##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 000-26679


Art Technology Group, Inc.


(Exact name of registrant as specified in its charter)


|                                                                                     |  |                                         
|------------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                             |  | 04-3141918                              
|(State or other jurisdiction of
    incorporation or organization)                   |  | (I.R.S. Employer
    Identification No.)
|                                                                                    
|25 First Street
    Cambridge, Massachusetts(Address of principal executive offices) |  | 02141(Zip Code)                         

(617) 386-1000


(Registrants telephone number, including area code)


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


None


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


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


(Title of Class)


o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ




Documents Incorporated by Reference












---



##### 










ART TECHNOLOGY GROUP, INC.


INDEX TO
FORM 10-K


|                                                                |  |                                                                                                                      |  |            |    |  |    | 
|--------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---------- | -- |  | -- | 
|                                                                |  |                                                                                                                      |  | Page       |   
|                                                                |  |                                                                                                                      |  |            |   
|PART I                                                         
|Item 1.                                                         |  | Business                                                                                                             |  |            | 1  | 
|Item 1A.                                                        |  | Risk Factors                                                                                                         |  |            | 10 | 
|Item 1B.                                                        |  | Unresolved Staff Comments                                                                                            |  |            | 22 | 
|Item 2.                                                         |  | Properties                                                                                                           |  |            | 23 | 
|Item 3.                                                         |  | Legal Proceedings                                                                                                    |  |            | 23 | 
|                                                               
|PART II                                                        
|Item 5.                                                         |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |            | 25 | 
|Item 6.                                                         |  | Selected Consolidated Financial Data                                                                                 |  |            | 26 | 
|Item 7.                                                         |  | Managements Discussion and Analysis
    of Financial Condition and Results of
    Operations                        |  |            | 27 | 
|Item 7A.                                                        |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |            | 40 | 
|Item 8.                                                         |  | Consolidated Financial Statements and
    Supplementary Data                                                         |  |            | 41 | 
|Item 9.                                                         |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |            | 77 | 
|Item 9A.                                                        |  | Controls and Procedures                                                                                              |  |            | 77 | 
|Item 9B.                                                        |  | Other Information                                                                                                    |  |            | 80 | 
|                                                               
|PART III                                                       
|Item 10.                                                        |  | Directors and Executive Officers of the
    Registrant                                                               |  |            | 80 | 
|Item 11.                                                        |  | Executive Compensation                                                                                               |  |            | 80 | 
|Item 12.                                                        |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |            | 80 | 
|Item 13.                                                        |  | Certain Relationships and Related
    Transactions                                                                   |  |            | 80 | 
|Item 14.                                                        |  | Principal Accountant Fees and Services                                                                               |  |            | 80 | 
|                                                               
|PART IV                                                        
|Item 15.                                                        |  | Exhibits and Financial Statement
    Schedules                                                                       |  |            | 81 | 
|                                                               
|SIGNATURES                                                     
|                                                                |  |                                                                                                                      |  | Signatures |    |  | 84 | 
|Ex-10.9 2005 Executive Management Compensation Plan, as amended
|Ex-10.31 Eighth Loan Modification Agreement                    
|Ex-10.32 Ninth Loan Modification Agreement                     
|Ex-21.1 Subsidiaries                                           
|Ex-23.1 Consent of Ernst & Young LLP                           
|Ex-31.1 Section 302 Certification of the P.E.O.                
|Ex-31.2 Section 302 Certification of the P.F.O.                
|Ex-32.1 Section 906 Certification of the P.E.O.                
|Ex-32.2 Section 906 Certification of the P.F.O.                





i



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##### Table of Contents






PART I


Certain of the information contained in this annual report on
Form 10-K consists
of forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based
on the beliefs and assumptions of our management based on
information currently available to our management. Use of words
such as believes, expects,
anticipates, intends, plans,
estimates, should, likely or
similar expressions, indicate a forward-looking statement.
Important factors that could cause actual results to differ
materially from the forward-looking statements include, but are
not limited to, those set forth below under the heading
Risk Factors. We assume no obligation to update any
forward-looking statements.







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

Our Business






Corporate Information


www.atg.com




Overview






1



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##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Until 1995, we functioned primarily as a professional services
    organization in the Internet commerce market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In 1996, we began offering Internet commerce and software
    solutions, initially focusing on infrastructure products such as
    our ATG Dynamo Application Server.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | In 2004, we began to concentrate on developing application
    products, having concluded that the market for infrastructure
    products had become increasingly standards driven and that we
    could best differentiate ourselves by offering our clients
    advanced applications functionality.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In November 2004, we acquired Primus Knowledge Solutions, Inc. a
    provider of software solutions for customer service.
    Primus software helps companies deliver a superior
    customer experience via contact centers,
    e-mail, information
    technology help desks, and web self-service. The Primus solution
    extended ATGs offerings beyond commerce and marketing and
    into customer service.                                                                                                                                                                                                                                                                                                                           
|
| |  | In 2004, we also began to offer our clients hosted services as
    an alternative delivery model for our application solutions. We
    believe that hosted services can provide significant advantages
    for our clients, and provide us with a substantial opportunity
    for growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In late 2005, we released our new Wisdom application suite,
    combining the ATG and Primus products. The Wisdom suite provides
    integrated commerce, marketing and customer service/support
    solutions on a common platform. ATG Wisdom represents our
    strategy for enabling enterprises to create a more relevant and
    consistent experience for their customers across the Web,
    e-mail, call center,
    and mobile channels, and throughout the marketing, commerce, and
    service lifecycle. Our ATG Wisdom product suite enables
    companies to connect with customers at a personal level,
    leveraging both the knowledge and experience necessary to build
    strong relationships and enhance lifetime value.

Our Strategy


e-commerce e-services




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facilitate integrated life cycle experience for online
    customers. We believe that our clients online
    customers want to cross seamlessly between the
    information-gathering, purchase and service phases of their
    online activity. We believe that consumers expect marketing
    messages they receive to be informed by their purchase and
    service history (for example, they should not be offered a
    product which they have recently purchased), service responses
    to be informed by their purchase history (for example, answers
    should be relevant to the products they own), and
    e-commerce should be
    informed by their service history and response to marketing
    campaigns. Rather than focusing solely on marketing or sales or
    service, we design our core software functionality to allow our
    clients to provide their customers with an integrated online
    marketing, sales and service experience.
|
| |  | Develop new applications that operate on leading
    infrastructure products. We believe the development of
    infrastructure products has become standards driven, but that
    there is an opportunity for continued innovation relating to
    application products. We design our products to operate on
    leading J2EE application server platforms, including WebLogic
    from BEA, WebSphere from IBM, and JBoss in addition to our own
    J2EE Dynamo Application Servers. As a result, our application
    software can provide value to new and existing clients, across a
    wide range of infrastructure environments.                                                                                                                                                                                                                                                                                                                             
|
| |  | Grow our hosted services as an alternate delivery model.
    We now offer our customers hosting services for the full
    spectrum of ATG applications. Clients can purchase licenses to
    our solutions and elect a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

2



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managed Services model where we host the clients solutions
    in our hosted environment; or clients can elect a subscription
    OnDemand model, which requires no investment in software
    licenses or support and maintenance agreements. With OnDemand we
    provide a full solution for the client, including the software,
    hardware and management. There are several advantages for
    organizations to choose a hosting model over a traditional
    license model, which may make this a potential growth area for
    us. These include:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | avoiding large upfront and ongoing expenditures required to
    purchase, implement and maintain software and hardware;                         
|
| |  | shortening the time to market (vs. in-house development,
    deployment and maintenance);                                                       
|
| |  | shifting the clients technology risks to us; and                                                                                               
|
| |  | leveraging our experience to accelerate growth of the
    clients online business and allowing clients to focus on
    their core competencies.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage existing sales channels. We sell our products
    directly to our clients and through value-added resellers. In
    addition, approximately 42% of our product revenue is co-sold or
    influenced by a variety of business entities, including systems
    integrators, solution providers, technology partners and
    value-added resellers. We currently have a broad range of
    business alliances throughout the world including large system
    integrators like IBM, Capgemini, EDS, HP Consulting, Blast
    Radius and CSC, as well as regional integrators such as Avenue
    A/ Razorfish, Professional Access, Whittman Hart, McFadyen
    Consulting and Rikei. In most geographies and situations, our
    goal is to maintain close relationships directly with our
    clients and to motivate systems integrators to implement our
    applications in their projects and solution sets.
|
| |  | Leverage and expand service capabilities. We have
    extensive experience in Web application development and
    integration services, as well as knowledge management design and
    call-center systems deployment. Through our Professional and
    Education Services organizations, we provide services to train
    our systems integrators, value added resellers and complementary
    software vendors in the use of our products and offer consulting
    services to assist with customer implementations. We seek to
    motivate our business partners to provide joint implementation
    services to our end user customers. We intend to continue to
    seek additional opportunities to increase revenues from product
    sales by expanding our base of partners trained in the
    implementation and application of our products.                                                               

Products




ATG
Commerce, ATG Service, and ATG Marketing.




| |             
| | ------------
| | ATG Commerce

e-commerce




| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ATG Commerceprovides a robust set of application
    components for creating a customized experience for businesses,
    channel partners and consumers purchasing goods or services
    online. ATG Commerces functionality includes catalogs,
    product management, shopping carts, checkout, pricing

3



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | management, merchandising, promotions, inventory management and
    business-to-business
    order management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | ATG Campaign Optimizerassists marketing professionals to
    define comparative tests of different offers, promotions and
    product representations through an A/ B split testing solution.
    The product puts those tests into production, specifying the
    segments of Web site visitors to be tested, and finally writes
    reports on the test results. Methods for testing campaigns
    provided by our competitors often require 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 without the need for expert
    programming or infrastructure modifications.
|
| | ATG Merchandisingenables merchandising professionals to
    launch and update catalog information and cross-sell/up-sell
    promotions using a customized, dynamic workflow that ensures an
    efficient, smooth deployment to maximize online sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | ATG Commerce Searchis a fully integrated intelligent
    search solution for commerce Web sites. ATG Commerce Search more
    effectively interprets the intent of a user who submits a
    search; it offers multiple sorting options, such as by brand,
    price, and relevance. ATG Commerce Search integrates the
    shopping cart right into search results, so that shoppers can
    buy directly from the results page. In addition, ATG Commerce
    Search can present cross-sell and up-sell offers tailored for
    the shoppers interests.                                                                                                                                                                                                                                                                                                 



| |            
| | -----------
| | ATG Service





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ATG Commerce Assistprovides complete
    e-commerce support for
    call center agents to create and manage orders in a unified
    browser-based application for the Web and call-center
    environments.                                                                                                                                                                                                                                                                         
|
| | ATG Knowledgeis a knowledge management solution used by
    call center agents and help-desk personnel who provide customers
    with assisted service to find quickly and accurately the answers
    to customer inquiries and to resolve problems. ATG Knowledge
    empowers agents to locate, leverage, communicate, and capture
    knowledge across the extended enterprise.                                                                                                  
|
| | ATG Self-Serviceoffers consumers access to highly
    personalized answers to questions and helps the customer answer
    his or her questions without telephoning for help. ATG
    Self-Service combines an answer repository with multi-lingual
    natural language search and navigation capabilities. The
    application also offers comprehensive business reporting that
    helps clients better understand customers needs and
    preferences.                         
|
| | ATG Response Managementis a solution for automating
    responses to inbound electronic communications, and for our
    clients to address their customers growing desire for
    electronic communications while also gaining significant savings
    in support costs. ATG Response Management integrates all forms
    of electronic communication, not only
    e-mail but also chat,
    multimedia messaging service (MMS), short messaging service
    (SMS), and Web forms.
|
| | ATG Advisorhelps organizations systematically guide
    users towards issue resolution by separating complicated tasks
    into manageable steps supporting both self-service and assisted
    service.                                                                                                                                                                                                                                                                             
|
| | ATG Forumlets clients leverage the expertise of external
    and internal customers by giving them an online forum in which
    to help one another, thereby reducing the load on the service
    and support team.                                                                                                                                                                                                                                                                 

4



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| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ATG Forum users can answer each others questions and
    receive important updates from the client company.                                                                                                                                                                                                                                           
|
| | ATG Outreachis an
    e-marketing and
    proactive service solution that leverages the understanding our
    clients gain through their customers behaviors,
    preferences, and Web interactions to help customer service and
    e-marketing
    professionals create more compelling, relevant campaigns by
    personalizing the communications.



| |               
| | --------------
| | ATG Marketing.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ATG Campaign Optimizer, which is also included above as
    an ATG Commerce product, is an A/ B split testing solution that
    lets business users improve a Web sites effectiveness, for
    example helping to convert more shoppers into buyers.                                                                                                                                                                                                                                
|
| | The ATG Adaptive Scenario Engine(ASE) is our core
    marketing engine that helps create a more compelling and
    relevant customer experience. The benefits are greater customer
    loyalty, higher revenue, and reduced operating costs. By
    adapting to customers ever changing needs and preferences,
    ASE automates the process of leading customers toward a desired
    outcome (such as accessing information, fulfilling a service
    need, or making a purchase).
|
| | ATG Outreach, which is also included above as an ATG
    Service product, is an
    e-marketing and
    proactive service solution that leverages the understanding of
    customers gained through their behaviors, preferences, and Web
    interactions to help
    e-marketing and
    customer service professionals create more compelling, relevant
    campaigns by personalizing the communications.                                                                        







5



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Services




Customer Support Services.


Professional Services.




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

Application Hosting Services. set-up


Education Services.


