<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

  /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
             ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                       OR
     / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
             FOR THE TRANSITION PERIOD FROM __________ TO __________

                        Commission file number 000-26679

                           ART TECHNOLOGY GROUP, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                      04-3141918
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                     Identification Number)

                 25 First Street, Cambridge, Massachusetts 02141
                                   Jeet Singh
                            Chief Executive Officer
                           Art Technology Group, Inc.
                                25 First Street
                         Cambridge, Massachusetts 02141
                                 (617) 386-1000

           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
                                (Title of Class)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $ based on the closing price of the Common Stock on
the NASDAQ National Market on March   , 2001.

The number of shares of the registrant's Common Stock outstanding as of
March  , 2001, was          .

                       Documents Incorporated by Reference

       DOCUMENT DESCRIPTION                                           10-K PART
       --------------------                                           ---------
Portions of the Registrant's Proxy Statement for the Annual
   Meeting of Stockholders to be held May 14, 2001.................      III

<PAGE>


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

                                     PART I

Item 1.  Business

Item 2.  Properties

Item 3.  Legal Proceedings

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

                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters

Item 6.  Selected Consolidated Financial Data

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

Item 8.  Financial Statements and Supplementary Data

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

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

                                   SIGNATURES

Signatures

                                     PART I

                                 Item 1 BUSINESS

Overview

We offer an integrated suite of Internet customer relationship management and
e-commerce software applications, as well as related application development,
integration and support services. Our solution enables businesses to understand,
manage and build online customer relationships and to market, sell and support

<PAGE>

products and services over the Internet more effectively. Our Dynamo product
suite includes an application server that is specifically designed to enable and
support Web applications, as well as e-commerce and Internet customer management
applications. An application server is a software program that facilitates the
development, deployment and management of other software programs. Our solution
is designed to provide businesses with the core application platform and
software tools required to develop and deploy personalized, reliable,
large-scale Web sites for conducting e-commerce.

INDUSTRY BACKGROUND

  GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE

The emergence of the Internet as a global medium for interactive communications
and commerce is fundamentally changing the way business is conducted. The
Internet is enabling businesses to attract and retain customers, conduct
e-commerce with those customers, and communicate with employees, suppliers and
strategic partners. The Internet is providing the opportunity for businesses to
establish new revenue streams, create a new distribution channel, reduce costs
and increase customer retention. This opportunity has driven the growth in
online marketing and e-commerce initiatives. International Data Corporation
estimates that more than $2.6 trillion worth of goods and services will be sold
over the Internet by 2004, which represents a compounded annual growth rate of
82% for the period between 1999 and 2004.

As the growth and acceptance of online marketing and e-commerce have increased,
the World Wide Web has become a highly competitive business environment where
customers have a large number of easily accessible choices. For a company to
succeed in this environment, its Web site must present content and provide an
overall visitor experience that captures the visitor's interest and satisfies
their informational and transactional needs. To accomplish this, companies are
investing in Internet-based customer relationship management and e-commerce
solutions, such as:

      -     online marketing and selling systems to target, attract and retain
            customers;

      -     transaction and distribution management systems to reduce the costs
            of delivering products and services to customers and distribution
            partners; and

      -     customer support and relationship management systems to better
            understand and serve the ongoing needs of their customers.

  EMERGING E-COMMERCE REQUIREMENTS

Many commercial Web sites present only a static collection of non-interactive
content. These sites offer basic content, such as corporate information, product
literature and banner advertisements, which are passively viewed by Web
visitors. While this information is useful, many Web visitors prefer dynamic
content, which is continually updated and enhanced, as well as interactive
content, which responds and changes based on the user's input. Many Web visitors
also prefer Web sites that personalize their experience and present more
relevant content based on their existing relationship with the business, stated
or implied preferences and needs, Web navigation behavior and other factors. To
attract, serve and retain customers online, businesses must engage visitors with
dynamic, relevant and targeted experiences, which often lead to transactional
opportunities.

<PAGE>

Businesses are seeking Web-based systems that can be dynamically updated and
integrated, sharing data among Web applications and across their entire
enterprises in order to present users with a personalized, consistent and
unified customer experience. The desired result is a customer-driven Web site
that takes into account the particular customer's profile, Web behavior and
relationship with the company. Customer-driven Web sites can provide
businesses with an efficient means to manage and maximize customer
relationships online. In order to accomplish this, businesses require
solutions that incorporate a number of features:

      -     EFFECTIVE CONTROL OF E-COMMERCE SYSTEMS AND STRATEGIES. Business
            managers responsible for Internet customer relationship management
            need easy-to-use tools to give them direct control over their
            e-commerce systems and strategies without requiring the
            time-consuming intervention of information technology specialists.
            With the appropriate tools, business managers can better manage
            their Internet customer relationships through improved customer
            segmentation and delivery of targeted content, promotions and
            advertising campaigns, and personalized pricing and account
            information.

      -     INTEGRATION WITH EXISTING INFORMATION SYSTEMS. In order to present
            the customer with a unified and personalized e-commerce experience,
            companies must address the difficult challenge of integrating Web
            applications with their existing content management, customer
            database, transaction and customer support systems.

      -     COMMON PLATFORM UPON WHICH TO BUILD FUTURE APPLICATIONS. Businesses
            implementing sophisticated Web-based applications desire an
            expandable Web platform to enable them to build new applications and
            add third-party functionality to their e-commerce initiatives on a
            rapid and ongoing basis.

      -     SCALABILITY, PERFORMANCE AND RELIABILITY. The increasing
            significance of Web-based commerce requires that e-commerce systems
            be highly scalable in order to accommodate rapid user growth and
            increased Web site complexity, content and functionality.
            Scalability refers to the ability of a computer system to handle
            greater load by adding additional hardware. Further, companies need
            high performance and highly reliable systems because if online
            systems fail or cause unsatisfactory delays, even for a short period
            of time, businesses could miss revenue opportunities and lose
            customers.

CURRENT SOLUTIONS

In response to these emerging business requirements, various applications have
been developed that address discrete aspects of the enterprise e-commerce
infrastructure. A number of vendors offer stand-alone solutions for Web content
management, advertising management, transaction processing, e-commerce
storefront development, personalization and recommendation engines, and
application development tools. By implementing a collection of these stand-alone
solutions, companies can attempt to deliver dynamic, personalized content to Web
site visitors and manage their e-commerce efforts. However, these stand-alone
solutions may not provide a satisfactory solution for many businesses:

      -     LACK OF INTEGRATED FUNCTIONALITY. Disparate stand-alone applications
            generally do not easily integrate and communicate with each
            other, lack a common user interface and lack a common platform
            for integrating with existing information systems. As a result, a
            collection of stand-alone applications often does not present the
            Web visitor with a unified customer experience and may sacrifice
            functionality and performance.

      -     HIGH COST. It is frequently difficult and expensive for companies to
            implement a solution consisting of a collection of disparate
            stand-alone solutions from

<PAGE>

            multiple vendors, and these implementations frequently fail to
            meet requirements. In addition, businesses often incur higher
            costs of ownership over time as it is difficult for them to
            manage the uncoordinated product upgrade cycles and new
            application development efforts of multiple vendors.

Today, businesses increasingly seek an integrated package of applications,
platforms and tools that addresses all aspects of their enterprise e-commerce
infrastructure, rather than just stand-alone solutions. Some software providers
have developed more comprehensive solutions incorporating a number of e-commerce
functions. However, these solutions may be inadequate for a number of reasons:

      -     LIMITED FUNCTIONALITY. The functionality may be insufficient to
            serve all of a company's e-commerce requirements, resulting in
            the need to buy, build or adapt additional applications.

      -     LACK OF A MODULAR, APPLICATION SERVER-BASED ARCHITECTURE. These
            solutions are typically not built with separate software modules
            and lack the expandability that an application server-based
            platform provides. This limits the ability of businesses to
            customize their implementations, integrate their solutions with
            existing applications and extend their e-commerce initiatives by
            building future applications or incorporating third-party
            technology.

      -     POOR SCALABILITY AND RELIABILITY. Most of today's computer systems
            are unable to scale to meet the growing performance demands of
            large-scale, e-commerce Web sites. Solutions that do not scale
            well can be unreliable and subject to system failures, which may
            result in frustrated customers, lost revenue opportunities and
            potential financial losses.

To address the limitations of most commercially available solutions, some
companies have built custom Internet customer relationship management solutions
with application development tools. While these solutions can provide the
required functionality and integration, they typically require lengthy
implementation periods and are expensive to build and maintain. In addition,
they require a comprehensive understanding of market segmentation, content
targeting and advertising, as well as extensive technical expertise in Web
application development and systems integration. Most companies, and many
third-party systems integrators and application developers, do not have the
expertise and experience to address all of these requirements.

As a result, businesses are increasingly seeking Web application software
providers offering products and professional services that enable them to
rapidly deploy comprehensive, effective Internet customer relationship
management solutions. Businesses prefer solutions that are modular and flexible
with an open, application server-based architecture. They desire solutions that
are easy to integrate with existing systems and third-party applications and
that enable them to extend their Web infrastructures with new applications and
functionality to meet their continually evolving e-commerce needs. Businesses
also need to leverage their existing business systems, strategies and expertise
to manage their customer relationships effectively. Finally, businesses are
seeking solutions that meet the demanding scalability, reliability and
performance requirements of large-scale Web sites that conduct e-commerce.

OUR SOLUTION

We offer a suite of Internet customer relationship management and e-commerce
software applications, as well as related application development, integration
and support services. Our solution enables businesses to understand, manage and
build their online customer relationships more effectively and to market, sell
and support their products and services over the Internet.

Our product suite includes Dynamo Application Server, an application server
specifically designed to enable and support Web applications. Dynamo Application
Server is designed to provide businesses with the core application platform and

<PAGE>

software tools required to develop and deploy personalized, effective e-commerce
Web sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Scenario Server and Dynamo Commerce Server. Dynamo Personalization Server is an
expandable personalization platform that enables companies to target specific
content and data to particular customers or visitors on the Web. Dynamo Scenario
Server allows non-technical business managers to define e-business scenarios,
which are scripted sequences of customer interactions that manage ongoing
business relationaships. Dynamo Commerce Server manages and delivers product
catalog content and personalized, scenario-based merchandising programs and
provides transaction processing capabilities for large-scale e-commerce
storefronts.

