 and 2002, respectively. At
December 31, 2003 and 2002, the difference between the
amortized cost and market value of ATGs marketable
securities were gains of approximately $4,000 and $21,000,
respectively. There were no realized gains or losses recorded
during the years ended December 31, 2003, 2002 or 2001. At
December 31, 2003 and 2002, ATGs cash, cash
equivalents and marketable securities consisted of the following:

|                            |                                                         |                                 |   |        |        |  |   |        |        | 
|--------------------------- | ------------------------------------------------------- | ------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                            |                                                         |                                
|                            |                                                         | December 31,                   
|                            |                                                         |                                
|                            |                                                         | 2003                            |   | 2002  
|                            |                                                         |                                 |   |       
|                            |                                                         |                                
|                            |                                                         | (In thousands)                 
|Cash and cash equivalents  |                                                         |                                 |   |        |        |  |   |       
|                            | Cash                                                    |                                 | $ | 12,536 |        |  | $ | 39,130 |       
|                            | Money market accounts                                   |                                 | $ | 20,167 |        |  | $ | 6,699  |       
|                            |                                                         |                                 |   |        |        |  |   |       
|                            |                                                         | Total cash and cash equivalents |   | $      | 32,703 |  |   | $      | 45,829 | 
|                            |                                                         |                                 |   |        |        |  |   |       
|                           
|Marketable securities      |                                                         |                                 |   |        |        |  |   |       
|                            | U.S. Treasury and U.S. Government
    Agency securities |                                 | $ | 1,008  |        |  | $ |       |       
|                            | Corporate debt securities                               |                                 | $ | 8,642  |        |  | $ | 22,729 |       
|                            |                                                         |                                 |   |        |        |  |   |       
|                            |                                                         | Total marketable securities     |   | $      | 9,650  |  |   | $      | 22,729 | 
|                            |                                                         |                                 |   |        |        |  |   |       

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(h) Other
Assets

Included in Other Assets is deferred rent expense
related to two lease settlements reached with landlords during
2003. These settlement agreements involved both reaching a
settlement on abandoned space and renegotiating a reduction in
the rate for continuing operating space. In these cases, a
portion of the settlement payment was accounted for as prepaid
rent expense. The prepaid rent will be amortized over the
remaining lease term, which will have the effect of maintaining
the effective rent expense per square foot on the existing
operating space equal to the effective rent expense per square
foot per the original lease (See Note 10).

(i) Property
and Equipment

Property and equipment are stated at cost, net of
accumulated depreciation and amortization. ATG provides for
depreciation and amortization using the straight-line method.

Property and equipment at December 31, 2003
and 2002, consisted of the following:

|                                                     |  |                                       |         |                |       |      |        |  |       |   |        | 
|---------------------------------------------------- |  | ------------------------------------- | ------- | -------------- | ----- | ---- | ------ |  | ----- | - | ------ | 
|                                                     |  |                                       |         |               
|                                                     |  |                                       |         | December 31,  
|                                                     |  | Estimated                             |         |               
|Asset Classification                                 |  | Useful Life                           |         | 2003           |       | 2002
|                                                     |  |                                       |         |                |       |     
|                                                     |  |                                       |         |               
|                                                     |  |                                       |         | (In thousands)
|Computer equipment                                   |  |                                       | 3 years |                |       | $    | 10,154 |  |       | $ | 12,231 | 
|Leasehold improvements                               |  | Lesser of usefullife or life of lease |         |                | 4,407 |      |        |  | 5,124 |  
|Furniture and fixtures                               |  |                                       | 5 years |                |       |      | 2,687  |  |       |   | 3,656  | 
|Computer software                                    |  |                                       | 3 years |                |       |      | 4,207  |  |       |   | 3,893  | 
|                                                     |  |                                       |         |                |       |      |        |  |       |   |        | 
|                                                     |  |                                       |         |                |       |      | 21,455 |  |       |   | 24,904 | 
|Less  accumulated depreciation and
    amortization |  |                                       |         |                |       |      | 17,704 |  |       |   | 17,906 | 
|                                                     |  |                                       |         |                |       |      |        |  |       |   |        | 
|                                                     |  |                                       |         |                |       | $    | 3,751  |  |       | $ | 6,998  | 
|                                                     |  |                                       |         |                |       |      |        |  |       |   |        | 

Depreciation expense included in the accompanying
statements of operations was approximately $3.9 million,
$7.1 million and $8.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

(j) Research
and Development Expenses for Software Products

ATG evaluates the establishment of technological
feasibility of its products in accordance with FAS 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed(FAS 86). ATG sells
products in a market that is subject to rapid technological
change, new product development and changing customer needs.
Accordingly, ATG has concluded that technological feasibility is
not established until the development stage of the product is
nearly complete. ATG defines technological feasibility as the
completion of a working model. The time period during which
costs could be capitalized, from the point of reaching
technological feasibility until the time of general product
release, is very short, and consequently, the amounts that could
be capitalized are not material to ATGs financial position
or results of operations. Therefore, ATG has charged all such
costs to research and development in the period incurred.

(k) Income
Taxes

ATG accounts for income taxes in accordance with
the provisions of FAS 109, Accounting for Income Taxes(FAS 109). This statement requires ATG to recognize a
current tax asset or liability for current taxes payable or
refundable and to record deferred tax assets or liabilities for
the estimated future tax effects of temporary differences and
carryforwards to the extent that they are realizable. A
valuation allowance is

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

established against net deferred tax assets, if
based on the weighted available evidence, it is more likely than
not that all or a portion of the deferred tax assets will not be
realized (see Note 4).

(l) Stock-Based
Compensation

ATG grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair
value of the shares at the date of grant. ATG accounts for
stock-based compensation for employees in accordance with
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25)
and related interpretations, and follows the disclosure-only
alternative under FAS 123, Accounting for Stock Based
Compensation(FAS 123) (see Note 5).

Had compensation expense for ATGs stock
plans been determined consistent with FAS 123, the pro
forma net loss per share would have been as follows:

|                                                                                                                    |                    |                          |         |         |   |      |         |         |   |   |          |          |  
|------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | -------- | -------- | -
|                                                                                                                    |                    |                         
|                                                                                                                    |                    | Years Ended December 31,
|                                                                                                                    |                    |                         
|                                                                                                                    |                    | 2003                     |         | 2002    |   | 2001
|                                                                                                                    |                    |                          |         |         |   |     
|                                                                                                                    |                    |                         
|                                                                                                                    |                    | (In thousands, except   
|                                                                                                                    |                    | per-share information)  
|Net income (loss) as reported                                                                                       |                    | $                        | 4,178   |         |   | $    | (29,490 | )       |   | $ | (156,005 | )       
|Add: Stock-based employee compensation expense
    included in reported net income (loss)                           |                    |                          | 136     |         |   |      | 942     |         |   |   | 1,280    |         
|Deduct: Total stock based employee compensation
    expense determined under fair value based method for all awards |                    |                          | (40,184 | )       |   |      | (39,913 | )       |   |   | (49,978  | )       
|                                                                                                                    |                    |                          |         |         |   |      |         |         |   |   |          |         
|                                                                                                                    | Pro forma net loss |                          | $       | (35,870 | ) |      | $       | (68,461 | ) |   | $        | (204,703 | )
|                                                                                                                    |                    |                          |         |         |   |      |         |         |   |   |          |         
|Basic and diluted net income (loss) per
    share                                                                  |                    |                          |         |         |   |      |         |         |   |   |          |         
|                                                                                                                    | As reported        |                          | $       | 0.06    |   |      | $       | (0.42   | ) |   | $        | (2.27    | )
|                                                                                                                    | Pro forma          |                          | $       | (0.50   | ) |      | $       | (0.98   | ) |   | $        | (2.98    | )

(m) Comprehensive
Income (Loss)

FAS 130, Reporting Comprehensive
Income, requires a full set of general-purpose financial
statements to include the reporting of comprehensive income
(loss), which includes net income (loss) and certain
transactions that have generally been reported in the statement
of stockholders equity. Comprehensive income (loss)
comprises net (income) loss and foreign currency translation
adjustments.

(n) Fair
Value of Financial Instruments

Financial instruments mainly consist of cash and
cash equivalents, marketable securities and accounts receivable.
The carrying amounts of these instruments approximate their fair
values.

(o) Concentrations
of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of marketable securities and accounts receivable. ATG maintains
cash, cash equivalents and marketable securities with high
credit quality financial institutions. To reduce its
concentration of credit risk with respect to accounts
receivable, the Company routinely assesses the financial
strength of its customers through continuing credit evaluations
and generally does not require collateral. ATG maintains an
allowance for potential credit losses but historically has not
experienced any significant losses related to individual
customers or groups of customers in any particular industry or
geographic area.

As of December 31, 2003 and 2002, no
customers accounted for greater than 10% of accounts receivable.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(p) Long-Lived
Assets

In accordance with FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
Company reviews the carrying value of its long-lived assets for
impairment whenever events and circumstances indicate that the
carrying value of the assets might be impaired and the carrying
value may not be recoverable. Recoverability of these assets is
measured by comparison of the carrying value of the assets to
the undiscounted cash flows estimated to be generated by those
assets over their remaining economic life. If the undiscounted
cash flows are not sufficient to recover the carrying value of
such assets the assets are considered impaired, the impairment
loss is measured by comparing the fair value of the assets to
their carrying values. Fair value is determined by either a
quoted market price or a value determined by a discounted cash
flow technique, whichever is more appropriate under the
circumstances involved. The Company has recorded impairment
charges as discussed in Note 12.

(q) Hedging
Activities

A portion of the Companys revenues,
earnings and cash flows are exposed to changes in foreign
exchange rates. On September 18, 2002, the Companys
Board of Directors formally approved a foreign currency-hedging
program to mitigate the risk of foreign currency fluctuations on
earnings and cash flows. Under this program, the Company may at
times seek to manage its foreign exchange risk through the use
of foreign currency forward-exchange contracts. ATG may use
these contracts to offset the potential foreign currency impact
to earnings and cash flows from short-term foreign currency
assets and liabilities that arise from operations. FAS 133,
Accounting for Derivative Instruments and Hedging
Activities, requires that all derivative contracts and
hedging activities be recorded at fair value in the financial
statements. Such contracts are marked to market in each
reporting period with the resulting change in fair value
recognized immediately in Other Income in the Consolidated
Statement of Operations as unrealized gains and losses up
through their maturity, at which time the gains or losses become
realized. These gains and losses offset the changes in fair
value of the asset or liability being hedged. Realized gains and
losses were not material in 2003, 2002 or 2001. As of
December 31, 2003 and 2002, there were no foreign
currency-hedging contracts or other option or derivative
contracts outstanding.