6



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Markets






Consumer Retail
    
    
    Financial Services
    
    
    ManufacturingAmerican Eagle Outfitters
    
    
    Allstate
    
    
    Abbott LaboratoriesBody Shop
    
    
    Barclays Global Investors
    
    
    BoeingBest Buy Companies, Inc.
    
    
    Citicorp
    
    
    Eastman KodakCabelas
    
    
    Conseco
    
    
    General MotorsFootlocker
    
    
    Deutsche Bank
    
    
    Newell RubbermaidJ. Crew
    
    
    Dreyfus Services Corporation
    
    
    NikeNeiman Marcus
    
    
    Fidelity
    
    
    Procter & GambleOffice Max
    
    
    Ford Motor CreditRestoration Hardware
    
    
    John Hancock FundsTarget Corporation
    
    
    HSBCThe Finish Line
    
    
    MFS Investment ManagementWalgreens
    
    
    Merrill LynchPioneer Investments




Communications and Technology
    
    
    Travel Media and Entertainment
    
    
    InternationalAdobe
    
    
    American Airlines
    
    
    AirbusBellSouth
    
    
    BMG Direct
    
    
    BBC Worldwide, Ltd.Cingular
    
    
    Elsevier
    
    
    Direkt Anlage BankEMC
    
    
    Hilton Hotels
    
    
    Deutsche PostPalm One
    
    
    Hotels.com
    
    
    France TelecomHewlett Packard
    
    
    Hyatt
    
    
    Heidelberger DruckmaschinenHitachi
    
    
    Intercontinental Hotels Group
    
    
    Hoffman la RocheIntuit
    
    
    Knight-Ridder
    
    
    IBMMicrosoft
    
    
    Media News Group
    
    
    KingfisherT-Mobile
    
    
    Meredith Corporation
    
    
    LavazzaVerisign
    
    
    Nintendo
    
    
    Louis VuittonReaders Digest
    
    
    Orange PLCNokia
    
    
    PirelliThe MTVi Group
    
    
    PhilipsTime, Inc.
    
    
    Premier FarnellWarner Music
    
    
    Royal MailTelefonicaVodafone


7



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Research and Development






Sales and Marketing








Strategic Alliances




Consulting and System Integration Partners:


Technology Partners:


Resellers: E-Tree,




8



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on-site




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ATG Certified Professional Programconsists of two
    exams. The first tests the developers expertise on our
    Adaptive Scenario Engine. The second exam assesses a
    developers proficiency with ATG Commerce, including
    consumer and
    business-to-business
    tools and concepts. Certification can provide a developer with a
    competitive advantage, since it offers evidence of the
    developers capabilities using our software.                                                     
|
| |  | Our ATG Accredited Partner Programis intended to
    identify our most qualified partners. To become an accredited
    partner, a channel partner must complete sales training, obtain
    certifications and complete at least two successful
    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, 2005, we had approximately 34 accredited
    partners.

Competition






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



out-of


Proprietary Rights and Licensing




9



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Employees




Internet Address and SEC Reports


10-K. 10-K, 10-Q 8-K,







|         |             
|-------- | ------------
|Item 1A. | Risk Factors





Risks Related To Our Business




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



10



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| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuating economic conditions, particularly as they affect our
    customers willingness to implement new
    e-commerce solutions;
|
| |  | the timing of sales and revenue recognition of our products and
    services;                                                         
|
| |  | the timing of customer orders and product implementations;                                                                            
|
| |  | delays in introducing new products and services;                                                                                      
|
| |  | the size of price discounting and/or concessions;                                                                                     
|
| |  | changes in 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;                                                                                          
|
| |  | variation in our actual costs from our cost estimates related to
    long term hosting contracts;                                     
|
| |  | increased expenses, whether related to sales and marketing,
    product development or administration; and                            
|
| |  | costs related to possible acquisitions of technologies or
    businesses.                                                             

quarter-to




| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | If the market for our Hosting solutions does not develop
    or develops more slowly than we expect, our business could be
    negatively affected.





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interruptions, delays or failures in our hosting services
    due to systems error or other causes, could adversely affect our
    business and subject us to liability.



11



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| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our product license revenue may not continue to grow at
    the rate it did in 2005 if our implementation of
    subscription-based OnDemand hosting services shifts more product
    license revenue than anticipated to the subscription service
    model.

97-2




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







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





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





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







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







13



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

e-commerce


e-mail








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



14



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| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to address the challenges associated with
    international operations, revenues from our products and
    services may decline or the costs of providing our products or
    services may increase.





| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in regulatory requirements, exchange rates, tariffs and
    other barriers;                                                                                                                                   
|
| |  | longer payment cycles and problems in collecting accounts
    receivable in Western Europe and the Far East;                                                                                                          
|
| |  | difficulties in managing systems integrators and technology
    partners;                                                                                                                                             
|
| |  | difficulties in staffing and managing foreign subsidiary
    operations;                                                                                                                                              
|
| |  | differing technology standards;                                                                                                                                                                                       
|
| |  | difficulties and delays in translating products and product
    documentation into foreign languages to the extent that our
    products are sold in countries that do not have English as their
    primary language;
|
| |  | reduced protection for intellectual property rights in some of
    the countries in which we operate or plan to operate;                                                                                              
|
| |  | difficulties related to entering into legal contracts under
    local laws and in foreign languages;                                                                                                                  
|
| |  | potentially adverse tax consequences; and                                                                                                                                                                             
|
| |  | political and economic instability.                                                                                                                                                                                   





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





15



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





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





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







| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional financing in the future, and any
    additional financing may result in restrictions on our
    operations or substantial dilution to our stockholders.



16



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



e-commerce E-commerce




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



e-commerce,




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



17



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##### Table of Contents







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





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





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





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



18



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Risks Related To the Internet Industry




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

e-commerce.




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

e-commerce e-commerce e-commerce


19



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





Risks Related to the Securities Markets and Our Stock




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





| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly operating results;                                                                             
|
| |  | changes in market valuations of Internet and software companies;                                                           
|
| |  | our announcement of significant contracts, acquisitions,
    strategic partnerships, joint ventures or capital commitments;
|
| |  | timing of completion of significant sales;                                                                                 
|
| |  | additions or departures of our key personnel;                                                                              
|
| |  | future sales of our common stock; or                                                                                       
|
| |  | changes in financial estimates by securities analysts.                                                                     



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



20



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





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





| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of blank check preferred
    stock;                                                                                                                                    
|
| |  | providing for a classified board of directors with staggered,
    three-year terms;                                                                                                               
|
| |  | providing that directors may only be removed for cause by a
    two-thirds vote of stockholders;                                                                                                  
|
| |  | limiting the persons who may call special meetings of
    stockholders and prohibiting stockholder action by written
    consent;                                                                 
|
| |  | establishing advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings; and
|
| |  | authorizing anti-takeover provisions.                                                                                                                                                             





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



21



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

10-K.








| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the accounting treatment of stock options will
    adversely affect our results of operations and our ability to
    comply with covenants in our credit facility.

Share-Based Payment Accounting for Stock
Issued to Employees Accounting for
Stock-Based Compensation. (m) 10-K.







|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments



22



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



10-K.







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

In re Art Technology Group, Inc. Securities
Litigation 10b-5


In re Primus Knowledge Solutions, Inc.
Securities Litigation 10b-5 In re
Initial Public Offering Securities Litigation


23



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24



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##### Table of Contents






PART II







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



|                              |  |      |      |  |     |   |      | 
|----------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                              |  | High |      |  | Low |  
|                              |  |      |      |  |     |  
|Year ending December 31, 2004 |  |      |      |  |     |   |      | 
|First quarter                 |  | $    | 2.25 |  |     | $ | 1.35 | 
|Second quarter                |  |      | 1.69 |  |     |   | 1.09 | 
|Third quarter                 |  |      | 1.23 |  |     |   | 0.70 | 
|Fourth quarter                |  |      | 1.61 |  |     |   | 0.84 | 
|Year ending December 31, 2005 |  |      |      |  |     |   |      | 
|First quarter                 |  | $    | 1.40 |  |     | $ | 1.05 | 
|Second quarter                |  |      | 1.22 |  |     |   | 0.95 | 
|Third quarter                 |  |      | 1.21 |  |     |   | 1.00 | 
|Fourth quarter                |  |      | 2.13 |  |     |   | 0.92 | 





25



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

Consolidated Statements of Operations Data:


|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |         |        | 
|------------------------------------------- | ------------------------------------ | --------------------------------------------------------- | -------- | ------ | -------- | - | ------- | ------ | ------- | - | ----- | ------- | ------ | ---- | ------ | ------ | ------ | - | ----- | ------- | ------ | 
|                                            |                                      | Year Ended December 31,                                   |         
|                                            |                                      |                                                           |         
|                                            |                                      | 2001                                                      |          |        | 2002     |   |         | 2003   |         |   | 2004  |         |        | 2005 |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | (In thousands, except per share data)                     |         
|Revenues:                                   |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |        
|                                            | Product license                      |                                                           | $        | 76,631 |          |   | $       | 48,796 |         |   | $     | 27,159  |        |      | $      | 23,345 |        |   | $     | 29,821  |       
|                                            | Services                             |                                                           |          | 63,707 |          |   |         | 52,697 |         |   |       | 45,333  |        |      |        | 45,874 |        |   |       | 60,825  |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Total revenues                                            |          |        | 140,338  |   |         |        | 101,493 |   |       |         | 72,492 |      |        |        | 69,219 |   |       |         | 90,646 | 
|Cost of Revenues:                           |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |        
|                                            | Product licenses                     |                                                           |          | 5,981  |          |   |         | 4,278  |         |   |       | 2,118   |        |      |        | 2,206  |        |   |       | 1,816   |       
|                                            | Services                             |                                                           |          | 47,827 |          |   |         | 33,745 |         |   |       | 19,808  |        |      |        | 19,879 |        |   |       | 23,255  |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Total cost of revenues                                    |          |        | 53,808   |   |         |        | 38,023  |   |       |         | 21,926 |      |        |        | 22,085 |   |       |         | 25,071 | 
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Gross profit                                              |          |        | 86,530   |   |         |        | 63,470  |   |       |         | 50,566 |      |        |        | 47,134 |   |       |         | 65,575 | 
|Operating Expenses:                         |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |        
|                                            | Research and development             |                                                           |          | 30,518 |          |   |         | 22,046 |         |   |       | 17,928  |        |      |        | 16,209 |        |   |       | 17,843  |       
|                                            | Sales and marketing                  |                                                           |          | 93,437 |          |   |         | 43,122 |         |   |       | 31,174  |        |      |        | 29,602 |        |   |       | 30,034  |       
|                                            | General and administrative           |                                                           |          | 24,116 |          |   |         | 11,087 |         |   |       | 9,538   |        |      |        | 7,742  |        |   |       | 11,231  |       
|                                            | Restructuring charge (benefit)       |                                                           |          | 75,580 |          |   |         | 19,005 |         |   |       | (10,476 | )      |      |        | 3,570  |        |   |       | 885     |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Total operating expenses                                  |          |        | 223,651  |   |         |        | 95,260  |   |       |         | 48,164 |      |        |        | 57,123 |   |       |         | 59,993 | 
|Income (loss) from operations               |                                      |                                                           | (137,121 | )      |          |   | (31,790 | )      |         |   | 2,402 |         |        |      | (9,989 | )      |        |   | 5,582 |        
|                                            | Interest and other income, net       |                                                           |          | 4,967  |          |   |         | 2,300  |         |   |       | 1,521   |        |      |        | 395    |        |   |       | 219     |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Income (loss) before provision (benefit) for income taxes |          |        | (132,154 | ) |         |        | (29,490 | ) |       |         | 3,923  |      |        |        | (9,594 | ) |       |         | 5,801  | 
|                                            | Provision (benefit) for income taxes |                                                           |          | 23,851 |          |   |         |       |         |   |       | (255    | )      |      |        | (50    | )      |   |       | 32      |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            |                                      | Net income (loss)                                         |          | $      | (156,005 | ) |         | $      | (29,490 | ) |       | $       | 4,178  |      |        | $      | (9,544 | ) |       | $       | 5,769  | 
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|Net income (loss) per share:                |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |        
|                                            | Basic                                |                                                           | $        | (2.27  | )        |   | $       | (0.42  | )       |   | $     | 0.06    |        |      | $      | (0.12  | )      |   | $     | 0.05    |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            | Diluted                              |                                                           | $        | (2.27  | )        |   | $       | (0.42  | )       |   | $     | 0.06    |        |      | $      | (0.12  | )      |   | $     | 0.05    |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|Weighted average common shares outstanding: |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |        |        |        |   |       |        
|                                            | Basic                                |                                                           |          | 68,603 |          |   |         | 69,921 |         |   |       | 71,798  |        |      |        | 79,252 |        |   |       | 109,446 |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       
|                                            | Diluted                              |                                                           |          | 68,603 |          |   |         | 69,921 |         |   |       | 73,768  |        |      |        | 79,252 |        |   |       | 111,345 |       
|                                            |                                      |                                                           |          |        |          |   |         |        |         |   |       |         |        |      |       

26



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Consolidated Balance Sheet Data:


|                                                            |  |                |         |  |      |   |         |      |  |   |        |  |  |      |        |  |  |   |        | 
|----------------------------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                                            |  | December 31,   |        
|                                                            |  |                |        
|                                                            |  | 2001           |         |  | 2002 |   |         | 2003 |  |   | 2004   |  |  | 2005 |       
|                                                            |  |                |         |  |      |   |         |      |  |   |        |  |  |      |       
|                                                            |  | (In thousands) |        
|Cash, cash equivalents and short term marketable securities |  | $              | 63,550  |  |      | $ | 68,558  |      |  | $ | 41,584 |  |  | $    | 26,507 |  |  | $ | 33,569 | 
|Restricted cash                                             |  |                | 16,757  |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 
|Long-term marketable securities                             |  |                |        |  |      |   |        |      |  |   |       |  |  |      | 4,001  |  |  |   |       | 
|Total assets                                                |  |                | 137,488 |  |      |   | 104,835 |      |  |   | 67,360 |  |  |      | 97,803 |  |  |   | 92,765 | 
|Long-term obligations, less current maturities              |  |                |        |  |      |   |        |      |  |   |       |  |  |      | 112    |  |  |   | 63     | 
|Total stockholders equity                                  |  | $              | 42,909  |  |      | $ | 16,023  |      |  | $ | 20,937 |  |  | $    | 42,185 |  |  | $ | 50,160 | 






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

Overview


10-K.