Our solution incorporates the following distinguishing characteristics:

AN INTEGRATED AND MODULAR PRODUCT SUITE BASED ON A COMMON PLATFORM. Our product
suite includes a comprehensive range of functionality that allows businesses to
quickly develop and deploy personalized Web-based e-commerce applications. Our
application server-based platform enables our Dynamo applications to share data
and work together more efficiently than would a collection of discrete Web
applications from different vendors using various technologies. An integrated
product suite based on a common platform also ensures that new products and
releases will be compatible with each other as well as with other applications
built on Dynamo Application Server. The modularity of our product suite allows
customers to purchase applications that fit their particular needs and allows
them to quickly expand their implementations as required.

RULES-BASED PERSONALIZATION IMPLEMENTED BY BUSINESS MANAGERS. Our products allow
business managers to apply new and pre-existing business rules to profile and
segment users and dynamically deliver personalized content and data to online
visitors. For example, businesses can present different prices, products and
promotional offers to different visitors or they can deliver customer-specific
information such as account detail and purchase history. Business managers can
review the behavior of visitors and quickly adjust their business rules to
manage their online marketing communications and e-commerce strategies.

E-BUSINESS SCENARIO-BASED CUSTOMER INTERACTION. Our products allow non-technical
business managers to define, manage and analyze customer interactions that take
place across both Web and non-Web based communication channels. For example, a
business manager can use a point-and-click visual interface to create an
e-business scenario that reacts to a new customer visit by offering an incentive
to sign up as a registered user. If the user takes advantage of the offer by
registering, the scenario might pause for several weeks and send a personalized
e-mail reminding the user to return. Finally, the scenario might be configured
to trigger a follow-up phone call after several repeat visits to enable a
customer care representative to build a more personal relationship with a highly
qualified customer.

HIGH SCALABILITY, RELIABILITY AND PERFORMANCE. Our Dynamo Application Server
employs a Java-based architecture that is highly scalable. It has a dynamic load
management system which allows applications to be distributed across multiple
server computers. This means that as a Web site becomes more heavily utilized,
additional computing resources can be added to handle the additional load. The
load management system provides redundant fail-over, a feature that transfers
users on a failed server to another server without interruption. Dynamo
Application Server has been designed to meet the performance requirements of
high-capacity, highly personalized e-commerce Web sites.

OPEN AND EXPANDABLE APPLICATION SERVER ARCHITECTURE. Our Dynamo Application
Server provides customers with an expandable platform that allows them to
rapidly integrate our products with their existing systems and to deploy new
applications, both internally developed and from third parties. The ability to
integrate multiple applications and information systems with our common platform
enables businesses to incorporate organization-wide customer data and support
systems to provide a unified customer experience. In addition,

<PAGE>

our open, application server-based platform and the modularity of our product
suite enable systems integrators and technology partners to develop their own
proprietary applications on Dynamo for reuse or resale.

PROFESSIONAL SERVICES CAPABILITIES. We have been designing and deploying
network-based applications for over eight years and Web sites for over five
years. We have two primary service offerings, Innovation Solutions and Express
Services. Our Innovation Solutions team provides customized application design,
development and integration services to clients who desire advanced solutions
that are not commercially available. We provide Innovation Solutions services
for a limited number of projects that we believe will provide us with an
understanding of emerging technical and business needs for our future products.
Our Express Services team provides strategic consulting and integration support
services to customers and systems integrators to facilitate the deployment of
our products. Express Services provides system architecture design, project
management, Web design and technical training and support.

Our solution provides our customers with:

EFFECTIVE, HIGH-PERFORMANCE E-COMMERCE WEB SITES THAT ARE:

       - dynamically generated and personalized on a real-time basis

       - highly functional with comprehensive e-commerce features

       - able to personalize content based on easily modifiable business rules

       - able to increase customer satisfaction and retention

       - able to present a unified, customer-centric experience by integrating
         various sources of customer data and content and leveraging existing
         information systems

       - designed by business managers to further their overall business
         strategies

THE ABILITY TO ACHIEVE RAPID TIME TO MARKET BY:

       - deploying our comprehensive suite of integrated applications

       - enabling rapid integration with existing information systems

       - taking advantage of our intuitive user interfaces for business managers
         and application developers

       - utilizing our experienced consulting services professionals

THE ABILITY TO ACHIEVE A COMPETITIVE ADVANTAGE AND A HIGHER RETURN ON INVESTMENT
BY:

       - increasing e-commerce and advertising revenues

       - improving marketing effectiveness

       - reducing marketing, transaction and customer support costs

       - increasing customer satisfaction and retention

STRATEGY

Our objective is to be a leading provider of Internet customer relationship
management solutions. To achieve this objective, we have adopted the following
strategies:

<PAGE>

MAINTAIN AND EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We believe we are a
technology leader in providing Internet customer relationship management
solutions. We offer a comprehensive suite of software applications that we
believe are based on an advanced technologies. We were one of the first
companies to market a high-performance dynamic Web page generation engine to
both generate and deliver Web pages on a real-time basis, and shipped our
first Java-based Web application server shortly after Sun Microsystem's first
commercial shipment of Java 1.0. In September 2000 we began shipping Dynamo 5
E-Business Platform, which we believe was the first fully certified J2EE
customer management solution to be commercially available. We intend to
extend our product and technology leadership by:

       - extending Dynamo's personalization capabilities and building new
         Internet customer relationship management applications

       - continuing to increase the scalability, reliability and performance of
         our Dynamo applications

       - continuing to develop new connector modules to allow our products to
         easily integrate with third-party Internet customer relationship
         management products, databases and information systems

       - providing Dynamo Application Server support for emerging industry
         standards, such as XML,for formatting data and other information, and
         WML, for serving content to wireless devices;and

       - using our Innovation Solutions services to identify emerging market
         needs.

GROW AND LEVERAGE PROFESSIONAL SERVICE CAPABILITIES. We have extensive
experience in Web application development and integration services. Through our
Express Services, we provide enabling services to train our systems integrators
and technology partners in the use of our products as well as consulting
services to assist with customer implementations. We plan to create additional
opportunities to increase revenues from product sales by continuing to expand
our base of partners trained in the implementation and application of Dynamo. We
intend to hire additional professional services personnel to increase our
services revenues and to enable and support product license sales through
systems integrators.

CONTINUE TO BUILD DIRECT SALES CAPABILITIES AND LEVERAGE CO-SELLING EFFORTS WITH
SYSTEMS INTEGRATORS AND WEB DEVELOPERS. We sell our products directly to
end-users and through co-selling efforts with systems integrators and Web
developers. We currently have more than 250 system integrators and technology
partners, including Adobe Systems, Cap Gemini Ernst & Young, CSC, Deloitte
Consulting, E.piphany, E-Tree, Fort Point Partners, PricewaterhouseCoopers and
Sun Microsystems. Our objective is to establish close relationships directly
with our customers and to motivate systems integrators to implement the Dynamo
technology and product suite on Internet and Web-based projects for their
customers. We intend to expand our sales by hiring additional direct sales
personnel, domestically and internationally, both to sell directly to end-users
and to expand our co-selling efforts. We plan to leverage our current
relationships and develop additional co-selling relationships with leading
systems integrators. In addition, many of our systems integrators are global
enterprises, which we believe provides us with an opportunity to expand our
international business.

EXPAND TECHNOLOGY PARTNER AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
AS A DISTRIBUTION CHANNEL. Our technology partners include Adobe Systems,
Documentum, E.piphany, Interwoven and Sun Microsystems. We work with some of our
technology partners to develop modules that enable our software products to
operate with their software products. We also work with original equipment
manufacturers to enable them to combine our software products with their
products to form a single software application product. Some of our customers
have requirements that can be met by a combination of our products and

<PAGE>

those of one or more of our partners. We sell in conjunction with these vendors
in a variety of ways:

       - co-marketing with a technology partner to promote the fact that our
         products operate together;

       - co-selling with a partner in an arrangement where sales and service
         personnel from both organizations approach a customer in a coordinated
         sales process

       - selling to reseller partners; and

       - selling to original equipment manufacturers that sell and support the
         combined product.

Many of our current and potential partners are looking to extend their current
offerings to include Web-enablement, personalization and e-commerce features. We
believe these relationships will provide us the opportunity to establish our
platform in additional markets.

EXPAND MARKET PRESENCE. We intend to increase our domestic and international
market presence through a variety of marketing and sales programs designed to
generate market awareness, penetrate target markets and help establish us as the
leading provider of Internet customer relationship management solutions. We plan
to increase spending on advertising, trade shows, seminars, industry events and
direct marketing efforts. We also plan to devote marketing resources to
expanding our channel relationships with systems integrators and technology
partners. We intend to develop and promote the Dynamo brand alongside our
partners' brands in all co-marketing relationships.

PURSUE STRATEGIC ACQUISITIONS. We intend to pursue acquisitions of, or,
investments in, complementary businesses and technologies. In particular, we
will seek to identify opportunities to acquire personnel that will help us
increase the breadth of our solution, provide us with additional technological
expertise and expand our geographical presence.

PRODUCTS

We offer an integrated suite of Internet customer relationship management
applications. Our core product is Dynamo Application Server, a dynamic Web page
generation engine and application server specifically designed to enable and
support Web applications, that provides businesses with the platform and
software tools to develop and deploy personalized, effective e-commerce Web
sites. Our product suite also includes Dynamo Personalization Server, Dynamo
Scenario Server, and Dynamo Commerce Server. Each of the applications in our
product suite can be purchased separately; however, the Dynamo Application
Server is required to run each of our other applications. Dynamo Personalization
Server is required to run Dynamo Scenario Server, and Dynamo Scenario Server is
required to run Dynamo Commerce Server. We also sell software tools to enable
rapid application development, as well as adaptor modules to integrate dynamo
products with content management systems. Our product suite is designed to meet
the performance and scalability requirements of large-scale e-commerce Web
sites. All of our products are based on Java.

The following table briefly describes the product included in our Dynamo 5
e-Business Platform, including list prices and system requirements.