(r) Foreign
Currency Translation

The financial statements of the Companys
foreign subsidiaries are translated in accordance with
FAS 52, Foreign Currency Translation(FAS 52).
In 2000, the functional currency of the Companys foreign
subsidiaries was the U.S. dollar. Accordingly, all assets
and liabilities of the foreign subsidiaries were translated
using the exchange rate at the balance sheet date, except for
property and equipment, other assets and stockholders
equity, which were translated at historical rates. Revenues and
expenses were translated at average rates during the period. In
2001, the Company determined the functional currency of its
foreign subsidiaries was the local currency. As a result, the
Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year-end. Prior
to translation, the Company re-measures foreign currency
denominated assets and liabilities into the functional currency
of the respective Company entity, resulting in unrealized gains
or losses recorded in Interest and Other Income, Net in the
accompanying Consolidated Statement of Operations. Revenues and
expenses are translated using average exchange rates in effect
during the year. Gains and losses from foreign currency
translation are recorded to Accumulated other comprehensive loss
included in Stockholders Equity in the accompanying
Consolidated Balance Sheets. During the years ended
December 31, 2003, 2002, and 2001, the Company recorded net
gains of $785,000, $950,000, and $58,000, respectively, from
realized foreign currency transactions gains and the
re-measurement of foreign currency denominated assets and
liabilities, which are included in Interest and Other Income,
Net in the accompanying Consolidated Statements of Operations.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(s) Goodwill

The Financial Accounting Standards Board
(FASB) issued FAS 141, Business Combinations(FAS 141) and FAS 142, Goodwill and Other
Intangible Assets(FAS 142) in July 2001. FAS 141
requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. FAS 142
requires that goodwill not be amortized but instead tested for
impairment at least annually and more frequently upon the
occurrence of certain events which may indicate that an
impairment has occurred. Intangible assets acquired in
conjunction with a business combination are required to be
separately recognized if the benefit of the intangible asset
obtained is through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirers intent to do so.
Intangible assets with determinable lives will continue to be
amortized over their useful lives. The adoption of FAS 141
and FAS 142 effective January 1, 2002 did not have a
material impact on the Companys financial position or
results of operations.

During fiscal 2001, the Company determined that
the remaining unamortized goodwill of $4.0 million
associated with two professional services acquisitions was
impaired, and accordingly recorded an impairment charge which
was included in the restructuring charge recorded in the fourth
quarter of fiscal 2001 (see Note 12). The effect of no
longer amortizing goodwill in accordance with FAS 142 for
the year ended December 31, 2001 is as follows:

|                                               |                            |                           |          |       |  
|---------------------------------------------- | -------------------------- | ------------------------- | -------- | ----- | -
|                                               |                            | For the Twelve Months    
|                                               |                            | Ended December 31, 2001  
|                                               |                            |                          
|                                               |                            | (in thousands, except per
|                                               |                            | share information)       
|Reported net income (loss)                     |                            | $                         | (156,005 | )    
|Add back: Goodwill amortization (net of taxes) |                            |                           | 2,217    |      
|                                               |                            |                           |          |      
|Adjusted net income (loss)                     |                            | $                         | (153,788 | )    
|                                               |                            |                           |          |      
|Basic earnings per share:                      |                            |                           |          |      
|                                               | Reported net income (loss) |                           | $        | (2.27 | )
|                                               | Goodwill amortization      |                           |          | 0.03  |  
|                                               |                            |                           |          |      
|                                               | Adjusted net income (loss) |                           | $        | (2.24 | )
|                                               |                            |                           |          |      
|Diluted earnings per share:                    |                            |                           |          |      
|                                               | Reported net income (loss) |                           | $        | (2.27 | )
|                                               | Goodwill amortization      |                           |          | 0.03  |  
|                                               |                            |                           |          |      
|                                               | Adjusted net income (loss) |                           | $        | (2.24 | )
|                                               |                            |                           |          |      

(t) Recent
Accounting Pronouncements

In November 2001, the FASB Emerging Issues Task
Force (EITF) issued EITF 01-14, Income Statement
Characterization of Reimbursement Received for
Out-of-Pocket Expenses Incurred, relating to the
accounting for reimbursements received for out-of-pocket
expenses. In accordance with EITF 01-14, reimbursements
received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The
Company historically had accounted for such reimbursements as a
reduction of the cost of revenues. The Company adopted
EITF 01-14 effective January 1, 2002. Comparative
consolidated financial statements for prior periods have been
reclassified to comply with the guidance in EITF 01-14. The
impact of the reclassification was to increase revenues by 2%
for the year ended December 31, 2002, and 1% for the year
ended December 31, 2001.

In November 2002, EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides guidance for
determining whether an arrangement involving multiple elements
contains more than one unit of accounting. EITF 00-21 does
not, however, apply to elements that are

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

subject to other accounting literature that
provides guidance on whether and/or how to separate
multiple-deliverable arrangements and how to allocate value
among those separate units of accounting, including software
licensing arrangements and related services agreements subject
to SOP 97-2. The provisions of EITF 00-21 apply to
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF 00-21 did
not have a material effect on the Companys consolidated
financial position or results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
or FIN 46, which is an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements. FIN 46 addresses consolidation by business
enterprises of variable interest entities and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest
entities that effectively disperse risks are not to be
consolidated unless a single party holds an interest or
combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 applies immediately to
variable interest entities created after January 31, 2003
and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year
or interim period ending after December 15, 2003, to
variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
The adoption of FIN 46 as it relates to variable interest
entities created before February 1, 2003 did not have a
material effect on our financial condition or results of
operations.

In April 2003, the FASB released FAS 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, clarifies the accounting for
derivatives, amending the previously issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities.
FAS 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a
derivative, amends the definition of an underlying contract, and
clarifies when a derivative contains a financing component in
order to increase the comparability of accounting practices
under FAS 133. FAS 149 is effective for contracts
entered into or modified after September 30, 2003. The
adoption of FAS 149 did not have a material impact on the
Companys financial position or results of operations.

In May 2003 the FASB issued FAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity(FAS 150). FAS 150 establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity.
FAS 150 applies specifically to a number of financial
instruments that companies have historically presented within
their financial statements either as equity or between the
liabilities section and the equity section, rather than as
liabilities. FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of FAS 150
did not have a material impact on the Companys financial
position or results of operations.

In August 2003, the EITF reached a consensus on
Issue 03-05, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software.EITF 03-05 addresses the applicability of SOP 97-2
to non-software deliverables in an arrangement containing
more-than-incidental software. In an arrangement that includes
software that is more than incidental to the products or
services as a whole, software and software-related elements are
included within the scope of SOP 97-2. Software-related
elements include software products and services, as well as any
non-software deliverables for which a software deliverable is
essential to its functionality. The adoption of EITF 03-05
did not have a material impact on the Companys
consolidated financial results.

(u) Financial
Statement Reclassifications

During 2003 and 2002, ATG made certain
reclassifications to the Consolidated Financial Statements and
related Notes. In 2003, the Company reclassified stock-based
compensation recorded in 2001, which previously had been
reported as a separate line item in the Consolidated Statement
of Operations, to cost of

55



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

revenues, research and development, sales and
marketing and general and administrative expenses. The Company
also reclassified an impairment charge recorded in restructuring
in 2001 for purchased software to cost of product license. In
addition, the Company reclassified net proceeds from maturities
(purchases) of marketable securities in the 2001 Consolidated
Statement of Cash Flows to reflect the gross cash flows from
maturities and purchases in separate line items. In 2002, in
accordance with EITF 01-14, the Company reclassified
reimbursements received for out-of-pocket expenses as revenue
and a reduction of the cost of revenues for the year 2001.
Changes in restricted cash have been separately disclosed in the
2001 Consolidated Statements of Cash Flows related to the
outstanding letters of credit in favor of various landlords to
secure obligations under the Companys facility leases. In
addition, the Company adopted FAS 142, effective
January 1, 2001, and has provided the required transitional
disclosures in Note 1(s).



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

FAS 131, Disclosures About Segments of an
Enterprise and Related Information(FAS 131),
establishes standards for reporting information regarding
operating segments in annual financial statements and requires
selected information for those segments to be presented in
interim financial reports issued to stockholders. FAS 131
also establishes standards for related disclosures about
products and services and geographic areas. Operating segments
are identified as components of an enterprise about which
separate discrete financial information is available for
evaluation by the chief operating decision-maker or
decision-making group in making decisions on how to allocate
resources and assess performance. The Companys chief
operating decision-maker, as defined under FAS 131, is its
executive management team. To date, the Company has viewed its
operations and manages its business as principally one segment
with two product offerings: software licenses and services. The
Company evaluates these product offerings based on their
respective gross margins. As a result, the financial information
disclosed herein represents all of the material financial
information related to the Companys principal operating
segment.

Revenues from sources outside of the United
States were approximately $25.3 million, $30.1 million
and $47.6 million in 2003, 2002 and 2001, respectively.
ATGs revenues from international sources were primarily
generated from customers located in Europe and Asia/ Pacific.
All of ATGs product sales for the years ended
December 31, 2003, 2002 and 2001, were delivered from its
headquarters located in the United States.

The following table represents the percentage of
total revenues by geographic region from customers for 2003,
2002 and 2001:

|                                              |  |              |     |      |  |      |     |   |  |  |     |  
|--------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                              |  |             
|                                              |  | Years Ended 
|                                              |  | December 31,
|                                              |  |             
|                                              |  | 2003         |     | 2002 |  | 2001
|                                              |  |              |     |      |  |     
|United States                                 |  |              | 65  | %    |  |      | 70  | % |  |  | 66  | %
|Europe, Middle East and Africa (excluding UK) |  |              | 17  |      |  |      | 6   |   |  |  | 18  |  
|United Kingdom (UK)                           |  |              | 13  |      |  |      | 18  |   |  |  | 10  |  
|Asia Pacific                                  |  |              | 3   |      |  |      | 3   |   |  |  | 2   |  
|Other                                         |  |              | 2   |      |  |      | 3   |   |  |  | 4   |  
|                                              |  |              |     |      |  |      |     |   |  |  |     |  
|                                              |  |              | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                              |  |              |     |      |  |      |     |   |  |  |     |  



|    |                
|--- | ---------------
|(3) | Credit Facility

Effective June 13, 2002, ATG entered into a
$15 million revolving line of credit with Silicon Valley
Bank (the Bank) which provided for borrowings of up to the
lesser of $15 million or 80% of eligible accounts
receivable. The line of credit bore interest at the Banks
prime rate. Effective December 24, 2002 the revolving line
of credit increased to $20 million. The line of credit is
secured by all of the Companys tangible and

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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

intangible intellectual and personal property and
is subject to financial covenants including liquidity coverage
and profitability.