Critical Accounting Policies and Estimates






27



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

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


97-2 97-2 97-2. Application of AICPA Statement of Position
97-2, Software Revenue Recognition, to Arrangements That Include
the Right to Use Software Stored on Another Entitys
Hardware




28



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percentage-of




| |                                  
| | ---------------------------------
| | Accounts Receivable and Bad Debts





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

Accounting for Research and Development
Costs, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed




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

Accounting for Costs Associated with Exit or Disposal
Activities Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits Restructuring and Impairment Charges. Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring)




29



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







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

Goodwill and Other
Intangible Assets




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

Accounting for Income Taxes


30



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Results of Operations




|                                                          |                                 |                          |   |    |      |  |     |      |     |  |   |     |     | 
|--------------------------------------------------------- | ------------------------------- | ------------------------ | - | -- | ---- |  | --- | ---- | --- |  | - | --- | --- | 
|                                                          |                                 | Year Ended               |  
|                                                          |                                 | December 31,             |  
|                                                          |                                 |                          |  
|                                                          |                                 | 2005                     |   |    | 2004 |  |     | 2003 |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|Revenues:                                                 |                                 |                          |   |    |      |  |     |      |     |  |   |    
|                                                          | Product license                 |                          |   | 33 | %    |  |     | 34   | %   |  |   | 37  | %  
|                                                          | Services                        |                          |   | 67 |      |  |     | 66   |     |  |   | 63  |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|                                                          |                                 | Total revenues           |   |    | 100  |  |     |      | 100 |  |   |     | 100 | 
|Cost of revenues:                                         |                                 |                          |   |    |      |  |     |      |     |  |   |    
|                                                          | Product license                 |                          |   | 2  |      |  |     | 3    |     |  |   | 3   |    
|                                                          | Services                        |                          |   | 26 |      |  |     | 29   |     |  |   | 27  |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|                                                          |                                 | Total cost of revenues   |   |    | 28   |  |     |      | 32  |  |   |     | 30  | 
|                                                          |                                 |                          |   |    |      |  |     |      |    
|                                                          | Gross margin                    |                          |   | 72 |      |  |     | 68   |     |  |   | 70  |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|Operating expenses:                                       |                                 |                          |   |    |      |  |     |      |     |  |   |    
|                                                          | Research and development        |                          |   | 20 |      |  |     | 23   |     |  |   | 25  |    
|                                                          | Sales and marketing             |                          |   | 33 |      |  |     | 43   |     |  |   | 43  |    
|                                                          | General and administrative      |                          |   | 12 |      |  |     | 11   |     |  |   | 13  |    
|                                                          | Restructuring (benefit) charges |                          |   | 1  |      |  |     | 5    |     |  |   | (14 | )  
|                                                          |                                 |                          |   |    |      |  |     |      |    
|                                                          |                                 | Total operating expenses |   |    | 66   |  |     |      | 83  |  |   |     | 66  | 
|                                                          |                                 |                          |   |    |      |  |     |      |    
|Income (loss) from operations                             |                                 |                          | 6 |    |      |  | (14 | )    |     |  | 3 |    
|Interest and other income, net                            |                                 |                          |  |    |      |  |    |      |     |  | 2 |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|Income (loss) before (benefit) provision for income taxes |                                 |                          | 6 |    |      |  | (14 | )    |     |  | 5 |    
|(Benefit) provision for income taxes                      |                                 |                          |  |    |      |  |    |      |     |  |  |    
|                                                          |                                 |                          |   |    |      |  |     |      |    
|Net income (loss)                                         |                                 |                          | 6 | %  |      |  | (14 | )%   |     |  | 6 | %  
|                                                          |                                 |                          |   |    |      |  |     |      |    

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|                                 |                                          |              |    |    |      |  |    |      |  |  |    |    | 
|-------------------------------- | ---------------------------------------- | ------------ | -- | -- | ---- |  | -- | ---- |  |  | -- | -- | 
|                                 |                                          | Year Ended   |   
|                                 |                                          | December 31, |   
|                                 |                                          |              |   
|                                 |                                          | 2005         |    |    | 2004 |  |    | 2003 | 
|                                 |                                          |              |    |    |      |  |    |      | 
|Cost of product license revenues |                                          |              | 6  | %  |      |  | 9  | %    |  |  | 8  | % 
|                                 | Gross margin on product license revenues |              |    | 94 |      |  |    | 91   |  |  |    | 92 | 
|Cost of services revenues        |                                          |              | 38 |    |      |  | 43 |      |  |  | 44 |   
|                                 | Gross margin on services revenues        |              |    | 62 |      |  |    | 57   |  |  |    | 56 | 



| |                                             
| | --------------------------------------------
| | Years ended December 31, 2005, 2004 and 2003



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

e-commerce


e-commerce




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





e-commerce


32



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|                                    |  |      |     |   |      |   |       |      |  |   |       |  
|----------------------------------- |  | ---- | --- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                    |  | 2005 |     |   | 2004 |   |       | 2003 | 
|                                    |  |      |     |   |      |   |       |      | 
|Reseller revenues                   |  | $    | 574 |   |      | $ | 5,223 |      |  | $ | 6,537 |  
|Percent of product license revenues |  |      | 2   | % |      |   | 22    | %    |  |   | 24    | %



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















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





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





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









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





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





34



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











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







35



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

10-K.












36



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|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   |        |       | 
|------------------------------------ | --------------------------- | ---- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | ----- | ---- | --- |  | - | ------ | ----- | 
|Lease Locations                      |                             | 2006 |        |       | 2007 |   |        | 2008  |  |   | 2009   |       |  | Total |     
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|Cambridge, MA*                       |                             | $    | 1,035  |       |      |   |        |       |  |   |        |       |  |       |      |     |  | $ | 1,035  |      
|Cambridge, MA                        |                             |      | 91     |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 91     |      
|Cambridge, MA                        |                             |      | 399    |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 399    |      
|Waltham, MA                          |                             |      | 1,452  |       |      |   | 1,452  |       |  |   | 1,452  |       |  |       | 364  |     |  |   | 4,720  |      
|Chicago, IL                          |                             |      | 427    |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 427    |      
|San Francisco, CA                    |                             |      | 513    |       |      |   | 512    |       |  |   |        |       |  |       |      |     |  |   | 1,025  |      
|Reading, UK                          |                             |      | 538    |       |      |   | 538    |       |  |   | 538    |       |  |       | 134  |     |  |   | 1,748  |      
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|                                     | Facility obligations, gross |      |        | 4,455 |      |   |        | 2,502 |  |   |        | 1,990 |  |       |      | 498 |  |   |        | 9,445 | 
|Contracted and assumed sublet income |                             |      | (1,664 | )     |      |   | (1,401 | )     |  |   | (1,149 | )     |  |       | (287 | )   |  |   | (4,501 | )    
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|                                     | Net cash obligations        |      | $      | 2,791 |      |   | $      | 1,101 |  |   | $      | 841   |  |       | $    | 211 |  |   | $      | 4,944 | 
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|Assumed sub-lease income             |                             | $    | 64     |       |      | $ | 204    |       |  | $ | 204    |       |  | $     | 51   |     |  | $ | 523    |      






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



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







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



Liquidity and Capital Resources




37



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



|                    |  |                                  |        |  |      |   |        |      |  |   |        | 
|------------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                    |  | 2005                             |        |  | 2004 |   |        | 2003 | 
|                    |  |                                  |        |  |      |   |        |      | 
|                    |  | (In thousands (except DSO data)) |       
|DSO                 |  |                                  | 86     |  |      |   | 129    |      |  |   | 77     | 
|Revenue             |  | $                                | 90,646 |  |      | $ | 69,219 |      |  | $ | 72,492 | 
|Accounts receivable |  | $                                | 21,459 |  |      | $ | 24,430 |      |  | $ | 15,364 | 





| |                
| | ---------------
| | Credit facility





38



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



|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |     |  |  |   |   | 
|----------------------- |  | ---------------------- | ------ | --------- | ------ | - | ----- | --------- | ----- | - | --------- |  |  | ------- | --- |  |  | - | - | 
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  |                        |        | Less Than |        |   |       |           | After
|Contractual Obligations |  | Total                  |        |           | 1 Year |   |       | 2-3 Years |       |   | 4-5 Years |  |  | 5 Years
|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |        
|Lease Commitments       |  | $                      | 12,073 |           |        | $ | 5,869 |           |       | $ | 5,500     |  |  | $       | 704 |  |  | $ |  | 
|Notes Payable           |  |                        | 215    |           |        |   | 215   |           |       |   |          |  |  |         |    |  |  |   |  | 
|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |    
|Total                   |  | $                      | 12,288 |           |        | $ | 6,084 |           |       | $ | 5,500     |  |  | $       | 704 |  |  | $ |  | 
|                        |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |    





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Recent Accounting Pronouncements


Share-Based Payment, Accounting for Stock Issued to Employees, Statement of Cash Flows.











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

held-to




40



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

Report of Independent Registered Public Accounting Firm
















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





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ART TECHNOLOGY GROUP, INC.


CONSOLIDATED BALANCE SHEETS


|                                                |                                                                                                                                                                                            |                             |        |          |        |   |        |          |        | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                                |                                                                                                                                                                                            | December 31,                |       
|                                                |                                                                                                                                                                                            |                             |       
|                                                |                                                                                                                                                                                            | 2005                        |        |          | 2004   |  
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | (In thousands, except share |       
|                                                |                                                                                                                                                                                            | and per-share information)  |       
|ASSETS                                         
|Current Assets:                                 |                                                                                                                                                                                            |                             |        |          |        |   |        |         
|                                                | Cash and cash equivalents                                                                                                                                                                  |                             | $      | 24,060   |        |   | $      | 21,310   |       
|                                                | Marketable securities                                                                                                                                                                      |                             |        | 9,509    |        |   |        | 5,197    |       
|                                                | Accounts receivable, net of allowances of $778 ($680 in 2004)                                                                                                                              |                             |        | 21,459   |        |   |        | 24,430   |       
|                                                | Prepaid expenses and other current assets                                                                                                                                                  |                             |        | 1,130    |        |   |        | 1,694    |       
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | Total current assets        |        |          | 56,158 |   |        |          | 52,631 | 
|Marketable securities, long term                |                                                                                                                                                                                            |                             |       |          |        |   | 4,001  |         
|Property and equipment, net                     |                                                                                                                                                                                            |                             | 2,995  |          |        |   | 3,120  |         
|Goodwill                                        |                                                                                                                                                                                            |                             | 27,347 |          |        |   | 27,458 |         
|Intangible assets, net                          |                                                                                                                                                                                            |                             | 4,859  |          |        |   | 7,177  |         
|Other assets                                    |                                                                                                                                                                                            |                             | 1,406  |          |        |   | 3,416  |         
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | $                           | 92,765 |          |        | $ | 97,803 |         
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                               
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Current Liabilities:                            |                                                                                                                                                                                            |                             |        |          |        |   |        |         
|                                                | Accounts payable                                                                                                                                                                           |                             | $      | 2,719    |        |   | $      | 5,186    |       
|                                                | Accrued expenses                                                                                                                                                                           |                             |        | 13,359   |        |   |        | 13,156   |       
|                                                | Accrued restructuring, short-term                                                                                                                                                          |                             |        | 3,012    |        |   |        | 6,095    |       
|                                                | Capital lease obligations, current portion                                                                                                                                                 |                             |        | 56       |        |   |        | 56       |       
|                                                | Notes payable                                                                                                                                                                              |                             |        | 198      |        |   |        | 595      |       
|                                                | Deferred revenue                                                                                                                                                                           |                             |        | 21,113   |        |   |        | 25,355   |       
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | Total current liabilities   |        |          | 40,457 |   |        |          | 50,443 | 
|Accrued restructuring, less current portion     |                                                                                                                                                                                            |                             | 2,085  |          |        |   | 5,063  |         
|Capital lease obligations, less current portion |                                                                                                                                                                                            |                             | 63     |          |        |   | 112    |         
|Commitments and contingencies                   |                                                                                                                                                                                            |                             |        |          |        |   |        |         
|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 
    110,637,606 shares and 108,141,966 shares at
    December 31, 2005 and 2004, respectively |                             |        | 1,106    |        |   |        | 1,081    |       
|                                                | Additional paid-in capital                                                                                                                                                                 |                             |        | 251,454  |        |   |        | 249,465  |       
|                                                | Accumulated deficit                                                                                                                                                                        |                             |        | (199,466 | )      |   |        | (205,235 | )     
|                                                | Accumulated other comprehensive loss                                                                                                                                                       |                             |        | (2,934   | )      |   |        | (3,126   | )     
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | Total stockholders equity  |        |          | 50,160 |   |        |          | 42,185 | 
|                                                |                                                                                                                                                                                            |                             |        |          |        |  
|                                                |                                                                                                                                                                                            | $                           | 92,765 |          |        | $ | 97,803 |         
|                                                |                                                                                                                                                                                            |                             |        |          |        |  