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<TABLE>
<CAPTION>
                  PRODUCT                                   DESCRIPTION                      LIST PRICE AND REQUIREMENTS

APPLICATION SUITE
<S>                                         <C>                                          <C>
Dynamo Application Server                   An open and expandable Java-based platform   $15,000 per CPU.
                                            designed for the development and
                                            deployment of high-performance, dynamic
                                            Web applications.

Dynamo Personalization Server               A platform designed to allow businesses to   $20,000 per CPU; requires Dynamo
                                            manage customer profiling and dynamic        Application Server.
                                            content targeting. Ensures that the right
                                            content gets to the right users at the
                                            right time.

Dynamo Scenario Server                      A platform for defining, delivering and      $30,000 per CPU; requires Dynamo
                                            analyzing E-business scenarios, which        Application Server and Dynamo
                                            are customized sequences of targeted         Personalization Server.
                                            interactions that allow businesses to
                                            create customer relationships across
                                            the entire lifecycle.

Dynamo Commerce Server                      A complete storefront solution for           $35,000 per CPU; requires Dynamo
                                            business-to-consumer and                     Application Server, Dynamo Personalization
                                            business-to-business e-commerce. Enables     Server and Dynamo Scenario Server.
                                            businesses to create personalized shopping
                                            experiences within a complete, rapidly
                                            deployable online selling environment.

TOOLS AND INTEGRATION MODULES

Dynamo Control Center                       An integrated interface to the               Single-seat licenses are included with the
                                            administrative, development and business     servers listed above. $4,000 per seat for
                                            tools in the Dynamo E-Business Platform.     additional users.


Dynamo Connectors                           Adaptors that provide direct integration     $10,000 per CPU.
                                            with leading content management systems
                                            and other enterprise applications.
</TABLE>

DYNAMO APPLICATION SERVER. The Dynamo Application Server is designed to provide
businesses with the core application platform and software tools required to
develop, deploy and manage personalized, effective Web sites for conducting
business on the Internet. The Dynamo Application Server provides a common
application platform for:

       - dynamically generating Web pages and managing user sessions;

       - supplying a framework of shared application services to connect and
         integrate each of the applications in our product suite;

       - managing the distribution of applications across multiple computers and
         providing an automatic recovery management system to prevent system
         failures; and

       - efficiently connecting to enterprise systems and third-party
         applications.

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Dynamo Application Server connects to Dynamo Control Center, a Web
application development tool that allows developers and Web designers to
build new applications and integrate third-party technologies.

DYNAMO PERSONALIZATION SERVER. Dynamo Personalization Server coordinates,
manages and centralizes the personalization functions of the Dynamo product
suite. Dynamo Personalization Server enables business managers to segment
users and target content based on new and pre-existing business rules. It
adjusts and personalizes Web content on a real-time basis by combining
explicit user data from existing customer management and marketing databases
with implicit information gathered on Web navigation behavior.

Dynamo Personalization Server performs the following functions:

         -  PROFILE GATHERING. When a visitor first arrives at a Web site, a
            profile is created automatically for that visitor. If the visitor
            registers or logs in, the visitor's identity is added to the
            profile, preserving any profile information that was gathered up to
            that point. Dynamo Personalization Server tracks both explicit user
            profile data supplied by the user as well as implicit profile
            attributes derived from the user's behavior on the Web site. This
            information is combined with any existing information about the
            visitor from the company's internal databases.

         -  SEGMENTATION AND CONTENT TARGETING. Dynamo Personalization Server
            enables business managers to segment visitors based on their profile
            data. Using business rules, content can be personalized and targeted
            to these groups of users. These business rules are created using the
            Dynamo Control Center.

         -  CONTENT MANAGEMENT AND INTEGRATION. In addition to using Dynamo
            Personalization Server to target content residing on internal file
            systems, customers may purchase Dynamo Connectors to integrate
            Dynamo with leading content management systems and other enterprise
            applications. The Dynamo Connectors provide direct integration to
            leading content management systems such as those from Documentum and
            OpenText.

         -  PERSONALIZED MESSAGING. Dynamo Targeted E-mail can be used with the
            Dynamo Personalization Server to send personalized messages to
            selected groups and individual Web site users.

DYNAMO SCENARIO SERVER. Dynamo Scenario Server provides a platform for
non-technical business managers to define, manage and analyze e-business
scenarios, which are planned sequences of interactions with a specific customer
or customer segment that enable businesses to manage long-term customer
relationships. E-business scenarios can span a wide variety of customer
interactions across multiple channels including customer acquisition and
retention, product discounts and promotions, cross-sell and up-sell incentives,
product fulfillment, and customer support functions. Dynamo Scenario Server
features include:

         -  "POINT-AND-CLICK" VISUAL INTERFACE. Dynamo Scenario Server features
            a point-and-click visual interface, integrated in the Dynamo Control
            Center, which enables non-technical business managers to define and
            manage e-business scenarios by manipulating graphical scenario
            elements. These elements include people, time, events, conditions
            and actions. This visual interface allows the managers to create and
            manage e-business initiatives without requiring skilled computer
            programming personnel.

         -  TIGHT INTEGRATION WITH DYNAMO PERSONALIZATION AND COMMERCE SERVERS.
            Dynamo Scenario Server is tightly integrated with the Dynamo
            Personalization Server and Dynamo Commerce Server products, so that
            e-business scenarios can automatically take advantage of information
            and configurations in those products. For example, e-business
            scenarios can be defined to only apply to customer segments that are
            identified through the Dynamo Personalization Server. When used in
            conjunction with Dynamo Commerce Server, e-business scenarios
            automatically present commerce related events and actions such
            as purchasing events and shopping cart discounts, integrated
            reporting and graphing.

<PAGE>

         -  SCENARIO TEMPLATES. Dynamo Scenario Server allows the creation and
            use of Scenario Templates, which are reusable, pre-built e-business
            scenarios that omit a small number of parameters. When a Scenario
            Template is re-used, the business manager is asked for the omitted
            parameters and the scenario is created. Scenario Templates enable
            business managers to quickly initiate commonly used scenarios and to
            simplify the creation of scenarios for less sophisticated users.

DYNAMO COMMERCE SERVER. Dynamo Commerce Server is a flexible solution enabling
businesses to deploy and manage large-scale, personalized, e-commerce
storefronts. Dynamo Commerce Server delivers product catalog content and
scenario-based, promotional merchandising programs to manage the online shopping
experience. It is designed to integrate with existing customer database,
inventory, order processing, payment and fulfillment systems operated by many
large organizations. In addition, Dynamo Commerce Server provides administration
features that allow e-commerce storefronts to be operated independently by
various managers throughout an organization. The Dynamo 5 version of Dynamo
Commerce Server offers gift registries, coupons, carts and shipping addresses,
support for multiple currencies and an improved administration interface. The
Dynamo Commerce Server is also tightly integrated with Dynamo Scenario Server so
that commerce transactions and merchandising features can interact effectively
with e-business scenarios. Dynamo Commerce Server features also include:

         -  COMPLETE E-COMMERCE STOREFRONT SOLUTION. Dynamo Commerce Server
            provides a comprehensive set of e-commerce storefront functions
            including catalog, shopping cart, order processing, built-in search
            capabilities and user registration. Business managers can customize
            the layout, look and feel, navigation and functionality of their
            storefronts through point and click interfaces and through
            customized Web page templates. Dynamo Commerce Server supports both
            business-to-business and business-to-consumer e-commerce.

         -  ENVIRONMENT FOR PERSONALIZED SELLING. Web sites built on Dynamo
            Commerce Server can be designed to deliver targeted merchandising
            campaigns based on user profiles gathered through Dynamo
            Personalization Server and driven by e-business scenarios defined
            through Dynamo Scenario Server. Since Dynamo Commerce Server uses
            both implicit and explicit profiles, content can be targeted to both
            anonymous and recognized visitors. Reporting functionality allows
            marketing personnel to gather real-time feedback on the
            effectiveness of various targeting and merchandising strategies.

         -  FLEXIBLE ORDER PROCESSING. Dynamo Commerce Server provides core
            order processing functionality that can be integrated with a wide
            variety of transaction models and existing business processes.
            Through the use of our integration modules, customers can
            incorporate business systems into the order processing flow at a
            number of stages as products are browsed, selected and purchased.

         -  CUSTOMIZATION, MAINTAINABILITY AND DAY-TO-DAY MANAGEMENT. Dynamo
            Commerce Server allows business managers, designers and programmers
            to independently maintain and manage the various aspects of the Web
            site relating to their particular expertise. Dynamo Commerce Server
            has an administrative interface, integrated into the Dynamo Control
            Center, so business managers can control product presentation,
            pricing and promotions. Designers can directly customize Web site
            templates upon which the site is built. The open, modular
            architecture makes it easy for programmers to extend and modify
            functionality. This separation simplifies deployment and ongoing
            maintenance.

<PAGE>

SERVICES

We provide a variety of consulting, design, application development,
integration and training and support services in conjunction with our
products through our Innovation Solutions and Express Services offerings.

INNOVATION SOLUTIONS. Innovation Solutions services consist of customized
application design, development and integration services and are ordinarily
provided on a fixed-price basis. We have extensive experience in developing,
designing and deploying large-scale Web applications. Our Innovation Solutions
services are provided to clients with complex requirements that seek advanced
solutions that are not commercially available to extend the capabilities and
features of their systems. As well as being a core component of our business,
Innovation Solutions projects provide us with an understanding of emerging
customer requirements and insights for new product developments. We typically
select projects that we believe may provide the technical and functional
foundation for our future products and services.

EXPRESS SERVICES. Express Services consist of high level consulting and enabling
support services such as system architectural design, project management, Web
site design, and technical training and support. Express Services are ordinarily
provided on a time and materials basis. Our Express Services are provided to
assist systems integrators, development partners and customers to rapidly
develop and deploy Dynamo-based applications and systems. Our objective is to
deploy our Express Services quickly and efficiently to reduce the time and
effort required by our partners and customers to successfully deploy Dynamo
applications. Our Express Services are priced on a per day basis.

CUSTOMER SUPPORT AND MAINTENANCE. We offer five levels of customer support
ranging from our evaluation support program, which is available for 30 days,
to our Premier Support Program, which includes telephone support 24 hours a
day, seven days per week, for customers deploying mission critical
applications. Customers are entitled to receive software updates, maintenance
releases and technical support for an annual maintenance fee of 20% to 30% of
the then-current list price of the licensed product.