Effective November 25, 2003, ATG modified
its existing working capital facility with the Bank. The line of
credit is secured by all of ATGs tangible and intangible
intellectual and personal property and is subject to financial
covenants including liquidity coverage and profitability. The
liquidity covenant mandates ATG maintain $25.0 million in
cash, which includes cash equivalents and marketable securities,
at the end of each month throughout the duration of the
facility. The profitability covenant allows for net losses not
to exceed: $3.5 million for the fourth quarter of 2003,
$3.0 million for the first quarter of 2004, and
$2.0 million for the second and third quarters of 2004 and
$1.0 million for the fourth quarter of 2004. ATG is
required to maintain $25 million in unrestricted cash,
which includes cash equivalents and marketable securities, at
the Bank. In the event ATGs cash balances at the Bank fall
below $25 million, ATG will be required to pay fees and
expenses to compensate the Bank for lost income. At
December 31, 2003, ATG was in compliance with all related
financial covenants. In the event that ATG does not comply with
any of the financial covenants within the line of credit or
defaults on any of its provisions, the Banks significant
remedies include: (1) declaring all obligations immediately
due and payable; (2) ceasing to advance money or extend
credit for our benefit; (3) applying to the obligations any
balances and deposits held by us or any amount held by the Bank
owing to or for the credit or the account of ATG; and,
(4) putting a hold on any deposit account held as
collateral. If the agreement expires, or is not extended, the
Bank will require outstanding Letters of Credit (LCs)
at that time to be cash secured on terms acceptable to the Bank.
The revolving line of credit expires on November 25, 2004.

While there were no outstanding borrowings under
the facility at December 31, 2003, ATG has issued LCs
totaling $12.0 million, which are supported by this
facility. The LCs have been issued in favor of various
landlords to secure obligations under ATGs facility leases
pursuant to leases expiring from August 2004 through August
2009. The line of credit bears interest at the Banks prime
rate (4.00% at December 31, 2003). As of December 31,
2003, approximately $8.0 million was available under the
facility.



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

Income (loss) before provision for income taxes
consists of the following:

|         |       |                          |        |       |  |      |         |         |   |   |          |          |  
|-------- | ----- | ------------------------ | ------ | ----- |  | ---- | ------- | ------- | - | - | -------- | -------- | -
|         |       |                         
|         |       | Years Ended December 31,
|         |       |                         
|         |       | 2003                     |        | 2002  |  | 2001
|         |       |                          |        |       |  |     
|         |       |                         
|         |       | (In thousands)          
|Domestic |       | $                        | 13,539 |       |  | $    | (22,197 | )       |   | $ | (128,885 | )       
|Foreign  |       |                          | (9,616 | )     |  |      | (7,293  | )       |   |   | (3,269   | )       
|         |       |                          |        |       |  |      |         |         |   |   |          |         
|         | Total |                          | $      | 3,923 |  |      | $       | (29,490 | ) |   | $        | (132,154 | )
|         |       |                          |        |       |  |      |         |         |   |   |          |         

57



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The (benefit) provision for income taxes shown in
the accompanying consolidated statements of operations is
composed of the following:

|        |          |                          |      |      |   |      |   |   |  |   |        |        |  
|------- | -------- | ------------------------ | ---- | ---- | - | ---- | - | - |  | - | ------ | ------ | -
|        |          |                         
|        |          | Years Ended December 31,
|        |          |                         
|        |          | 2003                     |      | 2002 |   | 2001
|        |          |                          |      |      |   |     
|        |          |                         
|        |          | (In thousands)          
|Federal |          |                          |      |      |   |      |   |   |  |   |        |       
|        | Current  |                          | $    |     |   |      | $ |  |  |   | $      |       |  
|        | Deferred |                          |      |     |   |      |   |  |  |   |        | 19,140 |  
|State   |          |                          |      |      |   |      |   |   |  |   |        |       
|        | Current  |                          |      |     |   |      |   |  |  |   |        | 53     |  
|        | Deferred |                          |      |     |   |      |   |  |  |   |        | 3,200  |  
|Foreign |          |                          |      |      |   |      |   |   |  |   |        |       
|        | Current  |                          |      | (255 | ) |      |   |  |  |   |        | 2,457  |  
|        | Deferred |                          |      |     |   |      |   |  |  |   |        | (999   | )
|        |          |                          |      |      |   |      |   |   |  |   |        |       
|        |          | $                        | (255 | )    |   | $    |  |   |  | $ | 23,851 |       
|        |          |                          |      |      |   |      |   |   |  |   |        |       

The provision for income taxes differs from the
federal statutory rate due to the following:

|                                     |  |                          |       |      |  |      |       |    |  |  |       |   
|------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2003                     |       | 2002 |  | 2001
|                                     |  |                          |       |      |  |     
|Federal tax at statutory rate        |  |                          | 35.0  | %    |  |      | (35.0 | )% |  |  | (35.0 | )%
|State taxes, net of federal benefit  |  |                          | 11.5  |      |  |      | (2.4  | )  |  |  | (3.1  | ) 
|Meals and entertainment              |  |                          | 4.3   |      |  |      | 0.3   |    |  |  | 1.0   |   
|Reversal of previously accrued taxes |  |                          | (8.5  | )    |  |      |      |    |  |  |      |   
|Other                                |  |                          | 0.8   |      |  |      | 1.4   |    |  |  | 2.0   |   
|                                     |  |                          |       |      |  |      |       |    |  |  |       |   
|Provision before valuation allowance |  |                          | 43.1  |      |  |      | (35.7 | )  |  |  | (35.1 | ) 
|                                     |  |                          |       |      |  |      |       |    |  |  |       |   
|Change in valuation allowance        |  |                          | (49.6 | )    |  |      | 35.7  |    |  |  | 53.1  |   
|                                     |  |                          |       |      |  |      |       |    |  |  |       |   
|                                     |  |                          | (6.5  | )%   |  |      |      | %  |  |  | 18.0  | % 
|                                     |  |                          |       |      |  |      |       |    |  |  |       |   

The approximate tax effect of each type of
temporary difference and carryforward is as follows (in
thousands):

|                                  |  |              |         |      |  |   |         |  
|--------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2003         |         | 2002
|                                  |  |              |         |     
|Cumulative temporary differences: |  |              |         |      |  |   |         |  
|Restructuring                     |  |              | 6,727   |      |  |   | 20,355  |  
|Depreciation & Amortization       |  |              | 1,183   |      |  |   | 855     |  
|Reserves and Accruals             |  |              | 460     |      |  |   | 1,180   |  
|Other                             |  |              | 12      |      |  |   | 741     |  
|US Income tax credits             |  |              | 1,037   |      |  |   | 1,037   |  
|Net operating losses              |  |              | 79,200  |      |  |   | 71,694  |  
|Valuation-allowance               |  |              | (88,619 | )    |  |   | (95,862 | )
|                                  |  |              |         |      |  |   |         |  
|                                  |  | $            |        |      |  | $ |        |  
|                                  |  |              |         |      |  |   |         |  

58



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of December 31, 2003, ATG had net
operating loss carryforwards of approximately $198 million
for federal income tax purposes and approximately
$18.5 million for non-US income tax purposes. Approximately
$90.4 million of the federal and state income tax net
operating loss carryforwards relate to the exercise of incentive
and nonqualified stock options which are treated as compensation
deductions for federal and state income tax purposes.
Approximately $56.0 million of this amount was tax
benefited through additional paid-in capital in 2000. ATG also
has available federal tax credit carryforwards of approximately
$1.0 million. If not utilized, these carryforwards will
expire at various dates beginning 2011 through 2023. If
substantial changes in ATGs ownership should occur, as
defined by Section 382 of the Internal Revenue Code (the
Code), there could be annual limitations on the amount of
carryforwards that can be realized in future periods. ATG has
completed several refinancings since its inception and has
incurred ownership changes, as defined under the Code, which
could have an impact on the Companys ability to utilize
these tax credit and operating loss carryforwards.

As of December 31, 2003, the Company
recorded a full valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realizability of
these assets. The valuation allowance decreased
$7.2 million to $88.6 million in 2003 from
$95.9 million in 2002 due to the utilization of previously
reserved net operating losses.

As of December 31, 2002, the Company
recorded a full valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realizability of
these assets. In order to record the full valuation allowance
against previously recognized tax assets, the Company recorded a
realized charge of $23.9 million in 2001.

The Company has provided for potential amounts
due in various foreign tax jurisdictions. Judgment is required
in determining the Companys worldwide income tax expense
provision. In the ordinary course of global business, there are
many transactions and calculations where the ultimate tax
outcome is uncertain. Some of these uncertainties arise as a
consequence of cost reimbursement arrangements among related
entities. Although we believe our estimates are reasonable, no
assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in
our historical income tax provisions and accruals. Such
differences could have a material impact on our income tax
provision and operating results in the period in which such
determination is made. For the year ended December 31, 2003
the Company reversed previously accrued taxes of $332,000 for
foreign locations due to a change in our estimates of potential
amounts due in those locations.



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



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



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

In April 1996, the 1996 Stock Option Plan (the
1996 Plan) was approved by ATGs Board of Directors and
stockholders. The purpose of the 1996 Plan is to reward
employees, officers and directors and consultants and advisors
to ATG who are expected to contribute to the growth and success
of ATG. The 1996 Plan provides for the award of options to
purchase shares of ATGs common stock. Stock options
granted under the 1996 Plan may be either incentive stock
options or nonqualified stock options. The 1996 Plan is
administered by the Board of Directors, which has the authority
to designate participants, determine the number and type of
options to be granted, the time at which options are
exercisable, the method of payment and any other terms or
conditions of the options. Options generally vest quarterly over
a two to four-year period and expire 10 years from the date
of grant. While the Board determines the prices at which options
may be exercised under the 1996 Plan, the exercise price of an
incentive stock option shall be at least 100% (110% for
incentive stock options granted to a 10% stockholder) of the
fair market value of ATGs common stock on the date of
grant. On May 14, 2001, the 1996 Plan was amended to
increase the total shares of common stock that have been

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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

reserved for options to be granted to 25,600,000.
As of December 31, 2003, there are 7,718,846 shares
available for future grant under the 1996 Plan.

Additionally, in May 1999, ATG granted 150,000
options outside ATGs stock option plans to an executive of
ATG. As of December 31, 2003, these options have not been
exercised.

1999 Outside
Director Stock Option Plan

The 1999 Outside Director Stock Option Plan
(Director Plan) was adopted by ATGs Board of Directors and
approved by stockholders in May 1999. Under the terms of the
Director Plan, non-employee directors of ATG receive
nonqualified options to purchase shares of ATGs common
stock. A total of 800,000 shares of common stock have been
reserved under the Director Plan.

Under the terms of the Director Plan, each
non-employee director on the effective date of the initial
public offering received an option to purchase
10,000 shares of common stock on the effective date of the
Companys initial public offering at the public offering
price. As of December 31, 2003, there are
550,000 shares available for future grant under the
Director Plan.