42



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ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                     |                                                    |                               |       |         |        |  |        |        |        |   |       |         |        | 
|------------------------------------ | -------------------------------------------------- | ----------------------------- | ----- | ------- | ------ |  | ------ | ------ | ------ | - | ----- | ------- | ------ | 
|                                     |                                                    | Year Ended December 31,       |      
|                                     |                                                    |                               |      
|                                     |                                                    | 2005                          |       |         | 2004   |  |        | 2003   |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | (In thousands, except         |      
|                                     |                                                    | per-share information)        |      
|Revenues:                            |                                                    |                               |       |         |        |  |        |        |        |   |       |        
|                                     | Product license                                    |                               | $     | 29,821  |        |  | $      | 23,345 |        |   | $     | 27,159  |       
|                                     | Services                                           |                               |       | 60,825  |        |  |        | 45,874 |        |   |       | 45,333  |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | Total revenues                |       |         | 90,646 |  |        |        | 69,219 |   |       |         | 72,492 | 
|Cost of Revenues:                    |                                                    |                               |       |         |        |  |        |        |        |   |       |        
|                                     | Product license                                    |                               |       | 1,816   |        |  |        | 2,206  |        |   |       | 2,118   |       
|                                     | Services                                           |                               |       | 23,255  |        |  |        | 19,879 |        |   |       | 19,808  |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | Total cost of revenues        |       |         | 25,071 |  |        |        | 22,085 |   |       |         | 21,926 | 
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | Gross profit                  |       |         | 65,575 |  |        |        | 47,134 |   |       |         | 50,566 | 
|Operating Expenses:                  |                                                    |                               |       |         |        |  |        |        |        |   |       |        
|                                     | Research and development                           |                               |       | 17,843  |        |  |        | 16,209 |        |   |       | 17,928  |       
|                                     | Sales and marketing                                |                               |       | 30,034  |        |  |        | 29,602 |        |   |       | 31,174  |       
|                                     | General and administrative                         |                               |       | 11,231  |        |  |        | 7,742  |        |   |       | 9,538   |       
|                                     | Restructuring charge (benefit)                     |                               |       | 885     |        |  |        | 3,570  |        |   |       | (10,476 | )     
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | Total operating expenses      |       |         | 59,993 |  |        |        | 57,123 |   |       |         | 48,164 | 
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     |                                                    | Income (loss) from operations |       |         | 5,582  |  |        |        | (9,989 | ) |       |         | 2,402  | 
|Interest and other income, net       |                                                    |                               | 219   |         |        |  | 395    |        |        |   | 1,521 |        
|                                     |                                                    |                               |       |         |        |  |        |        |       
|Income (loss) before income taxes    |                                                    |                               | 5,801 |         |        |  | (9,594 | )      |        |   | 3,923 |        
|Provision (benefit) for income taxes |                                                    |                               | 32    |         |        |  | (50    | )      |        |   | (255  | )      
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     | Net income (loss)                                  |                               | $     | 5,769   |        |  | $      | (9,544 | )      |   | $     | 4,178   |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     | Basic net income (loss) per share                  |                               | $     | 0.05    |        |  | $      | (0.12  | )      |   | $     | 0.06    |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     | Diluted net income (loss) per share                |                               | $     | 0.05    |        |  | $      | (0.12  | )      |   | $     | 0.06    |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     | Basic weighted average common shares outstanding   |                               |       | 109,446 |        |  |        | 79,252 |        |   |       | 71,798  |       
|                                     |                                                    |                               |       |         |        |  |        |        |       
|                                     | Diluted weighted average common shares outstanding |                               |       | 111,345 |        |  |        | 79,252 |        |   |       | 73,768  |       
|                                     |                                                    |                               |       |         |        |  |        |        |       



43



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ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------------------------------------ | ----------- |  | ---------- | - | ----- | ------- |  | - | ------------ | ----- |  | ----------- | ----- | - | ------------- | ------------- | -------- | ------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                     |  | Common Stock                                           |             |  |            |   |       |         |  |   | Accumulated  |       |  |             |       |  
|                                                                                     |  |                                                        |             |  | Additional |   |       |         |  |   |              | Other |  |             | Total |   |               | Comprehensive |         
|                                                                                     |  | Number of                                              |             |  | Par        |   |       | Paid-In |  |   | Deferred     |       |  | Accumulated |       |   | Comprehensive |               |          | Stockholders |  |   | Income |  
|                                                                                     |  | Shares                                                 |             |  | Value      |   |       | Capital |  |   | Compensation |       |  | Deficit     |       |   | Loss          |               |          | Equity        |  |   | (Loss) |  
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|                                                                                     |  | (In thousands, except share and per-share information) |            
|Balance, January 1, 2003                                                             |  |                                                        | 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 income:                                                                |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                                           |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               | 4,178    |               |  |   |       |   |  |   | 4,178  |   |  | $ | 4,178  |  
|Foreign currency translation adjustment                                              |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   | (1,236 | ) |  |   | (1,236 | ) |  |   | (1,236 | )
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Comprehensive income                                                                 |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   |       |   |  | $ | 2,942  |  
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2003                                                           |  |                                                        | 72,936,165  |  |            |   | 729   |         |  |   | 218,927      |       |  |             | (11   | ) |               |               | (195,691 | )             |  |   | (3,017 | ) |  |   | 20,937 |   |  |   |        |  
|Exercise of stock options                                                            |  |                                                        | 718,126     |  |            |   | 7     |         |  |   | 525          |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   | 532    |   |  |   |        |  
|Issuance of common stock in connection with employee stock
    purchase plan         |  |                                                        | 1,016,419   |  |            |   | 10    |         |  |   | 926          |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   | 936    |   |  |   |        |  
|Issuances of common stock and valuation of options related to
    Primus acquisition |  |                                                        | 33,471,256  |  |            |   | 335   |         |  |   | 29,087       |       |  |             |       |   |               |               |          |               |  |   |        |   |  |   | 29,422 |   |  |   |        |  
|Amortization of deferred compensation                                                |  |                                                        |            |  |            |   |      |         |  |   |              |       |  |             | 11    |   |               |               |         |               |  |   |       |   |  |   | 11     |   |  |   |        |  
|Comprehensive loss:                                                                  |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |   |  |   |        |   |  |   |        |  
|Net loss                                                                             |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               | (9,544   | )             |  |   |       |   |  |   | (9,544 | ) |  | $ | (9,544 | )
|Foreign currency translation adjustment                                              |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   | (109   | ) |  |   | (109   | ) |  |   | (109   | )
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Comprehensive loss                                                                   |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   |       |   |  | $ | (9,653 | )
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2004                                                           |  |                                                        | 108,141,966 |  |            |   | 1,081 |         |  |   | 249,465      |       |  |             |      |   |               |               | (205,235 | )             |  |   | (3,126 | ) |  |   | 42,185 |   |  |   |        |  
|Exercise of stock options                                                            |  |                                                        | 1,751,942   |  |            |   | 18    |         |  |   | 1,342        |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   | 1,360  |   |  |   |        |  
|Issuance of common stock in connection with employee stock
    purchase plan         |  |                                                        | 743,698     |  |            |   | 7     |         |  |   | 647          |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   | 654    |   |  |   |        |  
|Comprehensive income:                                                                |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                                           |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               | 5,769    |               |  |   |       |   |  |   | 5,769  |   |  | $ | 5,769  |  
|Foreign currency translation adjustment                                              |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   | 192    |   |  |   | 192    |   |  |   | 192    |  
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Comprehensive income                                                                 |  |                                                        |            |  |            |   |      |         |  |   |             |       |  |             |      |   |               |               |         |               |  |   |       |   |  |   |       |   |  | $ | 5,961  |  
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  
|Balance, December 31, 2005                                                           |  |                                                        | 110,637,606 |  |            | $ | 1,106 |         |  | $ | 251,454      |       |  | $           |      |   |               | $             | (199,466 | )             |  | $ | (2,934 | ) |  | $ | 50,160 |   |  |   |        |  
|                                                                                     |  |                                                        |             |  |            |   |       |         |  |   |              |       |  |             |       |   |               |               |          |               |  |   |        |  



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ART TECHNOLOGY GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |         |         |         |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ----- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                                           |                                                                                                        | Years Ended December 31,                                       |                                                    
|                                                                           |                                                                                                        |                                                                |                                                    
|                                                                           |                                                                                                        | 2005                                                           |                                                     |         | 2004   |       |         | 2003    |       
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|                                                                           |                                                                                                        | (In thousands)                                                 |                                                    
|Cash Flows from Operating Activities:                                      |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |        
|                                                                           | Net income (loss)                                                                                      |                                                                | $                                                   | 5,769   |        |       | $       | (9,544  | )      |         | $       | 4,178   |        
|                                                                           | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                                |                                                     |         |        |       |         |         |        |         |         |         |        
|                                                                           |                                                                                                        | Stock-based compensation                                       |                                                     |         |       |       |         |         | 11     |         |         |         | 136     |        
|                                                                           |                                                                                                        | Depreciation and amortization                                  |                                                     |         | 4,180  |       |         |         | 2,957  |         |         |         | 3,897   |        
|                                                                           |                                                                                                        | Non-cash restructuring charge                                  |                                                     |         | 1,167  |       |         |         | 667    |         |         |         | 1,144   |        
|                                                                           |                                                                                                        | Loss on disposal of fixed assets, net                          |                                                     |         |       |       |         |         | 33     |         |         |         | 121     |        
|                                                                           | Changes in operating assets and liabilities:                                                           |                                                                |                                                     |         |        |       |         |         |        |         |         |         |        
|                                                                           |                                                                                                        | Accounts receivable, net                                       |                                                     |         | 2,940  |       |         |         | (7,147 | )       |         |         | 9,857   |        
|                                                                           |                                                                                                        | Prepaid expenses and other current assets                      |                                                     |         | 434    |       |         |         | 671    |         |         |         | 371     |        
|                                                                           |                                                                                                        | Deferred rent                                                  |                                                     |         | 664    |       |         |         | 978    |         |         |         | (3,772  | )      
|                                                                           |                                                                                                        | Accounts payable                                               |                                                     |         | (1,428 | )     |         |         | 519    |         |         |         | (1,417  | )      
|                                                                           |                                                                                                        | Accrued expenses                                               |                                                     |         | 310    |       |         |         | (3,364 | )       |         |         | (5,856  | )      
|                                                                           |                                                                                                        | Deferred revenue                                               |                                                     |         | (4,067 | )     |         |         | 6,957  |         |         |         | (759    | )      
|                                                                           |                                                                                                        | Accrued restructuring                                          |                                                     |         | (6,061 | )     |         |         | (6,841 | )       |         |         | (34,446 | )      
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|                                                                           |                                                                                                        |                                                                | Net cash provided by (used in) operating activities |         |        | 3,908 |         |         |        | (14,103 | )       |         |         | (26,546 | )
|Cash Flows from Investing Activities:                                      |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |        
|                                                                           | Purchases of marketable securities                                                                     |                                                                |                                                     | (14,115 | )      |       |         | (11,426 | )      |         |         | (12,138 | )      
|                                                                           | Maturities of marketable securities                                                                    |                                                                |                                                     | 13,804  |        |       |         | 11,878  |        |         |         | 25,217  |        
|                                                                           | Purchases of property and equipment                                                                    |                                                                |                                                     | (1,924  | )      |       |         | (763    | )      |         |         | (993    | )      
|                                                                           | Proceeds from sales of equipment                                                                       |                                                                |                                                     |        |        |       |         |        |        |         |         | 91      |        
|                                                                           | Cash acquired in acquisition, net of acquisition costs paid                                            |                                                                |                                                     |        |        |       |         | 2,730   |        |         |         |        |        
|                                                                           | Payment of acquisition costs                                                                           |                                                                |                                                     | (1,010  | )      |       |         |        |        |         |         |        |        
|                                                                           | Decrease (increase) in other assets                                                                    |                                                                |                                                     | 313     |        |       |         | (12     | )      |         |         | 98      |        
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|                                                                           |                                                                                                        | Net cash (used in) provided by investing activities            |                                                     |         | (2,932 | )     |         |         | 2,407  |         |         |         | 12,275  |        
|Cash Flows from Financing Activities:                                      |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |        
|                                                                           | Principal payments on notes payable                                                                    |                                                                |                                                     | (413    | )      |       |         | (502    | )      |         |         |        |        
|                                                                           | Proceeds from exercise of stock options                                                                |                                                                |                                                     | 1,360   |        |       |         | 532     |        |         |         | 752     |        
|                                                                           | Proceeds from employee stock purchase plan                                                             |                                                                |                                                     | 654     |        |       |         | 936     |        |         |         | 1,095   |        
|                                                                           | Payments on capital leases                                                                             |                                                                |                                                     | (55     | )      |       |         | (7      | )      |         |         |        |        
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|                                                                           |                                                                                                        | Net cash provided by financing activities                      |                                                     |         | 1,546  |       |         |         | 959    |         |         |         | 1,847   |        
|Effects of Foreign Exchange Rate Changes On Cash and Cash
    Equivalents  |                                                                                                        |                                                                | 228                                                 |         |        |       | 113     |         |        |         | (1,471  | )      
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|Net Increase (Decrease) in Cash and Cash Equivalents                       |                                                                                                        |                                                                | 2,750                                               |         |        |       | (10,624 | )       |        |         | (13,895 | )      
|Cash and Cash Equivalents, Beginning of Period                             |                                                                                                        |                                                                | 21,310                                              |         |        |       | 31,934  |         |        |         | 45,829  |        
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|Cash and Cash Equivalents, End of Period                                   |                                                                                                        | $                                                              | 24,060                                              |         |        | $     | 21,310  |         |        | $       | 31,934  |        
|                                                                           |                                                                                                        |                                                                |                                                     |         |        |       |         |         |       
|Supplemental Disclosure of Cash Flow Information:                          |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |        
|                                                                           | Cash paid during the period for interest                                                               |                                                                | $                                                   | 18      |        |       | $       | 4       |        |         | $       |        |        
|                                                                           | Cash paid during the period for income taxes                                                           |                                                                | $                                                   | 39      |        |       | $       | 38      |        |         | $       | 140     |        
|Supplemental Disclosure of Noncash Investing and Financing
    Activities: |                                                                                                        |                                                                |                                                     |         |        |       |         |         |        |         |         |        
|                                                                           | Reversal of deferred compensation                                                                      |                                                                | $                                                   |        |        |       | $       |        |        |         | $       | 247     |        
|                                                                           |                                                                                                        | Reversal of provision for income taxes                         |                                                     | $       |       |       |         | $       | 158    |         |         | $       | 332     |        
|                                                                           |                                                                                                        | Issuance of stock and options related to acquisition of Primus |                                                     | $       |       |       |         | $       | 29,422 |         |         | $       |        |        



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ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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







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





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





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

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


97-2 97-2 97-2.