TRAINING. We provide a broad selection of training for customers and partners,
including programming classes covering all of the components of our product
suite. Training is priced on a per day basis. Fees vary for standard public
training classes and on-site private training classes.

<PAGE>

CUSTOMERS

We have delivered e-business solutions to more than 660 companies worldwide.
Our principal target markets are Global 2000 companies, as published by
Forbes, as well as leading companies using the Internet as a primary business
channel. Our customers represent a broad spectrum of enterprises within
diverse industry sectors. The following is a partial list of customers that
have purchased licenses and/or professional services from us:

CONSUMER RETAIL                    MANUFACTURING
BlueLight.com                      3M
CareSoft                           Abbott Laboratories
J.Crew                             Eastman Kodak
Target                             Procter & Gamble
Walgreens                          TECHNOLOGY
FINANCIAL SERVICES                 BellSouth
John Hancock Funds, Inc.           Informix
KeyBank                            Network Solutions
Scudder Kemper Investments         Newbridge Networks
INTERNATIONAL                      Sun Microsystems
Direckt Analge Bank                TRAVEL, MEDIA AND ENTERTAINMENT
Gameplay                           BMG Direct
Kingfisher                         Hilton Hotels
INTERNET                           MTVi
Loudcloud                          Sony Online Entertainment
TechRepublic
TheStreet.com

TECHNOLOGY

We believe we are a technology leader in providing Internet customer
relationship management solutions. Our technology leadership has been
evidenced by product awards and recognition by industry commentators. We
believe our technology enables our customers to create, deploy and maintain
large-scale, personalized e-commerce Web applications in less time and at a
lower cost than existing alternatives. We believe that our products have the
following technological advantages:

       JAVA FOUNDATION

Our products are written entirely in Java and support Java programming for
customization and extension, except for a few integration and installation
modules that can be implemented only in conventional programming languages.
We have performed internal tests to certify that our Dynamo 5 e- Business
Platform supports the J2EE standards established by Sun Microsystems.

We believe that our Java implementation results in the following benefits:

         -  STRONG COMPONENT MODEL. Java provides a component standard known as
            "JavaBeans," which enables developers to segment their code into
            discrete, well-defined units which can be assembled in a "building
            block" fashion to create new applications. JavaBeans' modularity
            makes it easier to create reusable software as well as maintain
            existing systems.

<PAGE>

         -  PLATFORM NEUTRALITY. Java's portability allows our applications to
            be run on virtually any major computer system without modification.
            This portability eliminates porting costs normally required to
            support multiple platforms or to change platforms, while allowing us
            to release products on major platforms simultaneously.

         -  ENTERPRISE INTEGRATION. We believe that Java's portability and
            direct support for distributed applications are helping Java to
            become the de facto standard language for enterprise system
            integration. We expect that Sun Microsystems' establishment of J2EE
            standards will make integration even easier for those enterprise
            systems that support J2EE specifications.

         -  FEWER PROGRAMMING ERRORS. Java's automatic memory management reduces
            memory corruption errors, which typically represent the most costly
            and difficult software "bugs" in conventional compiled languages
            such as C or C++.

         -  ACCELERATED DEVELOPMENT. We believe that the above features,
            combined with the broad availability of high-quality Java
            development tools, result in faster development time.

       MODULAR, STANDARDS-BASED COMPONENT ARCHITECTURE

One of the key features of our product architecture is its high degree of
modularity, achieved by building additional functionality on top of the
JavaBeans component technology. Customizations and extensions built by our
customers or partners using industry standard JavaBean components can be
managed by Dynamo Application Server. Dynamo Application Server enhances the
naming, configuration and lifecycle of each component, allowing components to
be added, extended, duplicated or replaced without recompilation of the rest
of the system. The modularity of our component technology allows our products
to be adapted to meet future business needs. In contrast, producers of
non-modular products must try to anticipate and develop additional
functionality at the time that they market their products.

One of the most powerful uses of our component technology is to integrate our
software with external enterprise systems. We provide reference
implementations of integration components while enabling our customers and
partners to easily replace our reference components with new components that
provide the same function but integrate with their existing systems. We
adhere to industry standards to enable our products to leverage technologies
produced by third parties and to protect the development investments of our
partners and customers.

       PERFORMANCE, SCALABILITY AND RELIABILITY

Our products have a layered architecture. Dynamo Personalization Server is
built on top of Dynamo Application Server, Dynamo Scenario Server is built on
top of Dynamo Personalization Server, and Dynamo Commerce Server is built on
top of Dynamo Scenario Server. We believe that the integration of Dynamo
Application Server with our other products yields significant benefits,
particularly in performance, scalability and reliability.

Dynamo Application Server uses page compilation technology to enhance the
performance of Web page generation. In most dynamic page generation servers,
a Web page is generated from an HTML template, a Web page that is mostly
standard HTML content with special embedded instructions to generate the
dynamic portions of the page. We utilize this basic page template model, but
unlike most other servers, Dynamo Application Server converts the HTML
template into Java source code and compiles it into executable binary
classes. This page compilation technology improves the speed at which Dynamo
Application Server can generate and serve dynamic Web pages.

<PAGE>

Scalability is a term used to describe the ability of an application to
handle greater load when additional hardware is added to a system.
Scalability is particularly important for e-commerce applications where
demand can grow dramatically and unpredictably. Dynamo handles scalability
across computers through a dynamic session-based load management system in
which multiple copies of the application are run on multiple computers. This
load distribution scheme has the advantage of accommodating additional users
by adding more computers. Our load management technology also enables our
applications to handle computer hardware failures automatically and without
interrupting the user's experience. If a computer fails, users are
automatically reassigned to another running computer.

RESEARCH AND DEVELOPMENT

Our research and development group is responsible for product management,
core technology, product architecture, product development, quality
assurance, documentation and third-party software integration. This group
also assists with pre-sale and customer support activities referred from the
Express Services group and quality assurance tasks supporting the Innovation
Solutions group.

Since we began focusing on selling software products in 1996, the majority of
our research and development activities have been directed towards creating
new versions of our products which extend and enhance competitive product
features, particularly in the areas of integrating our products with external
enterprise systems, supporting emerging industry standards and creating more
powerful user interfaces to our products. The systems we integrate with
include relational databases, content management systems and credit card
payment servers. The industry standards we support include Java Servlets, a
standard for constructing Web pages using the Java programming language; J2EE
standards for developing modular Java programs that can be accessed over a
network; and Simple Network Management Protocol, a standard for remotely
monitoring the operation of a system.

SALES AND MARKETING

Our principal target markets are Global 2000 companies and leading companies
using the Internet as a primary business channel. We target these potential
customers through our direct sales force and through arrangements with
systems integrators, Web developers, original equipment manufacturers and
other technology partners. We currently have more than 250 system integrators
and technology partners.

We employ one group of sales professionals who are compensated based on
product sales made directly to end-users, a second group of regional service
account managers who are compensated based on service sales made directly to
end-users and a third group of sales professionals who are compensated based
on sales made through co-selling efforts with our systems integrator
partners. We train and assist systems integrators in promoting, selling,
deploying, extending and supporting our products. The objective of this
strategy is to establish close product relationships directly with our
customers and to motivate systems integrators to adopt the Dynamo technology
and suite of products on Internet and Web-based projects for their clients.

In addition, we have initiated a strategy to co-market our products with
technology partners and to sell our products through original equipment
manufacturers. We intend to increase sales of our products by entering into
similar relationships with additional technology partners and original
equipment manufacturers.

Our co-marketing relationships are with major systems integrators that serve
the market for information system products and services. The objective of
this co-marketing strategy is to motivate systems integrators to adopt the
Dynamo technology and suite of products on Web-based projects for their
clients. We train and assist our systems integration partners to enable them
to deploy, extend and support our products.

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

<PAGE>

NORTH AMERICA                   Luminant
Adobe Systems                   marchFIRST
Cap Gemini Ernst & Young        Modem Media
Centrifusion                    Organic
Context Integration             PricewaterhouseCoopers
CSC                             Sapient
Deloitte Consulting             Sun Microsystems
Documentum                      INTERNATIONAL
E.piphany                       Digital Channel Partners
Fort Point Partners             E-TREE
Informix                        Fi SYSTEM
Inventa                         Icon Medialab
Interwoven                      MATERNA
iXL                             Quidnunc
KPMG

As of December 31, 2000, we had sales personnel located at our offices in
Australia, Canada, England, France, Germany, Hong Kong, Italy, the
Netherlands, Singapore and Sweden. During the past year, we have established
relationships with new international partners and have added key
international accounts. We intend to continue our international expansion by
working with additional global and local partners and by creating additional
local infrastructure to provide direct sales, service and marketing. While we
will continue to focus our international sales efforts principally on Europe,
we also will seek to expand our presence in the Asia/Pacific region,
including Japan and Singapore.

COMPETITION

The market for Internet customer relationship management solutions is
intensely competitive, subject to rapid technological change and
significantly affected by new product introductions and other market
activities of industry participants. We expect competition to persist and
intensify in the future. We have three primary sources of competition:

         -  in-house development efforts by potential customers or partners;

         -  Internet applications software vendors, such as Blue Martini,
            BroadVision and Vignette; and

         -  platform application server products and vendors, such as BEA
            Systems, IBM's Websphere products, and Microsoft, among others.

We also compete in the platform application server market with the Netscape/Sun
Alliance iPlanet Application Server product, which is partially controlled by
Sun Microsystems. Sun is one of our customers and co-marketing partners.

We believe the primary factors upon which we compete are the functionality
and expandability of our products, the extent to which our products integrate
with other systems, our prices and our ability to provide quality services to
assist our customers and partners. We believe that we have competitive
advantages that differentiate our products and services from those of our
competitors. Our application suite provides improved time-to-market and lower
cost of ownership in comparison to in-house development efforts. We believe
the expandability and scalability of our application server-based platform,
as well as our product features, provide us an advantage over other Internet
application software vendors. We believe the functionality provided by the
personalization and e-commerce components of the Dynamo application suite gives
us a competitive advantage over platform application server vendors.