The following table summarizes ATGs option
activity under the Companys 1996 Plan and Director Plan:

|                               |           |                                      |        |                |   |          |             |             |  |   |       |       | 
|------------------------------ | --------- | ------------------------------------ | ------ | -------------- | - | -------- | ----------- | ----------- |  | - | ----- | ----- | 
|                               |           |                                      |        |                |   | Weighted
|                               |           |                                      |        |                |   | Average 
|                               |           | Number                               |        |                |   | Exercise
|                               |           | of Shares                            |        | Exercise Price |   | Price   
|                               |           |                                      |        |                |   |         
|                               |           |                                     
|                               |           | (In thousands except per share data)
|Outstanding, December 31, 2000 |           |                                      | 10,542 |                |   | $        | 0.06-120.00 |             |  | $ | 36.42 |      
|                               | Granted   |                                      |        | 8,532          |   |          |             | 0.07- 40.25 |  |   |       | 8.81  | 
|                               | Exercised |                                      |        | (937           | ) |          |             | 0.06- 75.56 |  |   |       | 12.36 | 
|                               | Canceled  |                                      |        | (5,099         | ) |          |             | 0.06-120.00 |  |   |       | 35.47 | 
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Outstanding, December 31, 2001 |           |                                      | 13,038 |                |   | $        | 0.06-120.00 |             |  | $ | 21.25 |      
|                               | Granted   |                                      |        | 4,288          |   |          |             | 0.90-  4.31 |  |   |       | 2.39  | 
|                               | Exercised |                                      |        | (343           | ) |          |             | 0.06-  2.13 |  |   |       | 0.33  | 
|                               | Canceled  |                                      |        | (5,412         | ) |          |             | 0.06-120.00 |  |   |       | 36.16 | 
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Outstanding, December 31, 2002 |           |                                      | 11,571 |                |   | $        | .06-120.00  |             |  | $ | 7.91  |      
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|                               | Granted   |                                      |        | 4,807          |   |          |             | 0.84-  2.82 |  |   |       | 1.26  | 
|                               | Exercised |                                      |        | (786           | ) |          |             | 0.06-  2.13 |  |   |       | 0.96  | 
|                               | Canceled  |                                      |        | (4,212         | ) |          |             | 0.06-120.00 |  |   |       | 9.94  | 
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Outstanding, December 31, 2003 |           |                                      | 11,380 |                |   | $        | 0.06-120.00 |             |  | $ | 4.56  |      
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Exercisable, December 31, 2003 |           |                                      | 6,018  |                |   | $        | 0.06-120.00 |             |  | $ | 6.53  |      
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Exercisable, December 31, 2002 |           |                                      | 5,523  |                |   | $        | .06-120.00  |             |  | $ | 9.78  |      
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      
|Exercisable, December 31, 2001 |           |                                      | 4,370  |                |   | $        | .06-120.00  |             |  | $ | 23.76 |      
|                               |           |                                      |        |                |   |          |             |             |  |   |       |      

60



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes information
relating to currently outstanding and exercisable options as of
December 31, 2003:

|                |              |                                              |  |                  |        |          |  |           |     |          |  |   |       |  |  |  |       |  |  |   |       | 
|--------------- | ------------ | -------------------------------------------- |  | ---------------- | ------ | -------- |  | --------- | --- | -------- |  | - | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |              |                                              |  |                 
|                |              | Outstanding                                  |  | Exercisable     
|                |              |                                              |  |                 
|                |              |                                              |  | Weighted         |        |          |  |          
|                |              |                                              |  | Average          |        |          |  |          
|                |              |                                              |  | Remaining        |        | Weighted |  |           |     | Weighted
|                |              |                                              |  | Contractual Life |        | Average  |  |           |     | Average 
|Range of        |              | Number of                                    |  | Outstanding      |        | Exercise |  | Number of |     | Exercise
|Exercise Prices |              | Shares                                       |  | (Years)          |        | Price    |  | Shares    |     | Price   
|                |              |                                              |  |                  |        |          |  |           |     |         
|                |              |                                             
|                |              | (In thousands, except per-share information)
|$               | .06-$.07     |                                              |  |                  | 14     |          |  |           | 2.9 |          |  | $ | 0.07  |  |  |  | 14    |  |  | $ | 0.07  | 
|                | .25          |                                              |  |                  | 358    |          |  |           | 4.3 |          |  | $ | 0.25  |  |  |  | 358   |  |  | $ | 0.25  | 
|                | .70-1.04     |                                              |  |                  | 3,021  |          |  |           | 8.8 |          |  | $ | 0.93  |  |  |  | 1,024 |  |  | $ | 0.94  | 
|                | 1.05-1.55    |                                              |  |                  | 2,089  |          |  |           | 7.5 |          |  | $ | 1.35  |  |  |  | 840   |  |  | $ | 1.32  | 
|                | 1.58-2.37    |                                              |  |                  | 2,255  |          |  |           | 8.3 |          |  | $ | 1.97  |  |  |  | 1,007 |  |  | $ | 2.13  | 
|                | 2.54-3.56    |                                              |  |                  | 182    |          |  |           | 7.8 |          |  | $ | 3.04  |  |  |  | 77    |  |  | $ | 3.07  | 
|                | 3.90-5.82    |                                              |  |                  | 2,458  |          |  |           | 6.2 |          |  | $ | 4.53  |  |  |  | 1,806 |  |  | $ | 4.67  | 
|                | 6.19-8.27    |                                              |  |                  | 40     |          |  |           | 6.9 |          |  | $ | 7.80  |  |  |  | 37    |  |  | $ | 7.92  | 
|                | 9.31-13.41   |                                              |  |                  | 427    |          |  |           | 6.5 |          |  | $ | 10.05 |  |  |  | 402   |  |  | $ | 10.00 | 
|                | 14.00-20.00  |                                              |  |                  | 84     |          |  |           | 6.3 |          |  | $ | 18.79 |  |  |  | 69    |  |  | $ | 18.77 | 
|                | 22.94-34.25  |                                              |  |                  | 74     |          |  |           | 7.1 |          |  | $ | 29.43 |  |  |  | 52    |  |  | $ | 29.49 | 
|                | 34.75-51.69  |                                              |  |                  | 169    |          |  |           | 6.1 |          |  | $ | 47.80 |  |  |  | 151   |  |  | $ | 48.05 | 
|                | 52.50-78.00  |                                              |  |                  | 171    |          |  |           | 6.1 |          |  | $ | 64.56 |  |  |  | 151   |  |  | $ | 63.83 | 
|                | 80.56-120.00 |                                              |  |                  | 38     |          |  |           | 6.6 |          |  | $ | 94.63 |  |  |  | 30    |  |  | $ | 94.88 | 
|                |              |                                              |  |                  |        |          |  |           |     |          |  |   |       |  |  |  |       |  |  |   |       | 
|                |              |                                              |  |                  | 11,380 |          |  |           | 7.5 |          |  | $ | 4.56  |  |  |  | 6,018 |  |  | $ | 6.53  | 
|                |              |                                              |  |                  |        |          |  |           |     |          |  |   |       |  |  |  |       |  |  |   |       | 

Through the fourth quarter of 1998, ATG recorded
deferred compensation of approximately $4.9 million, which
represents the aggregate difference between the exercise price
and the fair market value of the Companys common stock, as
determined for accounting purposes. The deferred compensation is
being recognized as an expense over the vesting period of the
underlying stock options. ATG recorded compensation expense of
$136,000, $942,000 and $1,280,000 for the years ended
December 31, 2003, 2002 and 2001, respectively, related to
these options.

1999 Employee
Stock Purchase Plan

The 1999 Employee Stock Purchase Plan (the Stock
Purchase Plan) was adopted by ATGs Board of Directors and
approved by stockholders in May 1999. The Stock Purchase Plan,
as amended, authorizes the issuance of up to a total of
5,000,000 shares of ATGs common stock to
participating employees. All ATG employees, including directors
who are employees, are eligible to participate in the Stock
Purchase Plan. Employees who would immediately after the grant
own 5% or more of the total combined voting power or value of
the Companys stock are not eligible to participate. During
each designated quarterly offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase
shares of the Companys common stock. The purchase price is
85% of the closing market price of ATGs common stock on
either: (1) the first business day of the offering period
or (2) the last business day of the offering period,
whichever is lower.

During the years ended 2003, 2002 and 2001,
1,208,667, 1,616,442 and 131,708 shares, respectively, were
issued under the 1999 Employee Stock Purchase Plan. As of
December 31, 2003, there were 1,868,735 shares
remaining unissued in the plan.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock-Based
Compensation

As permitted under FAS 123, the Company has
elected to follow APB 25, and related Interpretations, in
accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation
expense with respect to such awards.

Pro forma financial measures regarding net income
(loss) and earnings per share is required by FAS 123 for
stock-based awards as if the Company had accounted for its
stock-based awards to employees under the fair value method of
FAS 123. The fair value of the Companys stock-based
awards to employees was estimated using the Black-Scholes option
valuation model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. Because the Companys stock-based awards to
employees have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in managements opinion the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
assuming no expected dividends and the following weighted
average assumptions.

|                        |  |              |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |             
|                        |  | Years Ended 
|                        |  | December 31,
|                        |  |             
|                        |  | 2003         |      | 2002 |  | 2001
|                        |  |              |      |      |  |     
|Risk-free interest rate |  |              | 2.51 | %    |  |      | 3.43 | % |  |  | 4.43 | %
|Expected dividend yield |  |              |     |      |  |      |     |   |  |  |     |  
|Expected life (years)   |  |              | 4    |      |  |      | 4    |   |  |  | 4    |  
|Expected volatility     |  |              | 117  | %    |  |      | 125  | % |  |  | 135  | %

The weighted average grant date fair values per
share generated by application of the Black-Scholes option
valuation model utilizing the assumptions noted above for the
years ended December 31, 2003, 2002 and 2001 were $0.97,
$1.97 and $7.40, respectively, resulting in total compensation
expense of $5,061,000, $8,549,000 and $62,197,000 for
stock-based awards granted in 2003, 2002 and 2001, respectively.
Total compensation expense is recognized over the vesting period
of the underlying stock options period adjusted for forfeitures.
As required under FAS 123, the reported net (loss) income
and basic and diluted earnings (loss) per share have been
presented to reflect the impact had the Company been required to
account for stock-based awards using the fair value method under
FAS 123. For purposes of this disclosure, the estimated
fair value of the options is amortized to expense over the
options vesting periods. See Note 1(l) for the
disclosure of pro forma net loss and net loss per share.

Adoption of
Shareholders Rights Plan

On September 26, 2001, ATGs Board of
Directors adopted a Shareholder Rights Plan (the Shareholder
Rights Plan) pursuant to which preferred stock purchase rights
were distributed to shareholders as a dividend at the rate of
one Right for each share of common stock held of record as of
the close of business on October 9, 2001. The Shareholder
Rights Plan was adopted to enable the Board of Directors to
protect the Company against any takeover attempt that the Board
considers not to be in the best interests of shareholders.

When exercisable, each Right will entitle
shareholders to buy one one-thousandth of a share of
Series A Junior Participating Preferred Stock at an
exercise price of $15 per Right. Subject to certain
exceptions, the Rights will be exercisable after a person or
group (except for certain excluded persons) acquires beneficial
ownership of 15% or more of ATGs outstanding common stock
or undertakes a tender or exchange offer which, if consummated,
would result in that person or group beneficially owning 15% or
more of ATGs outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

acquires 15% or more of ATGs outstanding
common stock and under certain other circumstances at a
redemption price of $.001 per Right.