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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Application of AICPA Statement of Position
97-2, Software Revenue Recognition, to Arrangements That Include
the Right to Use Software Stored on Another Entitys
Hardware


percentage-of percentage-of




|    |                                             
|--- | --------------------------------------------
|(d) | Allowances for Doubtful Accounts and Returns

Revenue Recognition When Right of
Return Exists.




|                             |  |              |       |            |            |   |     |             |  |   |                |   |  |   |     | 
|---------------------------- |  | ------------ | ----- | ---------- | ---------- | - | --- | ----------- |  | - | -------------- | - |  | - | --- | 
|                             |  |              |       | Additions/ |            |   |     |             | 
|                             |  | Beginning of |       |            | Charges to |   |     | Deductions/ |  |   | Balance at End |  
|                             |  | Period       |       |            | Expense    |   |     | Write-Offs  |  |   | of Period      |  
|                             |  |              |       |            |            |   |     |             |  |   |                |  
|Year Ended December 31, 2003 |  | $            | 1,941 |            |            | $ | 210 |             |  | $ | (1,352         | ) |  | $ | 799 | 
|                             |  |              |       |            |            |   |     |             |  |   |                |  
|Year Ended December 31, 2004 |  | $            | 799   |            |            | $ | 259 |             |  | $ | (378           | ) |  | $ | 680 | 
|                             |  |              |       |            |            |   |     |             |  |   |                |  
|Year Ended December 31, 2005 |  | $            | 680   |            |            | $ | 677 |             |  | $ | (579           | ) |  | $ | 778 | 
|                             |  |              |       |            |            |   |     |             |  |   |                |  

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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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





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

Earnings Per Share.




|                                                                                                                                 |  |                       |         |  |      |   |        |      |  |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                                                                                 |  | 2005                  |         |  | 2004 |   |        | 2003 | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|                                                                                                                                 |  | (In thousands, except |        
|                                                                                                                                 |  | per share amounts)    |        
|Net income (loss)                                                                                                                |  | $                     | 5,769   |  |      | $ | (9,544 | )    |  | $ | 4,178  | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|Weighted average common shares outstanding used in computing
    basic net income (loss) per share                               |  |                       | 109,446 |  |      |   | 79,252 |      |  |   | 71,798 | 
|Weighted average common equivalent shares outstanding:                                                                           |  |                       |         |  |      |   |        |      |  |   |        | 
|Dilutive employee common stock options                                                                                           |  |                       | 1,899   |  |      |   |       |      |  |   | 1,970  | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|Total weighted average common and common equivalent shares
    outstanding used in computing diluted net income (loss) per share |  |                       | 111,345 |  |      |   | 79,252 |      |  |   | 73,768 | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|Basic net income (loss) per share                                                                                                |  | $                     | 0.05    |  |      | $ | (0.12  | )    |  | $ | 0.06   | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|Diluted net income (loss) per share                                                                                              |  | $                     | 0.05    |  |      | $ | (0.12  | )    |  | $ | 0.06   | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 
|Anti-dilutive common stock options                                                                                               |  |                       | 7,443   |  |      |   | 15,236 |      |  |   | 5,489  | 
|                                                                                                                                 |  |                       |         |  |      |   |        |      | 



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

Accounting for Certain Investments in
Debt and Equity Securities.


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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


held-to


|                           |                                                     |                                 |   |        |        |  |   |        |        | 
|-------------------------- | --------------------------------------------------- | ------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                           |                                                     | December 31,                    |  
|                           |                                                     |                                 |  
|                           |                                                     | 2005                            |   |        | 2004   | 
|                           |                                                     |                                 |   |        |        | 
|Cash and cash equivalents: |                                                     |                                 |   |        |        |  |   |       
|                           | Cash                                                |                                 | $ | 15,473 |        |  | $ | 4,360  |       
|                           | Money market accounts                               |                                 |   | 5,253  |        |  |   | 13,529 |       
|                           | U.S. Treasury and U.S. Government Agency securities |                                 |   | 1,323  |        |  |   | 2,622  |       
|                           | Commercial paper                                    |                                 |   | 2,011  |        |  |   | 799    |       
|                           |                                                     |                                 |   |        |        | 
|                           |                                                     | Total cash and cash equivalents |   | $      | 24,060 |  |   | $      | 21,310 | 
|                           |                                                     |                                 |   |        |        | 
|Marketable securities:     |                                                     |                                 |   |        |        |  |   |       
|                           | U.S. Treasury and U.S. Government Agency securities |                                 | $ | 389    |        |  | $ | 648    |       
|                           | Certificate of Deposit                              |                                 |   | 450    |        |  |   |       |       
|                           | Commercial paper                                    |                                 |   | 2,011  |        |  |   | 796    |       
|                           | Corporate debt securities                           |                                 |   | 6,659  |        |  |   | 7,754  |       
|                           |                                                     |                                 |   |        |        | 
|                           |                                                     | Total marketable securities     |   | $      | 9,509  |  |   | $      | 9,198  | 
|                           |                                                     |                                 |   |        |        | 



|    |             
|--- | ------------
|(i) | Other Assets





|                                                             |  |              |       |  |      |   |       | 
|------------------------------------------------------------ |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                             |  | December 31, |      
|                                                             |  |              |      
|                                                             |  | 2005         |       |  | 2004 |  
|                                                             |  |              |       |  |      |  
|Deferred rent resulting from lease settlements (see Note 10) |  | $            | 562   |  |      | $ | 2,275 | 
|Other assets                                                 |  |              | 844   |  |      |   | 1,141 | 
|                                                             |  |              |       |  |      |  
|                                                             |  | $            | 1,406 |  |      | $ | 3,416 | 
|                                                             |  |              |       |  |      |  



|    |                       
|--- | ----------------------
|(j) | Property and Equipment



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                 |  |                       |                       |              |      |   |        |      |  |   |        | 
|------------------------------------------------ |  | --------------------- | --------------------- | ------------ | ---- | - | ------ | ---- |  | - | ------ | 
|                                                 |  |                       |                       | December 31, |     
|                                                 |  |                       |                       |              |     
|Asset Classification                             |  | Estimated Useful Life |                       |              | 2005 |   |        | 2004 | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|Computer equipment                               |  |                       | 3 years               |              |      | $ | 12,564 |      |  | $ | 10,985 | 
|Leasehold improvements                           |  |                       | Lesser of useful      |              |      |   | 3,342  |      |  |   | 3,711  | 
|                                                 |  |                       | life or life of lease |              |      |   |        |      |  |   |        | 
|Furniture and fixtures                           |  |                       | 5 years               |              |      |   | 2,969  |      |  |   | 2,850  | 
|Computer software                                |  |                       | 3 years               |              |      |   | 4,417  |      |  |   | 4,400  | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|                                                 |  |                       |                       |              |      |   | 23,292 |      |  |   | 21,946 | 
|Less  accumulated depreciation and amortization |  |                       |                       |              |      |   | 20,297 |      |  |   | 18,826 | 
|                                                 |  |                       |                       |              |      |   |        |      | 
|                                                 |  |                       |                       |              |      | $ | 2,995  |      |  | $ | 3,120  | 
|                                                 |  |                       |                       |              |      |   |        |      | 





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

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




|    |             
|--- | ------------
|(l) | Income Taxes

Accounting for Income Taxes.




|    |                         
|--- | ------------------------
|(m) | Stock-Based Compensation

Accounting
for Stock Issued to Employees Accounting for Stock Based
Compensation.


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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                    |                    |                          |        |       |      |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ------ | ----- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                    |                    | Years Ended December 31, |       
|                                                                                                                    |                    |                          |       
|                                                                                                                    |                    | 2005                     |        |       | 2004 |   |         | 2003    |  
|                                                                                                                    |                    |                          |        |       |      |   |         |         |  
|                                                                                                                    |                    | (In thousands, except    |       
|                                                                                                                    |                    | per-share information)   |       
|Net income (loss) as reported                                                                                       |                    | $                        | 5,769  |       |      | $ | (9,544  | )       |   | $ | 4,178   |        
|Add: Stock-based employee compensation expense included in
    reported net income (loss)                           |                    |                          |       |       |      |   | 11      |         |   |   | 136     |        
|Deduct: Total stock based employee compensation expense
    determined under fair value based method for all awards |                    |                          | (2,553 | )     |      |   | (15,659 | )       |   |   | (40,184 | )      
|                                                                                                                    |                    |                          |        |       |      |   |         |         |  
|                                                                                                                    | Pro forma net loss |                          | $      | 3,216 |      |   | $       | (25,192 | ) |   | $       | (35,870 | )
|                                                                                                                    |                    |                          |        |       |      |   |         |         |  
|Basic and diluted net income (loss) per share:                                                                      |                    |                          |        |       |      |   |         |         |   |   |         |        
|                                                                                                                    | As reported        |                          | $      | 0.05  |      |   | $       | (0.12   | ) |   | $       | 0.06    |  
|                                                                                                                    | Pro forma          |                          | $      | 0.03  |      |   | $       | (0.32   | ) |   | $       | (0.50   | )



|                        |  |              |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | Years Ended  |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2005         |      |   | 2004 |  |      | 2001 | 
|                        |  |              |      |   |      |  |      |      | 
|Risk-free interest rate |  |              | 3.70 | % |      |  | 2.93 | %    |  |  | 2.51 | %
|Expected life (years)   |  |              | 4    |   |      |  | 4    |      |  |  | 4    |  
|Expected volatility     |  |              | 82   | % |      |  | 102  | %    |  |  | 117  | %
|Expected dividend yield |  |              |     |   |      |  |     |      |  |  |     |  





|    |                            
|--- | ---------------------------
|(n) | Comprehensive Income (Loss)

Reporting Comprehensive Income


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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|    |                              
|--- | -----------------------------
|(p) | Concentrations of Credit Risk







|    |                                               
|--- | ----------------------------------------------
|(q) | Long-Lived Assets, including Intangible Assets

Accounting for the
Impairment or Disposal of Long-Lived Assets




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

Foreign Currency Translation.


52



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Goodwill and Other
Intangible Assets




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

Share-Based Payment Accounting for Stock Issued to Employees Statement of Cash
Flows.








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

Disclosures About Segments of an
Enterprise and Related Information


53



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                              |  |              |     |   |      |  |     |      |  |  |     |  
|--------------------------------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                              |  | Years Ended  |    
|                                              |  | December 31, |    
|                                              |  |              |    
|                                              |  | 2005         |     |   | 2004 |  |     | 2003 | 
|                                              |  |              |     |   |      |  |     |      | 
|United States                                 |  |              | 76  | % |      |  | 67  | %    |  |  | 65  | %
|Europe, Middle East and Africa (excluding UK) |  |              | 9   |   |      |  | 20  |      |  |  | 17  |  
|United Kingdom (UK)                           |  |              | 14  |   |      |  | 10  |      |  |  | 13  |  
|Asia Pacific                                  |  |              | 1   |   |      |  | 2   |      |  |  | 3   |  
|Other                                         |  |              | 0   |   |      |  | 1   |      |  |  | 2   |  
|                                              |  |              |     |   |      |  |     |      | 
|                                              |  |              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |              |     |   |      |  |     |      | 



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



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







54



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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







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



|         |       |                          |       |       |      |   |        |        |   |   |        |       | 
|-------- | ----- | ------------------------ | ----- | ----- | ---- | - | ------ | ------ | - | - | ------ | ----- | 
|         |       | Years Ended December 31, |      
|         |       |                          |      
|         |       | 2005                     |       |       | 2004 |   |        | 2003   |  
|         |       |                          |       |       |      |   |        |        |  
|Domestic |       | $                        | 5,777 |       |      | $ | (7,930 | )      |   | $ | 13,539 |      
|Foreign  |       |                          | 24    |       |      |   | (1,664 | )      |   |   | (9,616 | )    
|         |       |                          |       |       |      |   |        |        |  
|         | Total |                          | $     | 5,801 |      |   | $      | (9,594 | ) |   | $      | 3,923 | 
|         |       |                          |       |       |      |   |        |        |  