<PAGE>

Despite these advantages, many of our competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. As a result, they may be able to undertake more
extensive promotional activities, offer more attractive pricing and purchase
terms, and bundle their products in a manner that would put us at a
competitive disadvantage.

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

PROPRIETARY RIGHTS AND LICENSING

Our success and ability to compete depend on our ability to develop and
protect the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our proprietary technology. These legal protections afford only
limited protection for our technology. We seek to protect our source code for
our software, documentation and other written materials under trade secret
and copyright laws. We license our software pursuant to signed license,
"click through" or "shrink wrap" agreements, which impose restrictions on the
licensee's ability to use the software, such as prohibiting reverse
engineering and limiting the use of copies. We also seek to avoid disclosure
of our intellectual property by requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements
and by restricting access to our source code. Due to rapid technological
change, we believe that factors such as the technological and creative skills
of our personnel, new product developments and enhancements to existing
products are more important than legal protections to establish and maintain
a technology leadership position.

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

In addition, our software is written in the Java programming language
developed by Sun Microsystems and we incorporate J2EE, Java Runtime
Environment, Java Naming and Directory Interface, Java Servlet Development
Kit, Java Foundation Classes, JavaMail and JavaBeans Activation Framework
into our products under licenses granted to us by Sun. Our Dynamo 5 e
-Business Platform has been designed to support Sun's J2EE standards. If Sun
were to decline to continue to allow us to use these technologies for any
reason, we would be required to (a) license the equivalent technology from
another source, (b) rewrite the technology ourselves, or (c) rewrite portions
of our software to accommodate the change or no longer use the technology.

<PAGE>

EMPLOYEES

As of December 31, 2000, we had a total of 943 employees. Of our employees,
176 were in research and development, 324 in sales and marketing, 309 in
professional services and 134 in finance and administration. Our future
success will depend in part on our ability to attract, retain and motivate
highly qualified technical and management personnel, for whom competition is
intense. From time to time, we also employ independent contractors to support
our professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work stoppage. We
believe our relations with our employees are good.

    FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND STOCK PRICE

A NUMBER OF RISKS AND UNCERTAINTIES EXIST THAT COULD AFFECT OUR FUTURE
OPERATING RESULTS, INCLUDING THE FOLLOWING:

       RISKS RELATED TO OUR BUSINESS

WE DO NOT BELIEVE WE WILL BE ABLE TO SUSTAIN OUR CURRENT REVENUE GROWTH RATE,
AND WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE
PROFITABILITY ON A QUARTERLY OR ANNUAL BASIS.

The second, third and fourth quarters of 2000 were our first profitable
quarters since inception. We have incurred substantial costs to develop and
enhance our technology and products, to recruit and train a marketing and
sales group, and to establish an administrative organization. As of December
31, 2000, we had an accumulated deficit of $14.4 million. We anticipate that
our operating expenses will increase as we continue to develop our
technology, increase our sales and marketing activities, create and expand
our distribution channels, expand our services capabilities and improve our
operational and financial systems. Although our revenues have grown
significantly in recent quarters, they have grown from a relatively small
base and, as a result, we do not believe that we will be able to sustain the
growth rates we have achieved in recent quarters. In addition, we believe the
current United States economic downturn will have an adverse effect on demand
for our products and services, and therefore adversely affect our revenues as
well. Because we have a limited operating history, particularly as a company
that sells software products, we have difficulty predicting our future
operating results and we cannot be certain that our revenues will grow at a
rate that will allow us to maintain profitability. In addition, we cannot be
certain that we will be able to sustain or increase profitability on a
quarterly or annual basis.

WE EXPECT OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE, AND THE PRICE OF OUR
COMMON STOCK COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF
SECURITIES ANALYSTS.

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

         -  demand for our products and services;

         -  the timing of sales of our products and services;

         -  the timing of customer orders and product implementations;

         -  unexpected delays in introducing new products and services;

         -  increased expenses, whether related to sales and marketing, product
            development or administration;

         -  changes in the rapidly evolving market for Internet customer
            relationship management solutions;

         -  the mix of revenues derived from products and services;

<PAGE>

         -  timing of hiring and utilization of services personnel;

         -  cost overruns related to fixed-price services projects;

         -  the mix of domestic and international sales; and

         -  costs related to possible acquisitions of technologies or
            businesses.

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

We plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and
improve our operational and financial systems. If our revenues do not
increase as quickly as these expenses, our operating results may suffer and
our stock price may decline.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.

Our long sales cycle, which can range from several weeks to several months or
more, makes it difficult to predict the quarter in which sales may occur. We
have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our products and services. Our
sales cycle varies depending on the size and type of customer contemplating a
purchase and whether we have conducted business with a potential customer in
the past. In addition, we believe the current economic downturn in the United
States has increased the average length of our sales cycle as customers have
deferred implementing new e-commerce solutions. We may incur significant
sales and marketing expenses in anticipation of licensing our products, and
if we do not achieve the level of revenues we expected, our operating results
will suffer and our stock price may decline. These potential customers
frequently need to obtain approvals from multiple decision makers prior to
making purchase decisions. Delays in sales could cause significant
variability in our revenues and operating results for any particular period.

THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS NEW AND
RAPIDLY EVOLVING AND WE CANNOT BE CERTAIN THAT A VIABLE MARKET FOR OUR PRODUCTS
WILL CONTINUE TO DEVELOP.

The market for Internet customer relationship management solutions is new and
rapidly evolving. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective customers and partners about the
uses and benefits of our products and services. Accordingly, we cannot be
certain that a viable market for our products is sustainable. Organizations
that have already invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems.

THE MARKET FOR INTERNET CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS IS INTENSELY
COMPETITIVE, AND WE EXPECT COMPETITION TO INTENSIFY IN THE FUTURE.

The market for Internet customer relationship management solutions is
intensely competitive and we expect competition to intensify in the future as
revenues generated from Internet commerce increase. This level of competition
could reduce our revenues and result in increased losses or reduced profits.
Our primary competition currently comes from in-house development efforts by
potential customers or partners, as well as from other vendors of Web-based
application software. We currently compete with Internet application software
vendors such as Blue Martini, BroadVision and Vignette. We also compete with
platform application server products and vendors such as BEA Systems, IBM's
Websphere products, Microsoft, and the Netscape/Sun Microsystems Alliance,
among others. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources
than we do, and may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more extensive
customer bases that they can use to gain market share. These competitors may
be able to undertake more extensive promotional activities, adopt more
aggressive pricing policies and offer more attractive terms to purchasers
than we can. Moreover, our current and potential competitors, such as
Microsoft and the Netscape/Sun Microsystems Alliance, may bundle their
products in a manner that may discourage users from purchasing our products.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and expand their markets. Accordingly, new competitors
or alliances among competitors may emerge and rapidly acquire significant
market share.

<PAGE>


WE DEPEND ON OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS.

Since our potential customers often rely on third-party systems integrators
to develop, deploy and manage Web sites for conducting commerce on the
Internet, we cultivate relationships with systems integrators in order to
encourage them to support our products. If we do not adequately train a
sufficient number of systems integrators or if systems integrators were to
devote their efforts to integrating or co-selling different products, our
revenues could be reduced and our operating results could be harmed.

WE WILL NEED TO IMPLEMENT AND IMPROVE OUR OPERATIONAL SYSTEMS AND HIRE
ADDITIONAL SERVICE PROFESSIONALS ON A TIMELY BASIS IN ORDER TO MANAGE GROWTH.

We have expanded our operations rapidly in recent years. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities and to support our growing customer base. The number of
our employees increased from 324 on January 1, 2000 to 943 on December 31,
2000. Rapid growth places a significant demand on our management and
operational resources. In order to manage growth effectively, we must
implement and improve our operational systems, procedures and controls on a
timely basis. We plan in particular to expand our professional services
capabilities to support increased product license sales. However, we cannot
be certain that we will be able to attract a sufficient number of highly
qualified service personnel. In addition, new service personnel will require
training and it will take time for them to become productive. If we fail to
improve our operational systems or to expand our professional service
capabilities in a timely manner, we could experience customer
dissatisfaction, cost inefficiencies and lost revenue opportunities, which
could harm our operating results.

COMPETITION WITH OUR RESELLER PARTNERS COULD LIMIT OUR SALES OPPORTUNITIES AND
JEOPARDIZE THESE RELATIONSHIPS.

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

OUR BUSINESS MAY BE HARMED IF WE LOSE THE SERVICES OF EITHER JEET SINGH OR
JOSEPH CHUNG, OUR CO-FOUNDERS, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN OTHER
KEY PERSONNEL.

Our success depends largely on the skills, experience and performance of some
key members of our management, particularly our co-founders Jeet Singh and
Joseph Chung. If we lose one or more of our key employees, our business could
be harmed. We have purchased, and are the beneficiaries of, insurance
policies on the lives of Mr. Singh and Mr. Chung, each in the amount of
$1,000,000. Proceeds under this insurance may not cover our losses. In
addition, our future success will depend in large part on our ability to
continue attracting and retaining highly skilled personnel. Like other
software companies, we face intense competition for qualified personnel. We
may not be successful in attracting, assimilating and retaining qualified
personnel in the future.

<PAGE>

WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES IN ORDER TO INCREASE
MARKET AWARENESS OF OUR PRODUCTS AND INCREASE OUR REVENUES.

We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We may not be
successful in these efforts. We have recently expanded our direct sales force
and plan to hire additional sales personnel. Our products and services
require a sophisticated sales effort targeted at the senior management of our
prospective customers. Newly hired employees will require training and it
will take time for them to achieve full productivity. We may be unable to
hire enough qualified individuals in the future, and newly hired employees
may not achieve necessary levels of productivity.

WE COULD INCUR SUBSTANTIAL COSTS PROTECTING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR DEFENDING AGAINST A CLAIM OF INFRINGEMENT.

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

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

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any intellectual property
litigation. If we sue to enforce our rights, the litigation would be
expensive, would divert management resources and may not prevent other
parties from using our intellectual property without our permission. In
February 2000, we settled a lawsuit filed by BroadVision, which alleged that
we were infringing on a patent for a method of conducting e-commerce. As part
of the settlement, we agreed to pay BroadVision a total of $15.0 million in
license fees over a three-year period, of which $11 million had been paid as
of December 31, 2000.