Option
Exchange Program

On August 1, 2002, the Company offered all
full-time and part-time employees, other than the officers as
defined in Rule 16a-1(f) of the Securities Exchange Act of
1934, and directors, the opportunity to participate in a stock
option exchange program. The voluntary program gave employees
the opportunity to exchange options with exercise prices of
$15.00 or more per share that were granted under the Amended and
Restated 1996 Stock Option Plan. However, if an employee elected
to cancel any awards, all options granted after January 26,
2002 were also required to be canceled and the employee could
not be granted any additional shares of stock before
March 3, 2003. The new options were exercisable for one
share of ATGs common stock for every three shares of the
Companys common stock issuable upon exercise of a
surrendered option to be granted at least six months and one day
after the old options were cancelled. Approximately 3,000,495
options were eligible for exchange under this program.

On August 29, 2002, 1,997,819 options were
cancelled under the stock option exchange program. On
March 3, 2003, 479,447 replacement options were granted to
employees of ATG in accordance with the option exchange program,
at a grant price of $0.99 per share. Twenty-five percent of
each new option vested immediately on the date of grant. The
remaining seventy-five percent will vest in three equal
installments in six-month intervals.



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

On June 1, 2000, ATG completed the
acquisition of Petronio Technology Group, a Boston-based
provider of educational training and consulting services. ATG
acquired Petronio Technology Group for $1,200,000, consisting of
an initial payment of $600,000 at the closing and two annual
contingent payments of $300,000 each. The acquisition was
accounted for under the purchase method of accounting, and the
results of operations for Petronio Technology Group were
included in ATGs results from the acquisition date. ATG
recorded $600,000 in goodwill that was being amortized over two
years. The contingent payments were recognized as compensation
expense ratably over the two-year vesting period. For the year
ended December 31, 2000, ATG recorded amortization expense
of $188,000 and compensation expense of $188,000. For the year
ended December 31, 2001, ATG recorded amortization expense
of $241,000 and compensation expense of $300,000. Due to the
Companys restructuring of its business operations in 2001,
the Company determined the goodwill related to this acquisition
was permanently impaired. As a result, the Company wrote off
$171,000 of the remaining unamortized goodwill in the fourth
quarter of 2001. This amount is included in the Companys
2001 restructuring charge (see Note 12).

On July 17, 2000, ATG completed the
acquisition of The Toronto Technology Group, Inc., a
privately held 30-person consulting and educational services
company based in Toronto, Canada, for approximately
$12.0 million in cash, options and shares of common stock.
The acquisition was accounted for under the purchase method of
accounting. Upon the closing of the transaction, ATG paid
$5.2 million in cash, issued 19,634 employee stock
options and also issued 56,237 exchangeable shares of ATGs
subsidiary Art Technology Group (Canada), Inc. The
exchangeable shares were exchangeable for 56,237 shares of
ATGs common stock, subject to a three-year vesting
schedule. During 2001, 18,745 shares were exchanged for ATG
common shares. The Company recorded approximately
$2.1 million in compensation expense ratably from
July 18, 2000 to July 17, 2001 related to the
exchanged shares. Additionally, the Company settled 11,762
exchangeable shares with a certain employee. Upon settlement,
ATG recorded $1.3 million as a component of restructuring
expense (see Note 12). This expense included both the cash
paid to settle the award and unamortized deferred compensation
at the time of settlement. Additionally, the final
25,712 shares were forfeited when the remainder of the
employees ceased being employed by the Company. Also, as part of
the

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

2001 restructuring charge, ATG incurred charges
relating to headcount reductions, excess office space, and the
write-off of the remaining goodwill of $3.8 million all
relating to the Toronto Technology Group Inc. acquisitions. This
charge was included as part of the 2001 restructuring charge
(see Note 12).

(7) Commitments and
Contingencies



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

ATG has offices, primarily for sales and support
personnel, in eight domestic locations as well as four foreign
countries. At December 31, 2003, ATG had issued
$12.0 million of LCs under its line of credit in
favor of various landlords to secure obligations under its
facility leases, which expire from 2004 through 2009.

The future minimum payments of ATGs
facility leases and certain operating equipment leases as of
December 31, 2003, were as follows:

|                          |                                     |                  |       |        | 
|------------------------- | ----------------------------------- | ---------------- | ----- | ------ | 
|Years Ending December 31, |                                     | Operating Leases
|                          |                                     |                 
|                          |                                     | (In thousands)  
|2004                      |                                     | $                | 7,337 |       
|2005                      |                                     |                  | 6,482 |       
|2006                      |                                     |                  | 5,098 |       
|2007                      |                                     |                  | 2,299 |       
|2008                      |                                     |                  | 1,846 |       
|Thereafter                |                                     |                  | 461   |       
|                          |                                     |                  |       |       
|                          | Total future minimum lease payments |                  | $     | 23,523 | 
|                          |                                     |                  |       |       

Of the $23.5 million in future minimum lease
payments, $15.2 million was included in the Companys
2003, 2002 and 2001 restructuring charges. The
$15.2 million, which excludes settlements due in less than
one year, was reduced to a $12.7 million restructuring
charge after taking into consideration estimated sublease
income, contracted sublease income, vacancy periods and
operating costs of the various subleased properties (see
Note 12).

Rent expense included in the accompanying
statements of operations was approximately $5,472,000,
$9,434,000 and $15,076,000 for the years ended December 31,
2003, 2002 and 2001, respectively.



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

The Company frequently has agreed to
indemnification provisions in software license agreements with
customers and in its real estate leases in the ordinary course
of its business.

With respect to software license agreements,
these indemnifications generally include provisions indemnifying
the customer against losses, expenses, and liabilities from
damages that may be awarded against the customer in the event
the Companys software is found to infringe upon the
intellectual property. The software license agreements generally
limit the scope of and remedies for such indemnification
obligations in a variety of industry-standard respects. The
Company believes its internal development processes and other
policies and practices limit its exposure related to the
indemnification provisions of the software license agreements.
In addition, the Company requires its employees to sign a
proprietary information and inventions agreement, which assigns
the rights to its employees development work to the
Company. To date, the Company has not had to reimburse any of
its customers for any losses related to these indemnification
provisions and no material claims are outstanding as of
December 31, 2003.

With respect to real estate lease agreements or
settlement agreements with landlords, these indemnifications
typically apply to claims asserted against the landlord relating
to personal injury and property damage at

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the leased premises or to certain breaches of the
Companys contractual obligations or representations and
warranties included in the settlement agreements. These
indemnification provisions generally survive the termination of
the respective agreements, although the provision generally has
the most relevance during the contract term and for a short
period of time thereafter. The maximum potential amount of
future payments that the Company could be required to make under
these indemnification provisions is unlimited. The Company has
purchased insurance that reduces its monetary exposure for
landlord indemnifications. The Company has never paid any
amounts to defend lawsuits or settle claims related to these
indemnification provisions. Accordingly, the Company believes
the estimated fair value of these indemnification arrangements
is minimal.



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

In connection with a settlement of the patent
infringement claim by BroadVision Inc. (BroadVision), ATG
acquired a perpetual, paid-up license for BroadVisions
patented technology. ATG paid $2.0 million in each of 2002
and 2001, and $11.0 million in 2000. ATG expensed
$2.3 million of the settlement as cost of product revenues
in the each of 2002 and 2001.



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

Effective January 1, 1997, ATG adopted the
Art Technology Group 401(k) Plan (the 401(k) Plan).
All employees, as defined, are eligible to participate in the
401(k) Plan. The 401(k) Plan allows eligible employees
to make salary-deferred contributions of up to 15% of their
annual compensation, as defined, subject to certain Internal
Revenue Service limitations. ATG may contribute to the
401(k) Plan at its discretion. For the years ended
December 31, 2003, 2002 and 2001, ATG made a discretionary
contribution to the 401(k) Plan of approximately $0,
$1,216,000 and $1,008,000, respectively.



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

Accrued expenses at December 31, 2003 and
2002 consisted of the following:

|                          |  |                |        |      |  |   |        | 
|------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                          |  |               
|                          |  | December 31,  
|                          |  |               
|                          |  | 2003           |        | 2002
|                          |  |                |        |     
|                          |  |               
|                          |  | (In thousands)
|Payroll and related costs |  | $              | 3,894  |      |  | $ | 6,943  | 
|Accrued accounts payable  |  |                | 1,190  |      |  |   | 1,295  | 
|Taxes                     |  |                | 3,796  |      |  |   | 4,102  | 
|Other                     |  |                | 3,483  |      |  |   | 5,879  | 
|                          |  |                |        |      |  |   |        | 
|                          |  | $              | 12,363 |      |  | $ | 18,219 | 
|                          |  |                |        |      |  |   |        | 



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

Other assets at December 31, 2003 consisted
of the following:

|                                                                |  |                |       |      |  |   |       | 
|--------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                                                |  |               
|                                                                |  | December 31,  
|                                                                |  |               
|                                                                |  | 2003           |       | 2002
|                                                                |  |                |       |     
|                                                                |  |               
|                                                                |  | (In thousands)
|Prepaid rent resulting from lease settlements
    (see Note 12) |  | $              | 3,772 |      |  | $ |      | 
|Other assets                                                    |  |                | 940   |      |  |   | 1,569 | 
|                                                                |  |                |       |      |  |   |       | 
|                                                                |  | $              | 4,712 |      |  | $ | 1,569 | 
|                                                                |  |                |       |      |  |   |       | 

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The following is a rollforward of ATGs
allowance for doubtful accounts:

|                             |  |                |       |            |  |             |       |                |  |   |        |   |  |   |       | 
|---------------------------- |  | -------------- | ----- | ---------- |  | ----------- | ----- | -------------- |  | - | ------ | - |  | - | ----- | 
|                             |  |                |       | Additions/ |  |             |       |               
|                             |  | Beginning of   |       | Charges to |  | Deductions/ |       | Balance at End
|                             |  | Period         |       | Expense    |  | Write-offs  |       | of Period     
|                             |  |                |       |            |  |             |       |               
|                             |  |               
|                             |  | (In thousands)
|Year Ended December 31, 2001 |  | $              | 2,655 |            |  | $           | 4,900 |                |  | $ | (4,016 | ) |  | $ | 3,539 | 
|                             |  |                |       |            |  |             |       |                |  |   |        |   |  |   |       | 
|Year Ended December 31, 2002 |  | $              | 3,539 |            |  | $           | 694   |                |  | $ | (2,292 | ) |  | $ | 1,941 | 
|                             |  |                |       |            |  |             |       |                |  |   |        |   |  |   |       | 
|Year Ended December 31, 2003 |  | $              | 1,941 |            |  | $           | 210   |                |  | $ | (1,352 | ) |  | $ | 799   | 
|                             |  |                |       |            |  |             |       |                |  |   |        |   |  |   |       | 



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

During the years ended 2003, 2002 and 2001, the
Company recorded net restructuring charges/ (benefits) of
$(10.5) million, $19.0 million and $75.6 million,
respectively, as a result of the global slowdown in information
technology spending. The significant drop in demand in 2001 for
technology oriented products, particularly internet related
technologies, caused management to significantly scale back the
Companys prior growth plans, resulting in a significant
reduction in the Companys workforce and consolidation of
the Companys facilities in 2001. Throughout 2002, the
continued softness of demand for technology products, as well as
near term revenue projections, caused management to further
evaluate the Companys marketing, sales and service
resource capabilities as well as its overall general and
administrative cost structure, which resulted in additional
restructuring actions being taken in 2002. These actions
resulted in a further reduction in headcount and consolidation
of additional facilities. In 2003, as the Company continued to
refine its business strategy and to consider future revenue
opportunities, the Company took further restructuring actions to
reduce costs, including product development costs, in order to
help move the Company towards profitability. The charges
referred to above primarily pertain to the closure and
consolidation of excess facilities, impairment of assets,
employee severance benefits, and the settlement of certain
contractual obligations. The 2003 charges were recorded in
accordance with FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities, FAS 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits (FAS 88) and Staff Accounting
Bulletin (SAB) 100, Restructuring and Impairment
Charges. The 2002 and 2001 charges were recorded in
accordance with Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), FAS 88 and
SAB 100.