55



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |          |              |    |    |      |   |     |      |   |   |      |      |  
|------- | -------- | ------------ | -- | -- | ---- | - | --- | ---- | - | - | ---- | ---- | -
|        |          | Years Ended  |   
|        |          | December 31, |   
|        |          |              |   
|        |          | 2005         |    |    | 2004 |   |     | 2003 |  
|        |          |              |    |    |      |   |     |      |  
|Federal |          |              |    |    |      |   |     |      |   |   |      |     
|        | Current  |              | $  |   |      |   | $   |     |   |   | $    |     |  
|        | Deferred |              |    |   |      |   |     |     |   |   |      |     |  
|State   |          |              |    |    |      |   |     |      |   |   |      |     
|        | Current  |              |    |   |      |   |     | 30   |   |   |      |     |  
|        | Deferred |              |    |   |      |   |     |     |   |   |      |     |  
|Foreign |          |              |    |    |      |   |     |      |   |   |      |     
|        | Current  |              |    | 32 |      |   |     | (80  | ) |   |      | (255 | )
|        | Deferred |              |    |   |      |   |     |     |   |   |      |     |  
|        |          |              |    |    |      |   |     |      |  
|        |          | $            | 32 |    |      | $ | (50 | )    |   | $ | (255 | )   
|        |          |              |    |    |      |   |     |      |  



|                                     |  |                          |       |   |      |  |       |      |  |  |       |   
|------------------------------------ |  | ------------------------ | ----- | - | ---- |  | ----- | ---- |  |  | ----- | --
|                                     |  | Years Ended December 31, |      
|                                     |  |                          |      
|                                     |  | 2005                     |       |   | 2004 |  |       | 2003 | 
|                                     |  |                          |       |   |      |  |       |      | 
|Federal tax at statutory rate        |  |                          | 35.0  | % |      |  | (35.0 | )%   |  |  | 35.0  | % 
|State taxes, net of federal benefit  |  |                          | 0.9   |   |      |  | .2    |      |  |  | 11.5  |   
|Meals and entertainment              |  |                          | 2.5   |   |      |  | 1.8   |      |  |  | 4.3   |   
|Reversal of previously accrued taxes |  |                          | 0.0   |   |      |  | (1.6  | )    |  |  | (8.5  | ) 
|Other                                |  |                          | 0.0   |   |      |  |      |      |  |  | 0.8   |   
|                                     |  |                          |       |   |      |  |       |      | 
|Provision before valuation allowance |  |                          | 38.4  |   |      |  | (34.6 | )    |  |  | 43.1  |   
|                                     |  |                          |       |   |      |  |       |      | 
|Change in valuation allowance        |  |                          | (37.8 | ) |      |  | 34.1  |      |  |  | (49.6 | ) 
|                                     |  |                          |       |   |      |  |       |      | 
|                                     |  |                          | 0.6   | % |      |  | (0.5  | )%   |  |  | (6.5  | )%
|                                     |  |                          |       |   |      |  |       |      | 

56



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                              |                                 |              |          |         |      |   |          |         | 
|----------------------------- | ------------------------------- | ------------ | -------- | ------- | ---- | - | -------- | ------- | 
|                              |                                 | December 31, |         
|                              |                                 |              |         
|                              |                                 | 2005         |          |         | 2004 |  
|                              |                                 |              |          |         |      |  
|Deferred tax assets:          |                                 |              |          |         |      |   |          |        
|Restructuring                 |                                 | $            | 1,968    |         |      | $ | 5,161    |        
|Depreciation and amortization |                                 |              | 1,036    |         |      |   | 1,154    |        
|Reserves and accruals         |                                 |              | 758      |         |      |   | 1,320    |        
|Capitalized expenses          |                                 |              | 24,305   |         |      |   | 1,637    |        
|Deferred revenue              |                                 |              |         |         |      |   | 3,653    |        
|US Income tax credits         |                                 |              | 5,195    |         |      |   | 1,037    |        
|Net operating losses          |                                 |              | 88,066   |         |      |   | 102,602  |        
|                              |                                 |              |          |         |      |  
|                              | Total gross deferred tax assets |              |          | 121,328 |      |   |          | 116,564 | 
|Valuation allowance           |                                 |              | (119,384 | )       |      |   | (113,693 | )      
|                              |                                 |              |          |         |      |  
|                              | Total deferred tax assets       |              |          | 1,944   |      |   |          | 2,871   | 
|                              |                                 |              |          |         |      |  
|Deferred tax liabilities:     |                                 |              |          |         |      |   |          |        
|Intangible assets             |                                 |              | (1,944   | )       |      |   | (2,871   | )      
|                              |                                 |              |          |         |      |  
|                              | Net deferred tax assets         |              | $        |        |      |   | $        |        | 
|                              |                                 |              |          |         |      |  







57



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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

Stock Plans




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







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



58



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Primus Stock Option
Plans






|                               |           |            |        |          |          |   |      |      | 
|------------------------------ | --------- | ---------- | ------ | -------- | -------- | - | ---- | ---- | 
|                               |           |            |        | Weighted |         
|                               |           |            |        | Average  |         
|                               |           | Number     |        |          | Exercise |  
|                               |           | of Options |        |          | Price    |  
|                               |           |            |        |          |          |  
|Outstanding, December 31, 2002 |           |            | 11,571 |          |          | $ | 7.91 |     
|                               | Granted   |            |        | 4,807    |          |   |      | 1.26 | 
|                               | Exercised |            |        | (786     | )        |   |      | 0.96 | 
|                               | Canceled  |            |        | (4,212   | )        |   |      | 9.94 | 
|                               |           |            |        |          |          |  
|Outstanding, December 31, 2003 |           |            | 11,380 |          |          |   | 4.56 |     
|                               | Granted   |            |        | 8,750    |          |   |      | 1.06 | 
|                               | Exercised |            |        | (718     | )        |   |      | 0.74 | 
|                               | Canceled  |            |        | (4,176   | )        |   |      | 3.98 | 
|                               |           |            |        |          |          |  
|Outstanding, December 31, 2004 |           |            | 15,236 |          |          |   | 2.96 |     
|                               | Granted   |            |        | 3,839    |          |   |      | 1.22 | 
|                               | Exercised |            |        | (1,752   | )        |   |      | 0.78 | 
|                               | Canceled  |            |        | (4,079   | )        |   |      | 4.58 | 
|                               |           |            |        |          |          |  
|Outstanding, December 31, 2005 |           |            | 13,244 |          |          | $ | 2.33 |     
|                               |           |            |        |          |          |  
|Exercisable, December 31, 2005 |           |            | 7,378  |          |          | $ | 3.20 |     
|Exercisable, December 31, 2004 |           |            | 8,980  |          |          | $ | 4.08 |     
|Exercisable, December 31, 2003 |           |            | 6,018  |          |          | $ | 6.53 |     

59



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |       |  |  |   |       | 
|------------------------ |  | ------------------------------------------------------ | ------ | ---------------- | ----------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | ----- |  |  | - | ----- | 
|                         |  | Outstanding                                            |        |                  | Exercisable | 
|                         |  |                                                        |        |                  |             | 
|                         |  |                                                        |        | Weighted         |             |  |          |          | 
|                         |  |                                                        |        | Average          |             |  |          |          | 
|                         |  |                                                        |        | Remaining        |             |  | Weighted |          |  |   |           | Weighted | 
|                         |  |                                                        |        | Contractual Life |             |  | Average  |          |  |   |           | Average  | 
|                         |  | Number of                                              |        |                  | Outstanding |  |          | Exercise |  |   | Number of |          |  | Exercise |      
|Range of Exercise Prices |  | Shares                                                 |        |                  | (Years)     |  |          | Price    |  |   | Shares    |          |  | Price    |      
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      
|                         |  | (In thousands, except years and per-share information) |       
|$  0.06  $    0.84      |  |                                                        | 2,138  |                  |             |  | 5.91     |          |  | $ | 0.61      |          |  |          | 2,112 |  |  | $ | 0.63  | 
|0.85        1.27        |  |                                                        | 6,168  |                  |             |  | 8.6      |          |  |   | 1.09      |          |  |          | 1,934 |  |  |   | 1.06  | 
|1.29        1.85        |  |                                                        | 3,248  |                  |             |  | 7.7      |          |  |   | 1.50      |          |  |          | 1,743 |  |  |   | 1.48  | 
|2.04        3.01        |  |                                                        | 527    |                  |             |  | 6.2      |          |  |   | 2.18      |          |  |          | 443   |  |  |   | 2.18  | 
|3.90        5.82        |  |                                                        | 789    |                  |             |  | 4.0      |          |  |   | 4.32      |          |  |          | 772   |  |  |   | 4.33  | 
|8.27      10.22         |  |                                                        | 141    |                  |             |  | 5.2      |          |  |   | 9.41      |          |  |          | 141   |  |  |   | 9.41  | 
|13.41      19.04        |  |                                                        | 35     |                  |             |  | 3.7      |          |  |   | 18.28     |          |  |          | 35    |  |  |   | 18.28 | 
|22.94      31.00        |  |                                                        | 15     |                  |             |  | 4.1      |          |  |   | 25.42     |          |  |          | 15    |  |  |   | 25.42 | 
|34.75      51.69        |  |                                                        | 86     |                  |             |  | 4.4      |          |  |   | 49.07     |          |  |          | 86    |  |  |   | 49.07 | 
|52.50      78.00        |  |                                                        | 72     |                  |             |  | 4.4      |          |  |   | 62.36     |          |  |          | 72    |  |  |   | 62.36 | 
|$87.00  $120.00         |  |                                                        | 25     |                  |             |  | 4.7      |          |  |   | 92.93     |          |  |          | 25    |  |  |   | 92.93 | 
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      
|                         |  |                                                        | 13,244 |                  |             |  | 7.5      |          |  | $ | 2.33      |          |  |          | 7,378 |  |  | $ | 3.20  | 
|                         |  |                                                        |        |                  |             |  |          |          |  |   |           |          |  |          |      





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





60



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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



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





61



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|                          |  |                      |       |   |                    |   |      |       |  |   |        |  
|------------------------- |  | -------------------- | ----- | - | ------------------ | - | ---- | ----- |  | - | ------ | -
|                          |  | Involuntary          |       |   | Facilities Related |   |      |      
|                          |  | Termination Benefits |       |   | Costs              |   |      | Total | 
|                          |  |                      |       |   |                    |   |      |       | 
|Obligation                |  | $                    | 1,682 |   |                    | $ | 376  |       |  | $ | 2,058  |  
|Payments                  |  |                      | (464  | ) |                    |   | (97  | )     |  |   | (561   | )
|                          |  |                      |       |   |                    |   |      |       | 
|Balance December 31, 2004 |  |                      | 1,218 |   |                    |   | 279  |       |  |   | 1,497  |  
|Payments                  |  |                      | (891  | ) |                    |   | (279 | )     |  |   | (1,170 | )
|                          |  |                      |       |   |                    |   |      |       | 
|Balance December 31, 2005 |  | $                    | 327   |   |                    | $ |     |       |  | $ | 327    |  
|                          |  |                      |       |   |                    |   |      |       | 



62



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





|                        |  |                   |       |  |                   |   |        |          |  |   |          |  |  |              |       |  |          |   |        |   |  |   |       | 
|----------------------- |  | ----------------- | ----- |  | ----------------- | - | ------ | -------- |  | - | -------- |  |  | ------------ | ----- |  | -------- | - | ------ | - |  | - | ----- | 
|                        |  | December 31, 2005 |       |  | December 31, 2004 |  
|                        |  |                   |       |  |                   |  
|                        |  | Gross             |       |  |                   |   | Gross  |          |  |  
|                        |  | Carrying          |       |  | Accumulated       |   |        | Net Book |  |   | Carrying |  |  | Accumulated  |       |  | Net Book |  
|                        |  | Amount            |       |  | Amortization      |   |        | Value    |  |   | Amount   |  |  | Amortization |       |  | Value    |  
|                        |  |                   |       |  |                   |   |        |          |  |   |          |  |  |              |       |  |          |  
|Purchased technology    |  | $                 | 3,600 |  |                   | $ | (1,258 | )        |  | $ | 2,342    |  |  | $            | 3,600 |  |          | $ | (441   | ) |  | $ | 3,159 | 
|Customer relationships  |  |                   | 4,200 |  |                   |   | (1,927 | )        |  |   | 2,273    |  |  |              | 4,200 |  |          |   | (559   | ) |  |   | 3,641 | 
|Non-compete agreements  |  |                   | 400   |  |                   |   | (156   | )        |  |   | 244      |  |  |              | 400   |  |          |   | (23    | ) |  |   | 377   | 
|                        |  |                   |       |  |                   |   |        |          |  |   |          |  |  |              |       |  |          |  
|Total intangible assets |  | $                 | 8,200 |  |                   | $ | (3,341 | )        |  | $ | 4,859    |  |  | $            | 8,200 |  |          | $ | (1,023 | ) |  | $ | 7,177 | 
|                        |  |                   |       |  |                   |   |        |          |  |   |          |  |  |              |       |  |          |  



|     |       |   |       |       | 
|---- | ----- | - | ----- | ----- | 
|2006 |       | $ | 2,055 |      
|2007 |       |   | 1,740 |      
|2008 |       |   | 848   |      
|2009 |       |   | 216   |      
|     |       |   |      
|     | Total |   | $     | 4,859 | 
|     |       |   |      