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

         -  cease selling or using products or services that incorporate the
            challenged intellectual property;

         -  obtain a license, which may not be available on reasonable terms, to
            sell or use the relevant technology; or

         -  redesign those products or services to avoid infringement.

IF WE FAIL TO ADAPT TO RAPID CHANGES IN THE MARKET FOR INTERNET CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE.

The market for our products is marked by rapid technological change, frequent
new product introductions and Internet-related technology enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. We may not be able to develop and market new products or
product enhancements that comply with present or emerging Internet technology
standards. New products based on new technologies or new industry standards
could render our existing products obsolete and unmarketable. To succeed, we
will need to enhance our current products and develop new products on a
timely basis to keep pace with developments related to Internet technology
and to satisfy the increasingly sophisticated requirements of customers.
E-commerce technology is complex and new products and product enhancements
can require long

<PAGE>

development and testing periods. Any delays in developing and releasing new or
enhanced products could cause us to lose revenue opportunities and customers.

OUR BUSINESS MAY SUFFER IF WE FAIL TO ADDRESS THE CHALLENGES ASSOCIATED WITH
INTERNATIONAL OPERATIONS.

We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international
markets. We currently maintain offices in Australia, Canada, England, France,
Germany, Hong Kong, Japan, the Netherlands, Singapore and Sweden. We derived
21% of our total revenues from customers outside North America for the year
ended December 31, 2000. We anticipate that revenues from customers outside
North America will account for an increased portion of our total revenues for
the foreseeable future. To date, however, we have limited experience in
international operations and may not be able to compete successfully in
international markets. Our operations outside North America are subject to
additional risks, including:

         -  unexpected changes in regulatory requirements, exchange rates,
            tariffs and other barriers;

         -  longer payment cycles and problems in collecting accounts
            receivable;

         -  political and economic instability;

         -  difficulties in managing system 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;

         -  reduced protection for intellectual property rights in some of the
            countries in which we operate or plan to operate;

         -  problems associated with the conversion of various European
            currencies into a single currency, the euro; and

         -  potentially adverse tax consequences.

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

<PAGE>

WE USE THE JAVA PROGRAMMING LANGUAGE TO DEVELOP OUR PRODUCTS, AND OUR BUSINESS
COULD BE HARMED IF JAVA LOSES MARKET ACCEPTANCE OR IF WE ARE NOT ABLE TO
CONTINUE USING JAVA OR JAVA-RELATED TECHNOLOGIES.

We write our software in the Java computer programming language developed by
Sun Microsystems. While a number of companies have introduced Web
applications based on Java, Java could fall out of favor, and support by Sun
Microsystems or other companies could decline. Moreover, our new Dynamo 5
e-Business Platform is designed to support Sun's Java 2 Platform, Enterprise
Edition, or J2EE, standards for developing modular Java programs that can be
accessed over a network. We have licensed the J2EE brand and certification
tests from Sun. There can be no assurance that these standards will be widely
adopted, that we can continue to support J2EE standards established by Sun
from time to time or that the J2EE brand will continue to be made available
to us on commercially reasonable terms. If Java or J2EE support decreased or
we could not continue to use Java or related Java technologies or to support
J2EE standards, we might have to rewrite the source code for our entire
product line to enable our products to run on other computer platforms. Also,
changes to Java or J2EE standards or the loss of our license to the J2EE
brand could require us to change our products and adversely affect the
perception of our products by our customers. If we were unable to develop or
implement appropriate modifications to our products on a timely basis, we
could lose revenue opportunities and our business could be harmed.

OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE, OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.

Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. We began shipping our new application suite, Dynamo 5 e-Business
Platform, in September 2000. Despite internal testing and testing by
customers, our current and future products may contain serious defects.
Serious defects or errors could result in lost revenues or a delay in market
acceptance.

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

IF WE ACQUIRE OTHER COMPANIES OR BUSINESSES, WE WILL BE SUBJECT TO RISKS THAT
COULD HURT OUR BUSINESS.

We acquired Petronio Technology Group in May 2000 for consideration of
approximately $1.2 million and The Toronto Technology Group in July 2000 for
consideration of approximately $12.0 million. In the future, we may pursue
additional acquisitions to obtain complementary businesses, products,
services or technologies. An acquisition may not produce the revenues,
earnings or business synergies that we anticipated, and an acquired business,
product, service or technology might not perform as we expected. If we pursue
an acquisition, our management could spend a significant amount of time and
effort in identifying and completing the acquisition. If we complete an
acquisition, we may encounter significant difficulties and incur substantial
expenses in integrating the operations and personnel of the acquired company
into our operations while preserving the goodwill of the acquired company. In
particular, we may lose the services of key employees of the acquired company
and we may make changes in management that impair the acquired company's
relationships with employees and customers.

Any of these outcomes could prevent us from realizing the anticipated
benefits of our acquisitions. To pay for an acquisition, we might use stock
or cash. Alternatively, we might borrow money from a bank or other lender. If
we use our stock, our stockholders would experience dilution of their
ownership interests. If we use

<PAGE>

cash or debt financing, our financial liquidity would be reduced. Finally, if we
are unable to account for our acquisitions under the "pooling-of-interests"
method of accounting, which may be eliminated, we may be required to capitalize
a significant amount of intangibles, including goodwill, which may lead to
significant amortization charges. In addition, we may incur significant,
one-time write-offs and amortization charges. These amortization charges and
write-offs could decrease our future earnings or increase our future losses.

       RISKS RELATED TO THE INTERNET INDUSTRY

OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF E-COMMERCE.

Our success will depend heavily on the acceptance and wide use of the
Internet for e-commerce. The current United States economic downturn will
reduce demand for our products if customers and potential customers delay or
cancel the implementation of customer relationship management solutions.
Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet infrastructure may not
be able to support the demands placed on it by increased usage. In addition,
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, or increased government
regulation, could cause the Internet to lose its viability as a commercial
medium. Even if the required infrastructure, standards, protocols and
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.

REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE.

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

THE INTERNET IS GENERATING PRIVACY CONCERNS THAT COULD RESULT IN LEGISLATION OR
MARKET PERCEPTIONS THAT COULD HARM OUR BUSINESS OR RESULT IN REDUCED SALES OF
OUR PRODUCTS, OR BOTH.

Businesses use our Dynamo Personalization Server product to develop and
maintain profiles to tailor the content to be provided to Web site visitors.
When a visitor first arrives at a Web site, our software creates a profile
for that visitor. If the visitor registers or logs in, the visitor's identity
is added to the profile, preserving any profile information that was gathered
up to that point. Dynamo Personalization Server tracks both explicit user
profile data supplied by the user as well as implicit profile attributes
derived from the user's behavior on the Web site. Privacy concerns may cause
visitors to resist providing the personal data or avoid Web sites tracking
the Web behavioral information necessary to support this profiling
capability. More importantly, even the perception of security and privacy
concerns, whether or not valid, may indirectly inhibit market acceptance of
our products. In addition, legislative or regulatory requirements may
heighten these concerns if businesses must notify Web site users that the
data captured after visiting Web sites may be used to direct product

<PAGE>

promotion and advertising to that user. Other countries and political entities,
such as the European Economic Community, have adopted such legislation or
regulatory requirements. The United States may adopt similar legislation or
regulatory requirements. If privacy legislation is enacted or consumer privacy
concerns are not adequately addressed, our business, financial condition and
operating results could be harmed.

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

PROJECTIONS INCLUDED IN THIS ANNUAL REPORT RELATING TO THE GROWTH OF
E-COMMERCE AND THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO
BE INCORRECT AND ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE
PROJECTIONS.

This annual report contains various data and projections related to revenues
generated by electronic commerce and the size of the worldwide Internet
commerce application software market. These data and projections are
inherently imprecise, and investors are cautioned not to place undue reliance
on them. These data and projections have been included in studies prepared by
International Data Corporation, an independent market research firm, and the
projections are based on surveys, financial reports and models used by IDC to
measure license revenues and associated maintenance fees derived from sales
to e-commerce sites. These projections include assumptions regarding business
and home use of the Internet, including assumptions as to growth in the
percentage of Web users making online purchases, increases in the amount of
time people spend using the Web, changing attitudes toward Web usage and
purchasing, levels of business saturation for Web use and increases in the
level of software spending by businesses, as well as various assumptions
regarding the rate of growth of Web use in countries outside the United
States. Actual results or circumstances may be materially different from the
projections.

       RISKS RELATED TO THE SECURITIES MARKETS

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has fluctuated in the past and is likely
to continue to be highly volatile. For example, the market price of our
common stock has ranged from $5.13 per share to $126.88 per share since our
initial public offering in July 1999. Fluctuations in market price and volume
are particularly common among securities of Internet and software companies.
The market price of our common stock may fluctuate significantly in response
to the following factors, some of which are beyond our control:

         -  variations in our quarterly operating results;

         -  changes in market valuations of Internet and software companies;

         -  our announcements of significant contracts, acquisitions, strategic
            partnerships, joint ventures or capital commitments;

         -  our failure to complete significant sales;

         -  additions or departures of our key personnel;

<PAGE>


         -  future sales of our common stock; or

         -  changes in financial estimates by securities analysts.

WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION.

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's
attention and resources.

OUR EXECUTIVE OFFICERS AND DIRECTORS WILL BE ABLE TO INFLUENCE MATTERS
REQUIRING STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM
ACQUIRING OR MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR
INDEPENDENT STOCKHOLDERS.

Our executive officers and directors beneficially owned approximately 20% of
our common stock as of February 28, 2001. As a result, these stockholders may
be able to influence matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
This could delay or prevent someone from acquiring or merging with us.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.

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

         -  authorizing the issuance of "blank check" preferred stock;

         -  providing for a classified board of directors with staggered,
            three-year terms;

         -  providing that directors may only be removed for cause by a
            two-thirds vote of stockholders;

         -  limiting the persons who may call special meetings of stockholders
            prohibiting stockholder action by written consent; and

         -  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.

Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.