2001 Actions

Actions taken by the Company in 2001 included the
consolidation and closure of excess facilities, a worldwide
workforce reduction, the write-off of certain unrealizable
assets and settling certain obligations that had no future
benefit. In the second quarter of 2001, the Company recorded a
restructuring charge of $44.2 million, and in the fourth
quarter of 2001, the Company recorded a restructuring charge of
$31.4 million. In connection with these actions, the
Company also recorded an impairment charge in cost of product
licenses for purchased software of $1.4 million. Total
restructuring charges for 2001 totaled $75.6 million.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the charges and related activity of
the restructuring accruals is as follows (in thousands):

|                                               |  |         |        |                    |  |              |       |                |  |                   |        |   |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | ------- | ------ | ------------------ |  | ------------ | ----- | -------------- |  | ----------------- | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                               |  |         |        | 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 |       | Write-offs and |  | 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 |       | Write-offs and |  | 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 | 
|                                               |  |                   |        |                    |  |              |       |                |  |                   |         |   |  |   |        |   |  |   |        | 



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

During 2001, the Company recorded
facility-related charges of $59.4 million of which
$38.1 million was recorded in the second quarter and
$21.3 million was recorded in the fourth quarter. The
facilities-related charges comprise excess rental space for
offices worldwide, net of estimates for vacancy periods and
sublease

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

income based on the then-current real estate
market data, and related write-offs of abandoned leasehold
improvements and fixed assets of $7.7 million and
$2.2 million, respectively, which were directly related to
excess office facilities. The estimated sublease income was
$25.9 million and based on rental rates ranging from $18 to
$40 per square foot with estimated vacancy periods prior to
the expected sublease income ranging from 10 to 15 months.
During the fourth quarter of 2001, the Company recorded an
adjustment to increase the facility-related costs for a change
in estimate of the lease obligations for two leases by
$9.7 million as a result of a market analysis indicating
lower sublease rates and longer vacancy periods due to the
continued weakening of the real estate market. The sublease
income was adjusted by decreasing anticipated sublease rates
from the range of $18 to $40 to the range of $18 to $35 per
square foot and extending the initial vacancy periods by
approximately 9 months. In addition, the Company reduced
its lease accruals by $8.2 million for a lease settlement
in consideration of a buy-out totaling $9.3 million, which
is being paid ratably over 4.5 years.

During 2002, the Company recorded an adjustment
to increase the facilities-related portion of the 2001 charge by
an additional $2.2 million for changes to sublease and
vacancy assumptions due to the continued weakening in the real
estate market. The sublease income was adjusted by decreasing
two anticipated sublease rates to $18 from $25 per square
foot and extending the initial vacancy periods by 7 months.
In addition, during 2002, the Company executed sublease
agreements for two locations and recorded a reduction to its
lease accruals of $853,000 due to favorable sublease terms
compared to the Companys original estimates.

During 2003, the Company settled future lease
obligations for five leases for aggregate payments of
$17.1 million, resulting in an aggregate reduction to its
lease accruals relating to its 2001 restructuring of
$11.5 million, net of sublease and vacancy assumptions. The
Company also recorded an additional charge of $2.8 million
for facilities-related costs comprising $2.3 million for
updated management assumptions of probable settlement outcomes
based on the then-current negotiations and $450,000 for updated
sublease assumptions based on current real estate market
conditions extending the vacancy period to 33 months form
12 months.

The leaseholds improvements, which will continue
to be in use, related to the facilities the Company vacated and
is subleasing or attempting to sublease, were written down to
their estimated fair value of zero because the estimated cash
flows to be generated by sublease income at those locations are
not and will not be sufficient to recover the carrying value of
the assets. Furniture and fixtures were written down to their
fair value based on the expected discounted cash flows they will
generate over their remaining economic life. Because these
assets ceased being used as of the end of the period in which
the write-downs were recorded, the fair value of these assets
was estimated to be zero. The assets were abandoned and disposed
of at the time of the charge.



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

As part of the 2001 restructuring actions, the
Company recorded charges of $7.9 million for employee
severance. The Company terminated the employment of 530
employees, or 46% of the Companys workforce, of which 249
of these employees were from sales and marketing, 117 from
services, 101 from general and administrative and 63 from
research and development. No employees remained employed as of
June 30, 2002. In addition, the Company settled
11,762 exchangeable shares with a certain employee, who was
terminated in connection with the restructuring action, and
recorded $1.3 million as a charge to restructuring for this
settlement. During 2003, the Company recorded additional charges
of $229,000 for severance related to a specific employee
terminated as part of the 2001 restructuring action.



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

The asset impairment charges included the
write-off of approximately $4.0 million of the remaining
unamortized goodwill related to the two professional service
organizations acquisitions completed in 2000. The Company had
closed these operations and terminated the employees as part of
the 2001 restructuring action,

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and as a result, the unamortized goodwill was
impaired and had no future value. In addition, the Company
recorded an impairment charge of approximately $1.4 million
in cost of product license revenues in the accompanying
Consolidated Statements of Operations related to purchased
software to record the software at its net realizable value of
zero due to ATG abandoning a certain product development
strategy. The purchased software had no future use to the
Company.



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

The Company recorded charges of $851,000 to
write-off certain prepaid costs for future marketing services to
their fair value of zero due to changes in the Companys
product development strategy. As a result, the prepaid marketing
cost had no future utility to the Company. During 2002, the
Company unexpectedly was able to recoup $536,000 and recorded a
credit for the amount received. During 2001, the Company also
recorded $405,000 for legal and accounting services incurred in
connection with the 2001 restructuring action.

The 2001 actions were substantially completed by
February 28, 2002.

2002 Actions

Actions taken by the Company in 2002 included the
consolidation and closure of excess facilities, a worldwide
workforce reduction and the write-off of certain idle assets. In
the fourth quarter of 2002, the Company recorded a restructuring
charge $18.2 million.

A summary of the charges and related activity of
the restructuring accruals related to the 2002 restructuring
actions is as follows (in thousands):

|                                               |  |              |        |                |  |               |       |  |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | -------------- |  | ------------- | ----- |  |  | - | ------ | 
|                                               |  |              |        |                |  | 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 |       | Write-offs and |  | 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 | 
|                                               |  |               |        |              |  |              |       |                |  |               |        |   |  |   |       |  |  |   |       | 



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

During 2002, the Company recorded
facilities-related charges of $14.6 million, which included
$12.0 million for operating lease obligations, net of
assumptions for vacancy periods and sublease income based on the
then-current real estate market data, related to office space
that was either idle or vacated during the first quarter of
2003. This action was completed by January 31, 2003. This
charge also included write-offs of leasehold improvements and
furniture and fixtures associated with these facilities of
$948,000 and $507,000, respectively, and computer equipment and
software of $1,158,000. The lease charge was for office space the

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Company vacated and intends to sublease. The
estimated sublease income was $4.8 million and based on
rental rates ranging from $23 to $35 per square foot with
estimated vacancy periods prior to the expected sublease income
ranging from 12 to 21 months.

During 2003, the Company recorded an adjustment
of $1.9 million primarily to increase its lease obligation
accrual at two locations because of changes in the assumptions
of the vacancy period and sublease income. The sublease income
was adjusted by decreasing anticipated sublease rates to $18
from $23 per square foot for one facility and from $35 to
$30 per square foot at the other location. The Company also
extended the initial vacancy periods from 12 to 21 months
to 24 to 42 months. These changes resulted in an estimated
reduction of sublease income of $1.8 million. In addition,
principally due to a favorable lease settlement relating to its
2002 restructuring activities, the Company reduced its lease
obligations by $7.2 million. The settlement resulted in the
Company terminating a future lease obligation for an aggregate
payment of $3.3 million, which was paid in January 2004. As
a result of this transaction, the Company recorded prepaid rent
of $2.2 million increasing the accrual adjustments to
$4.1 million.

As a result of this action and the actions taken
in 2001, the Company wrote-off certain computer equipment and
software, aggregating $1,158,000, and furniture and fixtures,
aggregating $507,000, which were no longer being used due to the
reduction in personnel and office locations. These assets were
abandoned and written down to their fair value based on the
expected discounted cash flows they would generate over their
remaining economic life. Due to the short remaining economic
life and current market conditions for such assets, the fair
value of these assets was estimated to be zero. These assets
ceased being used either as of December 31, 2002 or in the
first quarter of 2003 and were disposed of in the quarter ended
March 31, 2003. In addition, the Company wrote-off
leasehold improvements, which will continue to be in use,
related to the facilities it is attempting to sublease to their
fair value of zero because the estimated cash flows to be
generated by sublease income at those locations will not be
sufficient to recover the carrying value of the assets.

Employee
Severance, Benefits and Related Costs

As part of the 2002 restructuring action, the
Company recorded a charge of $3.6 million for severance and
benefit costs related to cost reduction actions taken across the
worldwide employee base. The severance and benefit costs were
for 125 employees, or 23% of the Companys workforce,
none of whom remained employed at December 31, 2003. Of the
125 employees, 53 of the employees were from sales and
marketing, 45 from services, 19 from general and
administrative and 8 from research and development. The
Company accrued employee benefits pursuant to ongoing benefits
plans and statutory minimum requirements in foreign locations.
The Company began the termination process on January 6,
2003 and all employees had been terminated by June 30,
2003. During the second quarter of 2003, the Company recorded an
adjustment to increase the severance accrual by $327,000 based
on final severance settlements with certain employees at its
foreign locations. During the fourth quarter of 2003, the
Company reduced certain severance accruals by $86,000, primarily
at its foreign locations, primarily as a result of amounts being
settled at less than the amount recorded due to foreign currency
exchange movements.

2003 Actions

As a result of several reorganization decisions,
the Company undertook plans to restructure operations in the
second and third quarters of 2003. Actions taken by the Company
included the closure of excess facilities, a worldwide workforce
reduction and the write-off of certain idle assets.