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



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





63



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                  |  |                |     |   |                  |   |        | 
|------------------------------------------------- |  | -------------- | --- | - | ---------------- | - | ------ | 
|                                                  |  | Capital Leases |     |   | Operating Leases |  
|                                                  |  |                |     |   |                  |  
|Years Ending December 31,                         |  |                |     |   |                  |   |        | 
|2006                                              |  | $              | 61  |   |                  | $ | 5,808  | 
|2007                                              |  |                | 71  |   |                  |   | 2,941  | 
|2008                                              |  |                |    |   |                  |   | 2,488  | 
|2009                                              |  |                |    |   |                  |   | 704    | 
|                                                  |  |                |     |   |                  |  
|Total future minimum lease payments               |  |                | 132 |   |                  | $ | 11,941 | 
|                                                  |  |                |     |   |                  |  
|Less amount representing interest                 |  |                | (13 | ) |                  |   |        | 
|                                                  |  |                |     |   |                  |  
|Present value of minimum lease payments           |  |                | 119 |   |                  |   |        | 
|Less current portion of capital lease obligations |  |                | (56 | ) |                  |   |        | 
|                                                  |  |                |     |   |                  |  
|Capital lease obligations, non-current            |  | $              | 63  |   |                  |   |        | 
|                                                  |  |                |     |   |                  |  







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







64



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##### Table of Contents



ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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



|                                |  |      |        |  |      |   |        | 
|------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                |  | 2005 |        |  | 2004 |  
|                                |  |      |        |  |      |  
|Compensation and benefits costs |  | $    | 5,130  |  |      | $ | 5,294  | 
|Taxes                           |  |      | 4,172  |  |      |   | 4,022  | 
|Other                           |  |      | 4,057  |  |      |   | 3,840  | 
|                                |  |      |        |  |      |  
|                                |  | $    | 13,359 |  |      | $ | 13,156 | 
|                                |  |      |        |  |      |  



|     |              
|---- | -------------
|(10) | Restructuring

Accounting for Costs Associated with
Exit or Disposal Activities, Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits Restructuring and Impairment Charges. Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a
Restructuring)


65



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |        |  |  |   |        | 
|--------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ------- | - |  | ---- | ------ |  |  | - | ------ | 
|                                        |  | Restructuring Charge (Benefit) |      
|                                        |  |                                |      
|                                        |  | 2005                           |       |   | 2004 |   |       | 2003 |  |   | 2002    |   |  | 2001 |       
|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |       
|                                        |  | (In thousands)                 |      
|Facility-related costs and impairments  |  | $                              | 1,817 |   |      | $ | 1,488 |      |  | $ | 1,464   |   |  | $    | 14,634 |  |  | $ | 59,418 | 
|Employee severance and benefits costs   |  |                                |       |   |      |   | 2,461 |      |  |   | 1,236   |   |  |      | 3,553  |  |  |   | 7,938  | 
|Asset impairments                       |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |        |  |  |   | 4,205  | 
|Exchangeable share settlement           |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |        |  |  |   | 1,263  | 
|Marketing costs                         |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |        |  |  |   | 851    | 
|Legal and accounting                    |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |        |  |  |   | 405    | 
|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |       
|Restructuring Charges                   |  |                                | 1,817 |   |      |   | 3,949 |      |  |   | 2,700   |   |  |      | 18,187 |  |  |   | 74,080 | 
|Adjustments to 2001 action, net         |  |                                | (792  | ) |      |   | (60   | )    |  |   | (8,468  | ) |  |      | 818    |  |  |   | 1,500  | 
|Adjustments to 2002 action, net         |  |                                | 43    |   |      |   | (242  | )    |  |   | (5,118  | ) |  |      |        |  |  |   |        | 
|Adjustments to 2003 action, net         |  |                                | 74    |   |      |   | (77   | )    |  |   | 410     |   |  |      |        |  |  |   |        | 
|Adjustments to 2004 action, net         |  |                                | (257  | ) |      |   |       |      |  |   |         |   |  |      |        |  |  |   |        | 
|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |       
|Total adjustments of prior actions, net |  |                                | (932  | ) |      |   | (379  | )    |  |   | (13,176 | ) |  |      | 818    |  |  |   | 1,500  | 
|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |       
|Restructuring charge (benefit)          |  | $                              | 885   |   |      | $ | 3,570 |      |  | $ | (10,476 | ) |  | $    | 19,005 |  |  | $ | 75,580 | 
|                                        |  |                                |       |   |      |   |       |      |  |   |         |   |  |      |       

66



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ----------------------------- |  |  | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                  |  | Accrued Restructuring Balance | 
|                                                                  |  |                               | 
|                                                                  |  | 2005                          |  |  | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |        |   | Total |  
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|                                                                  |  | (In thousands)                | 
|Restructuring charges for the year ended December 31, 2001        |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       | $ | 74,080  |   |  | $ | 74,080  |  
|Changes in estimates resulting in additional charges              |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | 9,700   |   |  |   | 9,700   |  
|Changes in estimates reducing accruals                            |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (8,200  | ) |  |   | (8,200  | )
|Write-offs                                                        |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (16,219 | ) |  |   | (16,219 | )
|Facility related payments                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (6,308  | ) |  |   | (6,308  | )
|Employee related payments                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (6,748  | ) |  |   | (6,748  | )
|Legal and accounting payments                                     |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (232    | ) |  |   | (232    | )
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Balance December 31, 2001                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       | $ | 46,073  |   |  | $ | 46,073  |  
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Restructuring charges for the year ended December 31, 2002        |  |                               |  |  |      |   |       |      |  |   |       |   |  | $    | 18,187 |   |       |   |         |   |  | $ | 18,187  |  
|Changes in estimates resulting in additional charges              |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | 2,207   |   |  |   | 2,207   |  
|Changes in estimates reducing accruals                            |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (1,389  | ) |  |   | (1,389  | )
|Write-offs                                                        |  |                               |  |  |      |   |       |      |  |   |       |   |  |      | (2,613 | ) |       |   |         |   |  |   | (2,613  | )
|Facility related payments                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (9,016  | ) |  |   | (9,016  | )
|Employee related payments                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (920    | ) |  |   | (920    | )
|Legal and accounting payments                                     |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | (173    | ) |  |   | (173    | )
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Balance December 31, 2002                                         |  |                               |  |  |      |   |       |      |  |   |       |   |  | $    | 15,574 |   |       | $ | 36,782  |   |  | $ | 52,356  |  
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Restructuring charges for the year ended December 31, 2003        |  |                               |  |  |      |   |       |      |  | $ | 2,700 |   |  |      |        |   |       |   |         |   |  | $ | 2,700   |  
|Changes in estimates resulting in additional charges and accruals |  |                               |  |  |      |   |       |      |  |   | 494   |   |  |      | 4,421  |   |       |   | 2,998   |   |  |   | 7,913   |  
|Changes in estimates reducing accruals                            |  |                               |  |  |      |   |       |      |  |   | (84   | ) |  |      | (7,321 | ) |       |   | (11,466 | ) |  |   | (18,871 | )
|Write-offs                                                        |  |                               |  |  |      |   |       |      |  |   | (371  | ) |  |      |        |   |       |   | 536     |   |  |   | 165     |  
|Facility related payments                                         |  |                               |  |  |      |   |       |      |  |   | (70   | ) |  |      | (2,993 | ) |       |   | (18,143 | ) |  |   | (21,206 | )
|Employee related payments                                         |  |                               |  |  |      |   |       |      |  |   | (994  | ) |  |      | (3,794 | ) |       |   | (270    | ) |  |   | (5,058  | )
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Balance December 31, 2003                                         |  |                               |  |  |      |   |       |      |  | $ | 1,675 |   |  | $    | 5,887  |   |       | $ | 10,437  |   |  | $ | 17,999  |  
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Restructuring charges for the year ended December 31, 2004        |  |                               |  |  |      | $ | 3,949 |      |  |   |       |   |  |      |        |   |       |   |         |   |  | $ | 3,949   |  
|Changes in estimates resulting in additional charges              |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |   | 112     |   |  |   | 112     |  
|Changes in estimates reducing accruals                            |  |                               |  |  |      |   |       |      |  |   | (77   | ) |  |      | (242   | ) |       |   | (172    | ) |  |   | (491    | )
|Write-offs                                                        |  |                               |  |  |      |   | (667  | )    |  |   |       |   |  |      |        |   |       |   |         |   |  |   | (667    | )
|Facility related payments                                         |  |                               |  |  |      |   | (71   | )    |  |   | (179  | ) |  |      | (4,490 | ) |       |   | (4,066  | ) |  |   | (8,806  | )
|Employee related payments                                         |  |                               |  |  |      |   | (892  | )    |  |   | (46   | ) |  |      |        |   |       |   |         |   |  |   | (938    | )
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  
|Balance December 31, 2004                                         |  |                               |  |  |      | $ | 2,319 |      |  | $ | 1,373 |   |  | $    | 1,155  |   |       | $ | 6,311   |   |  | $ | 11,158  |  
|                                                                  |  |                               |  |  |      |   |       |      |  |   |       |   |  |      |        |   |       |  

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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                           |  |                               |        |   |      |   |        |      |  |   |       |   |  |      |       |   |       |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                                           |  | Accrued Restructuring Balance |       
|                                                           |  |                               |       
|                                                           |  | 2005                          |        |   | 2004 |   |        | 2003 |  |   | 2002  |   |  | 2001 |       |   | Total |  
|                                                           |  |                               |        |   |      |   |        |      |  |   |       |   |  |      |       |   |       |  
|                                                           |  | (In thousands)                |       
|Balance December 31, 2004                                  |  |                               |        |   |      | $ | 2,319  |      |  | $ | 1,373 |   |  | $    | 1,155 |   |       | $ | 6,311  |   |  | $ | 11,158 |  
|Restructuring charges for the year ended December 31, 2005 |  | $                             | 1,817  |   |      |   |        |      |  |   |       |   |  |      |       |   |       |   |        |   |  |   | 1,817  |  
|Changes in estimates resulting in additional charges       |  |                               |        |   |      |   | 200    |      |  |   | 98    |   |  |      | 91    |   |       |   |        |   |  |   | 389    |  
|Changes in estimates reducing accruals                     |  |                               |        |   |      |   | (457   | )    |  |   | (24   | ) |  |      | (48   | ) |       |   | (792   | ) |  |   | (1,321 | )
|Write-offs                                                 |  |                               | (1,167 | ) |      |   |        |      |  |   |       |   |  |      |       |   |       |   |        |   |  |   | (1,167 | )
|Facility related payments                                  |  |                               | (264   | ) |      |   | (317   | )    |  |   | (428  | ) |  |      | (548  | ) |       |   | (2,676 | ) |  |   | (4,233 | )
|Employee related payments                                  |  |                               |        |   |      |   | (1,546 | )    |  |   |       |   |  |      |       |   |       |   |        |   |  |   | (1,546 | )
|                                                           |  |                               |        |   |      |   |        |      |  |   |       |   |  |      |       |   |       |  
|Balance December 31, 2005                                  |  | $                             | 386    |   |      | $ | 199    |      |  | $ | 1,019 |   |  | $    | 650   |   |       | $ | 2,843  |   |  | $ | 5,097  |  
|                                                           |  |                               |        |   |      |   |        |      |  |   |       |   |  |      |       |   |       |  

2001 Actions






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







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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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





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





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





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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2002 Actions






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













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



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




2003 Actions




Second Quarter 2003 Actions






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







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



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



Third Quarter 2003 Actions






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









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



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2004 Actions






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









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





2005 Actions






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



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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                 
| | --------------------------------
| | Abandoned Facilities Obligations



|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   |        |       | 
|------------------------------------ | --------------------------- | ---- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | ----- | ---- | --- |  | - | ------ | ----- | 
|Lease Locations                      |                             | 2006 |        |       | 2007 |   |        | 2008  |  |   | 2009   |       |  | Total |     
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|Cambridge, MA*                       |                             | $    | 1,035  |       |      |   |        |       |  |   |        |       |  |       |      |     |  | $ | 1,035  |      
|Cambridge, MA                        |                             |      | 91     |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 91     |      
|Cambridge, MA                        |                             |      | 399    |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 399    |      
|Waltham, MA                          |                             |      | 1,452  |       |      |   | 1,452  |       |  |   | 1,452  |       |  |       | 364  |     |  |   | 4,720  |      
|Chicago, IL                          |                             |      | 427    |       |      |   |        |       |  |   |        |       |  |       |      |     |  |   | 427    |      
|San Francisco, CA                    |                             |      | 513    |       |      |   | 512    |       |  |   |        |       |  |       |      |     |  |   | 1,025  |      
|Reading, UK                          |                             |      | 538    |       |      |   | 538    |       |  |   | 538    |       |  |       | 134  |     |  |   | 1,748  |      
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|                                     | Facility obligations, gross |      |        | 4,455 |      |   |        | 2,502 |  |   |        | 1,990 |  |       |      | 498 |  |   |        | 9,445 | 
|Contracted and assumed sublet income |                             |      | (1,664 | )     |      |   | (1,401 | )     |  |   | (1,149 | )     |  |       | (287 | )   |  |   | (4,501 | )    
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|                                     | Net cash obligations        |      | $      | 2,791 |      |   | $      | 1,101 |  |   | $      | 841   |  |       | $    | 211 |  |   | $      | 4,944 | 
|                                     |                             |      |        |       |      |   |        |       |  |   |        |       |  |       |     
|Assumed sub-lease income             |                             | $    | 64     |       |      | $ | 204    |       |  | $ | 204    |       |  | $     | 51   |     |  | $ | 523    |      






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



|     |           
|---- | ----------
|(11) | Litigation

In re Art Technology Group, Inc. Securities
Litigation 10b-5


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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




In re Primus Knowledge Solutions, Inc.
Securities Litigation 10b-5 In re
Initial Public Offering Securities Litigation




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ART TECHNOLOGY GROUP, INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |                                            
|---- | -------------------------------------------
|(12) | Quarterly Results of Operations (Unaudited)



|                  |                                               |                              |        |      |            |   |        |            |   |   |            |      |  |   |        |      | 
|----------------- | --------------------------------------------- | ---------------------------- | ------ | ---- | ---------- | - | ------ | ---------- | - | - | ---------- | ---- |  | - | ------ | ---- | 
|                  |                                               | Year Ended December 31, 2005 |       
|                  |                                               |                              |       
|                  |                                               | First                        |        |      | Second     |   |        | Third      |   |   | Fourth     |     
|                  |                                               | Quarter(1)                   |        |      | Quarter(1) |   |        | Quarter(1) |   |   | Quarter(1) |     
|                  |                                               |                              |        |      |            |   |        |            |   |   |            |     
|Total revenues    |                                               | $                            | 21,994 |      |            | $ | 20,261 |            |   | $ | 22,705     |      |  | $ | 25,686 |     
|Gross profit      |                                               |                              | 15,990 |      |            |   | 14,516 |            |   |   | 16,323     |      |  |   | 18,746 |     
|Net income (loss) |                                               |                              | 1,408  |      |            |   | (327   | )          |   |   | 1,510      |      |  |   | 3,178  |     
|                  | Basic and diluted net income (loss) per share |                              | $      | 0.01 |            |   | $      | (0.00      | ) |   | $          | 0.01 |  |   | $      | 0.03 | 

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






|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | Restructuring charges (benefits) were taken during these
    quarters, see Note 10 for complete information.