                                Item 2. PROPERTIES

Our headquarters are currently located in a leased facility in Cambridge,
Massachusetts, consisting of approximately 60,000 square feet. In August 2000
we entered into a lease for approximately 30,000 square feet in another
facility in Cambridge, Massachusetts, and in June 2000 we entered into a
lease for approximately 42,000 square feet in Waltham, Massachusetts. We also
have offices for sales and support personnel in eight additional domestic
locations as well as in ten foreign countries.

                            Item 3. LEGAL PROCEEDINGS

A patent infringement claim was filed by BroadVision, one of our competitors,
against us on December 11, 1998. The case was filed in the U.S. District Court
for the Northern District of California. BroadVision alleged that we are

<PAGE>

infringing on a patent for a method of conducting e-commerce. We settled the
lawsuit in February 2000. As part of the settlement, we, in return for cash
payments, received a non-exclusive, worldwide, perpetual, paid-up license to
make, use and sell products arguably covered by the patent and any other patents
that may be issued in the future that are related to the original patent. We
agreed to pay BroadVision a total of $15.0 million in license fees over a
three-year period.

On October 31, 2000, Aron Rosenberg, one of our stockholders, filed a lawsuit in
the United States District Court for the District of Delaware, ROSENBERG V.
TUDOR INVESTMENT CORP., TUDOR PRIVATE EQUITY FUND L.P., THE RAPTOR GLOBAL FUND
L.P., THE RAPTOR GLOBAL FUND LTD., TUDOR GLOBAL TRADING LLC AND ART TECHNOLOGY
GROUP, INC., Civil Action No. 00-925. Mr. Rosenberg's complaint alleges that the
Tudor and Raptor entities violated Section 16(b) of the Securities Exchange Act
of 1934 in connection with their sales of our common stock after our initial
public offering on July 20, 1999. Those entities received shares of our common
stock immediately before our closing of our initial public offering, upon the
conversion of Series D preferred stock that they had acquired more than six
months before our initial public offering. The complaint alleges that those
entities should be deemed to have purchased shares of our common stock shortly
before the closing of our initial public offering, as the result of changes
effected through a charter amendment relating to the preferred stock. The
complaint also alleges that the entities obtained profits of more than $70
million from sales of our common stock within six months after the date on which
such purchase should be deemed to have occurred and that those profits should be
paid to our company in accordance with Section 16(b). Although we are a nominal
defendant in the suit, Mr. Rosenberg is not seeking any damages from us. We
cannot assure you that we will receive any payment as a result of this lawsuit.

           Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                                     None.

                                    PART II

    Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                                     MATTERS

Our common stock began trading on the Nasdaq National Market under the symbol
"ARTG" on July 21, 1999. Prior to that time, there was no established public
trading market for our common stock. The following table sets forth the high
and low reported sales prices of our common stock for the periods indicated
as reported by the Nasdaq National Market.

                                                           HIGH         LOW

Year ending December 31, 1999
  Third quarter (commencing July 21, 1999) ..........    $  19.06    $   5.13
  Fourth quarter ....................................       66.00       17.56

Year ending December 31, 2000
  First quarter .....................................      106.50       43.81
  Second quarter ....................................      101.94       28.63
  Third quarter .....................................      126.88       76.00
  Fourth quarter ....................................       96.50       20.50

On March 26, 2001 the last reported sale price on the Nasdaq National Market
for our common stock was $20.00 per share. On March 26, 2001, there were
16,740 holders of record of our common stock.

<PAGE>

We currently intend to retain future earnings, if any, to finance our growth. We
do not anticipate paying cash dividends on our common stock in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs,
restrictions in financing agreements and plans for expansion.

On July 26, 1999, we completed our initial public offering of 10,000,000
shares of common stock at a public offering price of $6.00 per share (SEC
registration number 333-78333). Our net proceeds from the offering were
approximately $54,302,000. On July 30, 1999, in connection with the exercise
of the underwriters' over-allotment option, we issued an additional 336,000
shares of common stock at the initial public offering price of $6.00 per
share. Our net proceeds from the exercise of the over-allotment option were
approximately $1,875,000. In connection with our initial public offering in
July 1999, all shares of our preferred stock were converted into 31,419,278
shares of common stock.

On November 10, 1999, we completed a follow-on public offering of 9,000,000
shares of common stock, of which 2,850,000 shares were sold by us at a public
offering price of $33.75 (SEC registration number 333-89577). Our net
proceeds from the offering were approximately $91,428,000. On November 22,
1999, in connection with the exercies of the underwriters' over-allotment
option, we issued an additional 175,840 shares of common stock at the public
offering price of $33.75 per share. Our net proceeds from the exercise of the
over-allotment option were approximately $5,671,000.

Through December 31, 2000, we used approximately $84.1 million of our
proceeds from the public offerings for sales and marketing, approximately
$27.9 million for capital expenditures, approximately $22.3 million for
research development, and approximately $500,000 for the repayment of
indebtedness. Additionally, we paid $5.2 million as partial consideration and
for professional fees in connection with our acquisition of The Toronto
Technology Group Inc. in July 2000. As of December 31, 2000, we had
approximately $12.8 million of net proceeds remaining, and pending use of
these proceeds, we intend to invest these net proceeds primarily in
high-quality short-term investments.

<PAGE>

                   Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth below as of December 31,
1999 and 2000 and for each of the years ended December 31, 1998, 1999 and
2000 are derived from consolidated financial statements audited by Arthur
Andersen LLP, independent public accountants, which are included in this
annual report. The selected consolidated financial data as of December 31,
1996, 1997 and 1998 and for each of the years ended December 31, 1996 and
1997 are derived from audited consolidated financial statements not included
in this annual report. Additional information regarding basic and diluted net
income (loss) per share is described in note 1(e) to the consolidated
financial statements included elsewhere in this annual report. The following
data should be read in conjunction with the consolidated financial statements
and related notes included elsewhere in this annual report and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                 ---------------------------------------------------------------------
                                                          1996         1997         1998          1999           2000
                                                        ------       ------       ------       -------       --------
                                                                   (in thousands, except per share data)
<S>                                              <C>                <C>           <C>          <C>          <C>
Revenues:

   Product license                                      $   53       $1,866       $4,059       $18,590       $121,525
   Services                                              3,849        4,592        8,078        13,487         41,817
                                                        ------       ------       ------       -------       --------
     Total revenues                                      3,902        6,458       12,137        32,077        163,342
                                                        ------       ------       ------       -------       --------
Cost of Revenues:

   Product license                                          --           64           30         8,160          3,426
   Services                                              1,985        3,133        5,020        10,232         34,739
                                                        ------       ------       ------       -------       --------
     Total cost of revenues                              1,985        3,197        5,050        18,392         38,165
                                                        ------       ------       ------       -------       --------

<PAGE>

<S>                                                  <C>           <C>           <C>          <C>          <C>
     Gross profit                                        1,917         3,261        7,087        13,685      125,177
                                                       -------      --------      -------      --------      -------
Operating Expenses:
  Research and development                               1,117         3,661        3,355         6,343       18,966
  Sales and marketing                                    1,152         2,287        4,074        15,921       73,261
  General and administrative                             1,060         1,418        2,291         5,323       22,791
  Amortization of deferred compensation                     --            --          107         1,127        1,273
                                                       -------      --------      -------      --------      -------
     Total operating expenses                            3,329         7,366        9,827        28,714      116,291
                                                       -------      --------      -------      --------      -------
Income (Loss) from Operations                           (1,412)       (4,105)      (2,740)      (15,029)       8,886
  Interest income                                           --             6           54         2,018        8,979
  Interest expense                                         (30)         (129)        (165)         (121)          --
                                                       -------      --------      -------      --------      -------
     Net income (loss) before provision for
     income taxes                                       (1,442)       (4,228)      (2,851)      (13,132)      17,865
Provision for income taxes                                  --            --           --            --        3,378
                                                       -------      --------      -------      --------      -------
      Net income (loss)                                 (1,442)       (4,228)      (2,851)      (13,132)      14,487

Accretion of Dividends,
   Discount and Offering Costs
   on Preferred Stock                                     (206)         (214)      (1,594)       (4,395)          --
                                                       -------      --------      -------      --------      -------
      Net income (loss) available for common
         stockholders                                  $(1,648)     $ (4,442)     $(4,445)     $(17,527)     $14,487
                                                       =======      ========      =======      ========      =======
Net income (loss) per share:
   Basic                                               $ (0.09)     $  (0.25)     $ (0.25)     $  (0.45)     $  0.22
                                                       =======      ========      =======      ========      =======
   Diluted                                             $ (0.09)     $  (0.25)     $ (0.25)     $  (0.45)     $  0.20
                                                       =======      ========      =======      ========      =======

Weighted average common shares outstanding:
   Basic                                                17,698        17,744       17,394        38,777       66,932
                                                       =======      ========      =======      ========      =======
   Diluted                                              17,698        17,744       17,394        38,777       73,138
                                                       =======      ========      =======      ========      =======
CONSOLIDATED BALANCE SHEET DATA (at period
end):                                                    1996         1997         1998         1999           2000
                                                        ------       ------       ------       ------         ------
Cash, cash equivalents and short term
   marketable securities                                $2,358     $    187      $ 4,093      $129,848       $126,473
Working capital (deficit)                                  902       (1,328)       3,649       117,727        122,422
Long-term marketable securities                             --           --           --        19,394         17,734
Total assets                                             3,038        1,672        7,766       177,735        259,515
Long-term obligations, less current maturities              24          122          322         4,000          2,000
Redeemable convertible preferred stock                   3,000        3,153        8,313            --             --
Total stockholders' equity (deficit)                    (1,648)      (4,060)      (4,034)      146,385        191,973
</TABLE>

<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                 OF OPERATIONS

                                    Overview

THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT.
THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "ITEM 1.
BUSINESS--FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND STOCK PRICE" AND
ELSEWHERE IN THIS ANNUAL REPORT.

OVERVIEW

We were founded in December 1991. From 1991 through 1995, we devoted our
efforts principally to building, marketing and selling our professional
services capabilities and to research and development activities related to
our software products. Beginning in 1996, we began to focus on selling our
software products. To date, we have enhanced and released several versions of
our Dynamo Application Server product and have completed development of our
current product suite. We began shipping the commercial version of Dynamo 5 e
-Business Platform in September 2000. We market and sell our products
worldwide through our direct sales force, systems integrators, technology
partners and original equipment manufacturers.