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the charges and related activity of
the restructuring accruals is as follows (in thousands):

|                                               |  |          |       |               |  |              |     |              |  |                |     |              |  |   |     |   |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | -------- | ----- | ------------- |  | ------------ | --- | ------------ |  | -------------- | --- | ------------ |  | - | --- | - |  | - | ----- |  |  | - | ----- | 
|                                               |  |          |       |               |  | 2003         |     |              |  |                |     |             
|                                               |  | Three    |       | Three         |  | Adjustments  |     | 2003         |  |                |     |             
|                                               |  | Months   |       | Months        |  | in Estimates |     | Adjustments  |  |                |     |             
|                                               |  | Ended    |       | Ended         |  | Resulting in |     | in Estimates |  |                |     | Balance at  
|                                               |  | June 30, |       | September 30, |  | Additional   |     | 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 | 
|                                               |  |          |       |               |  |              |     |              |  |                |     |              |  |   |     |   |  |   |       |  |  |   |       | 

Second Quarter 2003 Action

During the quarter ended June 30, 2003, the
Company recorded a restructuring charge of $2.0 million.
The Company also recorded an impairment charge in cost of
product licenses of $169,000 related to certain purchased
software.

Facilities-Related
Costs and Impairments

During the second quarter of 2003, the Company
recorded facilities-related charges of $1.1 million
comprising $866,000 for an operating lease related to idle
office space, $144,000 of leasehold improvements and fixed
assets written down to their fair value, and $61,000 for various
office equipment leases. The lease charge was for office space
the Company vacated and intends to sublease. The amount of the
operating lease charge was based on assumptions from current
real estate market data for sublease income rates and vacancy
rates at the location. The estimated sublease income was
$500,000 and based on a rental rate of $35 per square foot
with an estimated vacancy period prior to the expected sublease
income of 24 months. In the fourth quarter, as result of
updated market conditions, the estimated sublet rental rate was
lowered to $30 per square foot from $35 per square
foot and the vacancy period was extended to 36 months from
24 months resulting in an additional charge of $227,000. In
accordance with FAS 146, the Company has recorded the
present value of the net lease obligation.

As a result of a reduction of employees and
closure of an office location, the Company wrote-off computer
and office equipment to their fair value based on the expected
discounted cash flows they would generate over their remaining
economic life. Due to the short remaining economic life and
current market conditions for such assets, the fair value of
these assets were estimated to be zero. These assets ceased
being used by June 30, 2003 and were disposed of by
September 30, 2003. In addition, the Company wrote off
leasehold improvements, which continue to be in use, related to
the facility it is attempting to sublease to their fair value of
zero because the estimated cash flows to be generated from that
location will not be sufficient to recover the carrying value of
the assets.



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

As part of the second quarter 2003 restructuring
action, the Company recorded a charge of $927,000 for severance
and benefit costs related to cost reduction actions taken across
the worldwide employee base. The severance and benefit costs
were for 32 employees, or 7.4% of the Companys
workforce, consisting of 11 employees from sales and
marketing, 3 from services, 3 from general and
administrative and 15 from research and development. The
Company accrued employee benefits pursuant to its ongoing
benefit plans for domestic locations and under statutory minimum
requirements in foreign locations. All employees were notified
of their termination as of June 30, 2003. The termination
process was completed during the fourth

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

quarter of 2003. During the third quarter of
2003, the Company accrued an additional $69,000 for employees at
its foreign locations based on managements best estimate
of the final payments for severance. During the fourth quarter
of 2003, the Company reduced certain severance accruals by
$84,000 at its international locations as a result of final
settlements.

Asset
Impairments

The Company recorded a charge in cost of product
license revenues of $169,000 to reduce the carrying value of
third-party software embedded into one of its products, which is
a minor component of our suite of products, to its net
realizable value of $210,000 based on managements best
estimate of future net cash flows to be generated from the sale
of the software to customers. The Company has discontinued
marketing of this software and has ceased future development
work specifically related to this third-party software. However,
the Company has not changed its overall product strategy for the
purpose for which the software was acquired. The Company is in
the process of partnering with another vendor and do not expect
this change in vendor to impact our future product offering.

Third Quarter 2003 Action

During the third quarter of 2003, the Company
recorded a restructuring charge of approximately $771,000.



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

The Company recorded facilities-related charges
of $393,000 comprising $227,000 for an operating lease related
to idle office space and $166,000 of leasehold improvements and
fixed assets written down to their fair value. The lease charge
was for office space the Company vacated and intends to
sublease. The amount of the operating lease charge was based on
assumptions from current real estate market data for sublease
income rates and vacancy rates at the location. The estimated
sublease income was $216,000 and based on a rental rate of
$19 per square foot with an estimated vacancy period prior
to the expected sublease income of 12 months. During the
fourth quarter, as a result of updated market conditions, the
Company determined that it is unlikely it will sublet this space
before its lease expires resulting in an additional charge of
$198,000. In accordance with FAS 146, the Company has
recorded the present value of the net lease obligation.

As a result of a reduction of employees and the
closure of one office location, the Company wrote off computer
and office equipment to their fair value based on the expected
discounted cash flows they would generate over their remaining
economic life. Due to the short remaining economic life and
current market conditions for such assets, the fair value of
these assets was estimated to be zero. These assets ceased being
used prior to September 30, 2003 and were disposed of by
December 31, 2003. In addition, the Company wrote-down
leasehold improvements to their fair value of zero because the
estimated cash flows to be generated from that location will not
be sufficient to recover the carrying value of the assets.

Employee
Severance, Benefits and Related Costs

The Company recorded a charge of $309,000 for
severance and benefit costs related to cost reduction actions
taken across the worldwide employee base. The severance and
benefit costs were for 16 employees, or 4.3% of the
Companys workforce, consisting of 7 employees from
sales and marketing, 4 from services and 5 from
research and development. The Company accrued employee benefits
pursuant to its ongoing benefit plans. All employees were
notified of their termination as of September 30, 2003. The
termination process was completed during the fourth quarter of
2003.

As of December 31, 2003 the Company had an
accrued restructuring liability of $18.0 million, of which
$10.4 million related to 2001 restructuring charges,
$5.9 million relates to 2002 restructuring charges, and

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$1.7 million related to 2003 restructuring
charges. The long-term portion of the accrued restructuring
liability was $8.6 million.

Abandoned Facilities Obligations

At December 31, 2003, the Company had lease
arrangements related to eight abandoned facilities. The lease
arrangements with respect to five of these facilities are
ongoing, and the other three facilities are the subject of lease
settlement arrangements under which the Company is obligated to
make payments through 2006. All locations for which the Company
has recorded restructuring charges have been exited, and thus
managements plans with respect to these leases have been
completed. A summary of the remaining facility locations and the
timing of the remaining cash payments is as follows (in
thousands):

|                                     |                             |  |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |     | 
|------------------------------------ | --------------------------- |  | - | ---- |  | ---- | ------ | ----- |  | ---- | ----- | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ---- | --- | 
|Lease Locations                      |                             |  |   | 2004 |  | 2005 |        | 2006  |  | 2007 |       | 2008  |  | 2009
|                                     |                             |  |   |      |  |      |        |       |  |      |       |       |  |     
|Cambridge, MA                        |                             |  | * |      |  | $    | 2,069  |       |  | $    | 2,069 |       |  | $    | 1,035  |       |  |   |        |       |  |   |        |       |  |   |      |    
|Cambridge, MA                        |                             |  | * |      |  |      | 4,215  |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Cambridge, MA                        |                             |  |   |      |  |      | 137    |       |  |      | 137   |       |  |      | 91     |       |  |   |        |       |  |   |        |       |  |   |      |    
|Waltham, MA                          |                             |  |   |      |  |      | 1,466  |       |  |      | 1,466 |       |  |      | 1,466  |       |  | $ | 1,466  |       |  | $ | 1,466  |       |  | $ | 366  |    
|Chicago, IL                          |                             |  |   |      |  |      | 524    |       |  |      | 524   |       |  |      | 393    |       |  |   |        |       |  |   |        |       |  |   |      |    
|San Francisco, CA                    |                             |  |   |      |  |      | 111    |       |  |      | 111   |       |  |      | 111    |       |  |   | 111    |       |  |   |        |       |  |   |      |    
|Mountain View, CA                    |                             |  | * |      |  |      | 869    |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|Reading, UK                          |                             |  |   |      |  |      | 579    |       |  |      | 579   |       |  |      | 579    |       |  |   | 579    |       |  |   | 579    |       |  |   | 181  |    
|                                     |                             |  |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     | Facility obligations, gross |  |   |      |  |      |        | 9,970 |  |      |       | 4,886 |  |      |        | 3,675 |  |   |        | 2,156 |  |   |        | 2,045 |  |   |      | 547 | 
|Contracted and assumed sublet income |                             |  |   |      |  |      | (1,221 | )     |  |      | (435  | )     |  |      | (1,104 | )     |  |   | (1,263 | )     |  |   | (1,218 | )     |  |   | (304 | )  
|                                     |                             |  |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    
|                                     | Net cash obligations        |  |   |      |  |      | $      | 8,749 |  |      | $     | 4,451 |  |      | $      | 2,571 |  |   | $      | 893   |  |   | $      | 827   |  |   | $    | 243 | 
|                                     |                             |  |   |      |  |      |        |       |  |      |       |       |  |      |        |       |  |   |        |       |  |   |        |       |  |   |      |    



---



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



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

On October 31, 2000, Aron Rosenberg, one of
the Companys stockholders, brought a claim on ATGs
behalf in the U.S. District Court for the District of
Delaware. Mr. Rosenberg alleged that the Tudor and Raptor
entities violated Section 16(b) of the Securities Exchange
Act of 1934 in connection with their sale of ATGs common
stock after its initial public offering on July 20, 1999.
Those entities acquired the Companys common stock upon
conversion of its Series D Preferred Stock that they
acquired more than six months before the initial public
offering. Mr. Rosenberg claimed that those entities should
be deemed to have purchased the Companys common stock when
the Companys stockholders approved an amendment to the
Companys Certificate of Incorporation related to preferred
stock of the Company on June 18, 1999. He also claimed that
those entities obtained profits of more than $70 million in
connection with sales of the Companys common stock within
six months after June 18, 1999, and that those profits
should be paid to the Company. In January 2002, the parties
entered into a settlement agreement, later approved by the
court, providing that Tudor would pay $1,050,000 to the Company
and $400,000 to the plaintiffs attorneys, in return for
which the Company would release Tudor from any claims under
Section 16 of the Exchange Act arising from the facts and
circumstances alleged in the complaint. On May 23, 2002
Tudor made the payment to the Company and this matter is now
resolved. The receipt of the settlement of $1,050,000 has been
recorded as contributed capital within additional paid-in
capital in the accompanying Consolidated Balance Sheet and
Statement of Stockholders Equity and Comprehensive Income
(Loss).