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








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



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

13a-15(e) 15d-15(e)








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



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

13a-15(f)




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



77



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78



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Report of Independent Registered Public Accounting Firm



















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




79



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Item 9B.Other
information







PART III







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





8-K 8-K







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








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








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








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



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PART IV







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

Financial Statements






| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report of Independent Registered Public Accounting Firm                                                                                     
|
| |  | Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                
|
| |  | Consolidated Statements of Operations for the years ended
    December 31, 2005, 2004 and 2003                                              
|
| |  | Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2005, 2004 and 2003
|
| |  | Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003                                              
|
| |  | Notes to Consolidated Financial Statements                                                                                                  

Financial Statement Schedule




Exhibits


|        |    |      |             |                                                                                              |      |  |                           |      |  |         |             |  |  |     |                   |  |  |  |       | 
|------- | -- | ---- | ----------- | -------------------------------------------------------------------------------------------- | ---- |  | ------------------------- | ---- |  | ------- | ----------- |  |  | --- | ----------------- |  |  |  | ----- | 
|        |    |      |             | Filed with                                                                                   |      |  | Incorporated by Reference |     
|        |    |      |             | This                                                                                         |      |  |                           |     
|Exhibit |    |      |             |                                                                                              | Form |  |                           |      |  | Exhibit |            
|No.     |    |      | Description |                                                                                              | 10-K |  |                           | Form |  |         | Filing Date |  |  | No. |                  
|        |    |      |             |                                                                                              |      |  |                           |      |  |         |             |  |  |     |                  
|        | 3  | .1   |             | Amended and Restated Certificate of Incorporation                                            |      |  |                           |      |  |         | S-8         |  |  |     | June 12, 2003     |  |  |  | 4.1   | 
|        | 3  | .2   |             | Amended and Restated By-Laws                                                                 |      |  |                           |      |  |         | S-3         |  |  |     | July 6, 2001      |  |  |  | 4.2   | 
|        | 4  | .1   |             | Rights Agreement dated September 26, 2001 with EquiServe
    Trust Company, N.A              |      |  |                           |      |  |         | 8-K         |  |  |     | October 2, 2001   |  |  |  | 4.1   | 
|        | 10 | .1*  |             | 1996 Stock Option Plan, as amended                                                           |      |  |                           |      |  |         | 10-Q        |  |  |     | November 8, 2005  |  |  |  | 10.4  | 
|        | 10 | .2*  |             | 1999 Outside Director Stock Option Plan, as amended (including
    form of option agreement) |      |  |                           |      |  |         | 10-Q        |  |  |     | November 8, 2005  |  |  |  | 10.3  | 
|        | 10 | .3   |             | 1999 Employee Stock Purchase Plan                                                            |      |  |                           |      |  |         | S-1         |  |  |     | June 21, 1999     |  |  |  | 10.3  | 
|        | 10 | .4   |             | Primus 1999 Non-Officer Stock Option Plan                                                    |      |  |                           |      |  |         | 10-K        |  |  |     | March 16, 2005    |  |  |  | 10.4  | 
|        | 10 | .5   |             | Primus 1999 Stock Incentive Compensation Plan                                                |      |  |                           |      |  |         | 10-K        |  |  |     | March 16, 2005    |  |  |  | 10.5  | 
|        | 10 | .6*  |             | Change-in-Control Policy for Employees                                                       |      |  |                           |      |  |         | 10-Q        |  |  |     | November 9, 2004  |  |  |  | 10.21 | 
|        | 10 | .7*  |             | Amended and Restated Employment Agreement dated November 8,
    2004 with Robert Burke       |      |  |                           |      |  |         | 10-Q        |  |  |     | November 9, 2004  |  |  |  | 10.22 | 
|        | 10 | .8*  |             | Offer letter with Julie M.B. Bradley dated July 6, 2005                                      |      |  |                           |      |  |         | 10-Q        |  |  |     | November 8, 2005  |  |  |  | 10.1  | 
|        | 10 | .9*  |             | 2005 Executive Management Compensation Plan, as amended                                      |      |  | X                         |      |  |         |             |  |  |     |                   |  |  |  |       | 
|        | 10 | .10* |             | 2006 Executive Management Compensation Plan                                                  |      |  |                           |      |  |         | 8-K         |  |  |     | February 15, 2006 |  |  |  | 99.1  | 
|        | 10 | .11* |             | Non-Employee Director Compensation Plan                                                      |      |  |                           |      |  |         | 10-Q        |  |  |     | November 8, 2005  |  |  |  | 10.2  | 

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|        |    |     |             |                                                                                                   |      |  |                           |      |  |         |             |  |  |     |                   |  |  |  |       | 
|------- | -- | --- | ----------- | ------------------------------------------------------------------------------------------------- | ---- |  | ------------------------- | ---- |  | ------- | ----------- |  |  | --- | ----------------- |  |  |  | ----- | 
|        |    |     |             | Filed with                                                                                        |      |  | Incorporated by Reference |     
|        |    |     |             | This                                                                                              |      |  |                           |     
|Exhibit |    |     |             |                                                                                                   | Form |  |                           |      |  | Exhibit |            
|No.     |    |     | Description |                                                                                                   | 10-K |  |                           | Form |  |         | Filing Date |  |  | No. |                  
|        |    |     |             |                                                                                                   |      |  |                           |      |  |         |             |  |  |     |                  
|        | 10 | .12 |             | Lease dated January 2004 with Davenport Building Limited
    Partnership                          |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.4  | 
|        | 10 | .13 |             | Lease Termination Agreement dated January 2004 with Davenport
    Building Limited Partnership    |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.5  | 
|        | 10 | .14 |             | Lease dated October 6, 1999 with Pine Street Investors I,
    LLC                                 |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.5  | 
|        | 10 | .15 |             | First Amendment to Lease dated December 30, 1999 with Pine
    Street Investors I, LLC            |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.6  | 
|        | 10 | .16 |             | Second Amendment to Lease dated August 20, 2000 with Pine
    Street Investors I, LLC             |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.7  | 
|        | 10 | .17 |             | Third Amendment to Lease dated December 22, 2000 with Pine
    Street Investors I, LLC            |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.8  | 
|        | 10 | .18 |             | Fourth Amendment to Lease dated July 15, 2001 with Pine
    Street Investors I, LLC               |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.10 | 
|        | 10 | .19 |             | Fifth Amendment to Lease dated March 31, 2003 with Pine
    Street Investors I, LLC               |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.11 | 
|        | 10 | .20 |             | Lease dated March 19, 2001 with DIFA Deutsche Immobilien
    Fonds AG                             |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.9  | 
|        | 10 | .21 |             | Lease Termination with DIFA Deutsche Immobilien Fonds AG                                          |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.13 | 
|        | 10 | .22 |             | Amended and Restated Loan and Security Agreement dated
    June 13, 2002 with Silicon Valley Bank |      |  |                           |      |  |         | 10-Q        |  |  |     | August 14, 2002   |  |  |  | 10.1  | 
|        | 10 | .23 |             | First Loan Modification Agreement dated September 30, 2002
    with Silicon Valley Bank           |      |  |                           |      |  |         | 10-Q        |  |  |     | November 14, 2002 |  |  |  | 10.1  | 
|        | 10 | .24 |             | Amendment Agreement dated October 4, 2002 with Silicon
    Valley Bank                            |      |  |                           |      |  |         | 10-Q        |  |  |     | November 14, 2002 |  |  |  | 10.2  | 
|        | 10 | .25 |             | Second Loan Modification Agreement dated December 20, 2002
    with Silicon Valley Bank           |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003    |  |  |  | 10.21 | 
|        | 10 | .26 |             | Fourth Loan Modification Agreement dated November 26, 2003
    with Silicon Valley Bank           |      |  |                           |      |  |         | 10-K        |  |  |     | March 15, 2004    |  |  |  | 10.25 | 
|        | 10 | .27 |             | Fifth Loan Modification Agreement dated June 2004 with Silicon
    Valley Bank                    |      |  |                           |      |  |         | 10-Q        |  |  |     | August 9, 2004    |  |  |  | 10.26 | 
|        | 10 | .28 |             | Letter Agreement re: loan dated June 16, 2004 with Silicon
    Valley Bank                        |      |  |                           |      |  |         | 10-Q        |  |  |     | August 9, 2004    |  |  |  | 10.25 | 
|        | 10 | .29 |             | Sixth Loan Modification Agreement dated November 24, 2004
    with Silicon Valley Bank            |      |  |                           |      |  |         | 10-K        |  |  |     | March 16, 2005    |  |  |  | 10.28 | 
|        | 10 | .30 |             | Seventh Loan Modification Agreement dated December 21, 2004
    with Silicon Valley Bank          |      |  |                           |      |  |         | 10-K        |  |  |     | March 16, 2005    |  |  |  | 10.29 | 
|        | 10 | .31 |             | Eighth Loan Modification Agreement dated December 30, 2005
    with Silicon Valley Bank           |      |  | X                         |      |  |         |             |  |  |     |                   |  |  |  |       | 
|        | 10 | .32 |             | Ninth Loan Modification Agreement dated February 10, 2006
    with Silicon Valley Bank            |      |  | X                         |      |  |         |             |  |  |     |                   |  |  |  |       | 

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|        |    |     |             |                                                                                                                              |      |  |                           |      |  |         |             |  |  |     |                |  |  |  |       | 
|------- | -- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------- | ---- |  | ------------------------- | ---- |  | ------- | ----------- |  |  | --- | -------------- |  |  |  | ----- | 
|        |    |     |             | Filed with                                                                                                                   |      |  | Incorporated by Reference |     
|        |    |     |             | This                                                                                                                         |      |  |                           |     
|Exhibit |    |     |             |                                                                                                                              | Form |  |                           |      |  | Exhibit |            
|No.     |    |     | Description |                                                                                                                              | 10-K |  |                           | Form |  |         | Filing Date |  |  | No. |               
|        |    |     |             |                                                                                                                              |      |  |                           |      |  |         |             |  |  |     |               
|        | 10 | .33 |             | Securities Account Control Agreement dated December 20,
    2002 with Silicon Valley Bank                                    |      |  |                           |      |  |         | 10-K        |  |  |     | March 28, 2003 |  |  |  | 10.20 | 
|        | 10 | .3  |             | Settlement Agreement dated November 1, 2004 with
    ServiceWare Technologies, Inc.                                          |      |  |                           |      |  |         | 10-K        |  |  |     | March 16, 2005 |  |  |  | 10.32 | 
|        | 21 | .1  |             | Subsidiaries                                                                                                                 |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 23 | .1  |             | Consent of Ernst & Young LLP                                                                                                 |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 31 | .1  |             | Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
    of the Exchange Act of 1934 of the principal executive officer |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 31 | .2  |             | Certification pursuant to Rules 13a-14(a) and 15(d)-14(a)
    of the Exchange Act of 1934 of the principal financial officer |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 32 | .1  |             | Certificate pursuant to 18 U.S.C. Section 1350 of the
    principal executive officer                                        |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 
|        | 32 | .2  |             | Certificate pursuant to 18 U.S.C. Section 1350 of the
    principal financial officer                                        |      |  | X                         |      |  |         |             |  |  |     |                |  |  |  |       | 






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

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##### Table of Contents






SIGNATURES






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



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

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



|                                         |  |                                                                                               |  | 
|---------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | 
|Name                                     |  | Title                                                                                        
|                                         |  |                                                                                              
|                                        
|/s/ ROBERT D. BURKERobert D. Burke       |  | Chief Executive Officer and President(Principal Executive Officer)                           
|                                        
|/s/ JULIE M.B. BRADLEYJulie M.B. Bradley |  | Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
|                                        
|/s/ DANIEL C. REGISDaniel C. Regis       |  | Chairman of the Board                                                                        
|                                        
|/s/ JOHN R. HELDJohn R. Held             |  | Director                                                                                     
|                                        
|/s/ ILENE H. LANGIlene H. Lang           |  | Director                                                                                     
|                                        
|/s/ MARY E. MAKELAMary E. Makela         |  | Director                                                                                     
|                                        
|/s/ MICHAEL A. BROCHUMichael A. Brochu   |  | Director                                                                                     
|                                        
|/s/ DAVID B. ELSBREEDavid B. Elsbree     |  | Director                                                                                     
|                                        
|/s/ PHYLLIS S. SWERSKYPhyllis S. Swersky |  | Director                                                                                     

84