The Company and certain former officers have been
named defendants in seven purported class action suits currently
pending in the United States District Court for the District of
Massachusetts. Each of these cases alleges that we and certain
officers have violated Sections 10(b) and 20(a) of the
Securities Exchange

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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Act of 1934 and Rule 10b-5 thereunder, which
generally may subject issuers of securities and persons
controlling those issuers to civil liabilities for fraudulent
actions or defects in the public disclosure required by
securities laws. Four of the cases were filed on various dates
in October 2001 in the U.S. District Court for the District
of Massachusetts. Three of the cases were initially filed in the
Central District of California (the California
actions) on various dates in August and September 2001.
The California actions were consolidated and transferred to the
District of Massachusetts on or about November 27, 2001. On
December 13, 2001, the Court issued an Order of
Consolidation in which it consolidated all actions filed against
the Company and appointed certain individuals as Lead Plaintiffs
in the consolidated action. It also appointed two law firms as
Co-Lead Counsel, and a third law firm as Liaison Counsel.
Counsel for the plaintiffs has filed a Consolidated Amended
Complaint applicable to all of the consolidated actions. On
April 19, 2002, we filed a motion to dismiss the case. On
September 4, 2003 the court issued a ruling dismissing all
but one of the plaintiffs allegations. The remaining
allegation is based on the veracity of a public statement made
by a former officer of the Company. While management believes
the remaining claim against the Company is without merit, and
intends to defend the action vigorously, the litigation is still
in the preliminary stage.

A breach of contract claim was filed in Germany
by DIFA Deutsche Immobilien Fonds AG against Art Technology
Group GmbH (ATG GmbH), a subsidiary of the Company, on
July 18, 2002. The suit alleged that ATG GmbH failed
to pay rent on office space leased by the plaintiff and failed
to deliver a bank guarantee, thereby breaching its lease
obligations to plaintiff. The German court returned a ruling on
January 22, 2003 adverse to ATG GmbH and found in favor of
the plaintiff in the approximate amount of 1.4 million
euros plus 8% interest and the delivery of a security deposit in
the form of a bank guarantee in the amount of approximately
675,000 euros. ATG GmbH filed an appeal to the suit on
February 6, 2003. On August 18, 2003, ATG and DIFA
settled the lawsuit and all remaining lease obligations for
5.75 million euros (approximately $6.4 million on
August 18, 2003) plus 16% VAT (approximately
$1.0 million on August 18, 2003 which we recovered in
October 2003) in exchange for dismissal of the lawsuit against
ATG GmbH and a complete release from all liability related
to the claim.

The Company is also subject to various other
claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not
expected to have a material effect on the Companys
business, financial condition or results of operations.



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

The following table presents a condensed summary
of quarterly results of operations for the years ended
December 31, 2003 and 2002 (in thousands):

|                            |         |                              |        |               |   |            |        |            |  |   |        |       |   |   |        |      | 
|--------------------------- | ------- | ---------------------------- | ------ | ------------- | - | ---------- | ------ | ---------- |  | - | ------ | ----- | - | - | ------ | ---- | 
|                            |         |                             
|                            |         | Year Ended December 31, 2003
|                            |         |                             
|                            |         | First                        |        | Second        |   | Third      |        | Fourth    
|                            |         | Quarter                      |        | Quarter(1)(2) |   | 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 | 

74



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                   |         |                              |        |            |   |         |        |            |   |   |        |       |   |   |         |       |  
|------------------ | ------- | ---------------------------- | ------ | ---------- | - | ------- | ------ | ---------- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                   |         |                             
|                   |         | Year Ended December 31, 2002
|                   |         |                             
|                   |         | First                        |        | Second     |   | Third   |        | Fourth    
|                   |         | Quarter                      |        | Quarter(1) |   | Quarter |        | Quarter(1)
|                   |         |                              |        |            |   |         |        |           
|Total revenues     |         | $                            | 27,323 |            |   | $       | 25,152 |            |   | $ | 24,502 |       |   | $ | 24,516  |      
|Gross profit       |         |                              | 17,210 |            |   |         | 15,128 |            |   |   | 15,196 |       |   |   | 15,936  |      
|Net loss           |         |                              | (2,849 | )          |   |         | (2,750 | )          |   |   | (3,057 | )     |   |   | (20,834 | )    
|Net loss per share |         |                              |        |            |   |         |        |            |   |   |        |       |   |   |         |      
|                   | Basic   |                              |        | (0.04      | ) |         |        | (0.04      | ) |   |        | (0.04 | ) |   |         | (0.30 | )
|                   | Diluted |                              |        | (0.04      | ) |         |        | (0.04      | ) |   |        | (0.04 | ) |   |         | (0.30 | )



---



|    |                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restructuring charges (benefits) were taken
    during these quarters, see Note 12 for complete information.                                                               
|   
|(2) | The Company has reclassified an impairment charge
    for purchased software, which previously had been reported in
    restructuring, to cost of product license revenues.

75



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##### Table of Contents






PART IV






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

(a)(1) Financial Statements

The following are included in Item 8:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report of Independent Auditors                                                                                                              
|
| |  | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                            
|
| |  | Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                                              
|
| |  | Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2002 and 2001
|
| |  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                              
|
| |  | Notes to Consolidated Financial Statements                                                                                                  

(a)(2) Financial Statement Schedule

Schedule II for Valuation and Qualifying
Accounts is contained in Item 8 in the Notes to the
Consolidated Financial Statements. All other schedules have been
omitted since the required information is not present, or not
present in amounts sufficient to require submission of the
schedule or because information required is included in the
consolidated financial statements or the notes thereto.

(a)(3) Exhibits

The following exhibits are included in
Item 14(c)*:

|        |    |             |  |                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Certificate of Incorporation
    of the Registrant, as amended.                                     
|        | 3  | .2(2)       |  | Amended and Restated By-Laws of the Registrant.                                                                          
|        | 4  | .1(3)       |  | Rights Agreement between Registrant and Equiserve
    Trust Company, N.A., as rights Agent.                              
|        | 10 | .1(4)       |  | 1996 Stock Option Plan of the Registrant, as
    amended.                                                                
|        | 10 | .2(5)       |  | 1999 Outside Director Stock Option Plan of the
    Registrant, as amended.                                               
|        | 10 | .3(4)       |  | 1999 Employee Stock Purchase Plan of the
    Registrant.                                                                 
|        | 10 | .4          |  | Lease between the Registrant and Davenport
    Building Limited Partnership, as Landlord, dated January, 2004.           
|        | 10 | .5          |  | Lease Termination Agreement between the
    Registrant and Davenport Building Limited Partnership dated
    January, 2004
|        | 10 | .6(9)       |  | Lease between the Registrant and Pine Street
    Investors I, LLC, dated October 6, 1999.                                
|        | 10 | .7(9)       |  | First Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated December 30,
    1999.       
|        | 10 | .8(9)       |  | Second Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated August 28,
    2000.        
|        | 10 | .9(9)       |  | Third Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated December 22,
    2000.       
|        | 10 | .10         |  | Fourth Amendment to Lease between the Registrant
    and 100 Pine Street LP, dated July 15, 2001.                        
|        | 10 | .11         |  | Fifth Amendment to Lease between the Registrant
    and 100 Pine Street LP, dated March 31, 2003.                        
|        | 10 | .12(9)      |  | Lease between the Registrant and DIFA Deutsche
    Immobilien Fonds AG dated, March 19, 2001.                            
|        | 10 | .13         |  | Lease Termination Agreement between the
    Registrant and DIFA Deutsche Immobilen Fonds AG.                             

76



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .14(6)      |  | Nonstatutory Option Agreement between Paul
    Shorthose and the Registrant dated October 23, 2001.                                                                                    
|        | 10 | .15(6)      |  | Promissory Note issued by Edward Terino to the
    Registrant dated November 21, 2001.                                                                                                 
|        | 10 | .16(6)      |  | Letter of Credit Agreement between Silicon Valley
    Bank and the Registrant noting Amgen Cambridge Real Estate
    Holdings as beneficiary, dated December 21, 2001.                 
|        | 10 | .17(6)      |  | Termination of Lease Agreement between Amgen
    Cambridge Real Estate Holdings, Inc., and the Registrant
    dated January 2, 2002.                                                   
|        | 10 | .18(7)      |  | Amended and Restated Loan and Security Agreement
    between the Registrant and Silicon Valley Bank, dated
    June 13, 2002.                                                          
|        | 10 | .19(8)      |  | First Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated September 30, 2002.                                                                         
|        | 10 | .20(8)      |  | Amendment Agreement between the Registrant and
    Silicon Valley Bank dated October 4, 2002.                                                                                          
|        | 10 | .21(9)      |  | Edward Terino Executive Change-in-Control
    Agreement, dated December 1, 2002.                                                                                                       
|        | 10 | .22(9)      |  | Robert Burke offer letter dated December 4,
    2002.                                                                                                                                  
|        | 10 | .23(9)      |  | Securities Account Control Agreement between
    Registrant and Silicon Valley Bank, dated December 20, 2002.                                                                          
|        | 10 | .24(9)      |  | Second Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated December 20, 2002.                                                                         
|        | 10 | .25         |  | Fourth Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated November 26, 2003.                                                                         
|        | 10 | .26         |  | Amended and Restated Intellectual Property
    Security Agreement.                                                                                                                     
|        | 21 | .00(6)      |  | Subsidiaries of the Registrant.                                                                                                                                                        
|        | 23 | .1          |  | Consent of Ernst & Young LLP.                                                                                                                                                          
|        | 31 | .1          |  | Certification Pursuant to Rule 13a-14(a) and
    15d-14(a) of the Exchange Act, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 (Chief
    Executive Officer).
|        | 31 | .2          |  | Certification Pursuant to Rule 13a-14(a) and
    15d-14(a) of the Exchange Act, as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 (Chief
    Financial Officer).
|        | 32 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Chief Executive Officer).                               
|        | 32 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Chief Financial Officer).                               



---



| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Copies of the exhibits to this annual report on
    Form 10-K/A are available to stockholders at the SECs
    Web site at http://www.sec.gov. In addition, stockholders
    may obtain copies of the exhibits from us, without charge, by
    writing to Art Technology Group, Inc., 25 First Street,
    Cambridge, Massachusetts 02141, Attention: Secretary.



|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-8
    (File No. 333-106058) 
|   
|(2) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-3
    (File No. 333-64698). 
|   
|(3) | Incorporated herein by reference to the Exhibits
    to the Registrants Current Report on Form 8-K filed
    on October 2, 2001.     
|   
|(4) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-1
    (File No. 333-78333). 
|   
|(5) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-8
    (File No. 333-106057).

77



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##### Table of Contents





|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Incorporated herein by reference to the Exhibits
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2001.      
|   
|(7) | Incorporated herein by reference to the Exhibits
    to the Registrants Quarterly Report on Form 10-Q for
    the period ended June 30, 2002.     
|   
|(8) | Incorporated herein by reference to the Exhibits
    to the Registrants Quarterly Report on Form 10-Q for
    the period ended September 30, 2002.
|   
|(9) | Incorporated by reference to the Exhibits to the
    Registrants Annual Report on Form 10-K for the period
    ended December 31, 2003            

(b) Reports on Form 8-K



| |      
| | -----
| | None.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, as of July 12, 2004.



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



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

| |                        
| | -----------------------
| |                        
| | Robert D. Burke        
| | Chief Executive Officer
| | and President          

79