We derive our revenues from the sale of software product licenses and related
services. Product license revenues are derived from the sale of software
licenses of our Dynamo products. Our software licenses are priced based on
either the size of the customer implementation or site license terms.
Services revenues are derived from fees for professional services, training
and software maintenance and support. Professional services include custom
application development and project and technical consulting. We bill
professional service fees primarily on a time and materials basis or in some
cases, on a fixed-price schedule defined specifically in our contracts.
Software maintenance and support arrangements are priced based on the level
of services provided. Generally, customers are entitled to receive software
updates, maintenance releases and technical support for an annual maintenance
fee of 20% to 30% of the list price of the licensed product. Customers that
purchase maintenance and support generally receive all product updates and
upgrades of software modules purchased as well as Web-based and telephone
technical support. Training is billed as services are provided.

We recognize revenue in accordance with Statement of Position (SOP) 97-2,
SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Revenues from
software product license agreements are recognized upon execution of a
license agreement and delivery of the software, provided that the fee is
fixed or determinable and deemed collectible by management. If conditions for
acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be perfunctory. In
multiple element arrangements, we use the residual value method in accordance
with SOP 97-2 and SOP 98-9. Revenues from software maintenance agreements are
recognized ratably over the term of the maintenance period, which is
typically one year. We enter into reseller arrangements that typically
provide for sublicense fees payable to us based upon a percentage of our list
price. Revenues are recognized under reseller agreements as earned which is
generally ratably over the life of the reseller agreement for guaranteed
minimum royalties or based upon unit sales by the resellers. We do not grant
our resellers the right of return or price protection. Revenues from
professional service arrangements are recognized on either a time and
materials or percentage-of-completion basis as the services are performed,
provided that amounts due from customers are fixed or determinable and deemed
collectible by management. Amounts collected prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue. Unbilled
services represent service revenues that have been earned by us in advance of
billings.

<PAGE>


Services revenues have increased primarily due to the expansion of our
service capabilities by hiring additional service personnel and the increase
in the number of customers using our Dynamo products. Sales of Dynamo
products often lead to sales of consulting services and software maintenance
and support. To date, substantially all of our Dynamo customers have entered
into annual software maintenance and support agreements at the time of
purchase and have renewed such maintenance and support contracts in
subsequent periods. We believe that growth of our product license sales
depends on our ability to provide customers with support, training,
consulting and implementation services and to educate systems integrators and
resellers on how to use and install our products. We have invested
significantly and expect to continue to invest in expanding our services
organization.

We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international
markets. We currently maintain offices in Australia, Canada, England, France,
Germany, Hong Kong, Japan, the Netherlands, Singapore and Sweden. Revenues
from customers outside the United States accounted for 7% of our total
revenues in 1998, 7% in 1999 and 23% in 2000. We have not entered into
contracts denominated in foreign currencies to date, but may in the future.
We currently do not have hedging or similar arrangements to protect us
against foreign currency fluctuations. We, therefore, increasingly may become
subject to currency fluctuations, which could harm our operating results in
future periods.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                              DECEMBER 31,
                                                         ---------------------
                                                         1998    1999     2000
                                                         ----    ----     ----
<S>                                                    <C>     <C>       <C>
   Revenues:
      Product license ...............................     33%      58%      74%
      Services ......................................     67       42       26
                                                        ----     ----     ----
         Total revenues .............................    100      100      100

   Total cost of revenues ...........................     42       57       23
                                                        ----     ----     ----
      Gross margin...................................     58       43       77
                                                        ----     ----     ----
   Operating expenses:
      Research and development ......................     27       20       12
      Sales and marketing ...........................     34       50       45
      General and administrative ....................     19       17       14
      Stock-based compensation ......................      1        3        1
                                                        ----     ----     ----
         Total operating expenses ...................     81       90       72
                                                        ----     ----     ----
   Income (loss) from operations ....................    (23)     (47)       5
   Interest income (expense), net ...................     (1)       6        6
                                                        ----     ----     ----
      Income (loss) before provision for income taxes    (24)     (41)      11
   Provision for income taxes .......................     --       --        2
                                                        ----     ----     ----
   Net income (loss) ................................    (24)%    (41)%      9%
                                                        ====     ====     ====
</TABLE>


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

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                              DECEMBER 31,
                                                         ---------------------
                                                         1998    1999     2000
                                                         ----    ----     ----
<S>                                                     <C>      <C>      <C>
Cost of product license revenues...................         1%     44%       3%
Cost of services revenues..........................        62      76       83
</TABLE>


YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

       REVENUES

Total revenues increased 409% from $32.1 million in 1999 to $163.3 million in
2000. The increase was primarily attributable to market acceptance of our
Dynamo suite of products as we continued to cultivate relationships with
systems integrators and train our partner channels to encourage them to
support our products. Additionally, global expansion and the release of our
newest product offering in September 2000, ATG Dynamo 5, contributed to our
revenue growth. Revenues generated from international customers increased to
$37.6 million in 2000 from $2.2 million in 1999.

Total revenues increased 164% from $12.1 million in 1998 to $32.1 million in
1999. The increase was primarily attributable to growth in the number of
customers and the number of larger deals with customers. In addition, we
expanded our sales force and introduced version 4.0 of our Dynamo product
suite in December 1998, which increased our market presence.

No individual customer accounted for more than 10% of total revenues in 1999
or 2000. In 1998, three customers each accounted for more than 10% of total
revenues and collectively accounted for 37% of total revenues.

<PAGE>

       PRODUCT LICENSE REVENUES

Product license revenues increased 553% from $18.6 million in 1999 to $121.5
million in 2000. The increase was primarily attributable to the continued
rapid growth in our partner channel, as well as increased sales to larger
enterprises and international customers. Product license revenues generated
from international customers increased to $27.1 million in 2000 from $1.2
million in 1999. We experienced an increase in the number of individual
license arrangements under which the initial license fee was in excess of $1
million. Additionally, the increase was attributable to the market acceptance
of ATG Dynamo 5, which was released in September 2000. We anticipate that
product license revenues will continue to grow in absolute dollars, but
expect the sequential rate of growth to decrease as compared to the past
several quarters.

Product license revenues increased 358% from $4.1 million in 1998 to $18.6
million in 1999. This increase was attributable to the market acceptance of
our Dynamo product suite following the release of Dynamo 4.0 in December 1998
and an increase in the number of larger deals with customers. Additionally,
11% of our product license revenues in 1999 were the result of an agreement
with an original equipment manufacturer or OEM. The OEM agreement had an
initial term that ended on December 31, 2000. We elected not to renew the
agreement.

Product license revenues as a percentage of total revenues for the years
ended December 31, 2000, 1999 and 1998 were 74%, 58% and 33%, respectively.
We expect this percentage to decrease in the foreseeable future until
reaching a level of approximately two-thirds of total revenues.

       SERVICES REVENUES

Services revenues increased 210% from $13.5 million in 1999 to $41.8 million
in 2000. Professional services revenues increased 95% from $9.7 million in
1999 to $18.9 million in 2000. The increase in professional services revenues
was primarily attributable to the continued growth of our customer base and
an increase in resources in our professional services group including the
acquisition of The Toronto Technology Group, Inc. Software maintenance and
support revenues increased 496% from $2.8 million in 1999 to $16.7 million in
2000. The increase in software maintenance and support revenues was the
result of continued increases in product revenues that generate software
maintenance and support revenues and increases in software maintenance and
support renewals. Training revenues increased 463% from $1.1 million in 1999
to $6.2 million in 2000. The increase in training revenues was primarily
attributable to our extended training program offerings. Additionally, our
acquisition of Petronio Technology Group on May 17, 2000 provided us with
additional Java, J2EE and XML courseware, as well as strengthened our
training capabilities with the addition of seasoned trainers and curriculum
developers. We believe these capabilities enhance our selling efforts for
product license revenues to end-users, resellers and partners. We anticipate
that services revenues will continue to grow in absolute dollars, but expect
the sequential rate of growth to decrease as compared to the past several
quarters.

Services revenues increased 67% from $8.1 million in 1998 to $13.5 million in
1999. Professional services revenues increased 26% in 1999 from $7.7 million
in 1998 to $9.7 million in 1999. The increase in professional services
revenues was primarily attributable to the continued growth of our customer
base and an increase in resources in our professional services group.
Software maintenance and support revenues increased 653% from $372,000 in
1998 to $2.8 million in 1999. This increase in software maintenance and
support revenues was attributable to an increase in the number of customers
and sales of product licenses.

Services revenues as a percentage of total revenues for the years ended
December 31, 2000, 1999 and 1998 were 26%, 42% and 67%, respectively. We
expect this percentage to increase in the forseeable future to approximately
one-third of total revenues.

<PAGE>

       COST OF PRODUCT LICENSE REVENUES

Cost of product license revenues decreased from $8.2 million in 1999 to $3.4
million in 2000. For the year ended December 31, 2000, approximately $2.3
million related to the BroadVision settlement which was included in cost of
product license revenues. We paid BroadVision $750,000 per quarter in 2000
and will pay BroadVision $500,000 per quarter in 2001 and 2002. Cost of
product license revenues also includes costs associated with sustaining the
current release of the Dynamo suite of products.

Cost of product license revenues increased from $30,000 in 1998 to $8.2
million in 1999. In February 2000, we settled a lawsuit filed by BroadVision
in December 1998, which alleged that we were infringing on a patent for a
method of conducting e-commerce. As part of the settlement, we, in return for
cash payments, received a non-exclusive, worldwide, perpetual, paid-up
license to make, use and sell products arguably covered by the patent and any
other patents that may be issued in the future that are related to the
original patent. We agreed to pay BroadVision a total of $15.0 million in
license fees, which are being accounted for as cost of product license
revenues. An initial payment of $8.0 million in February 2000 was expensed
during the year ended December 31, 1999, and the remaining $7.0 million is
being expensed ratably over a three-year period that began in the first
quarter of 2000.

       COST OF SERVICES REVENUES

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

Cost of services revenues increased 240% from $10.2 million in 1999 to $34.7
million in 2000. The increase was attributable to the growth of our resources
in our professional services group. Approximately 61% of the increase was
related to compensation and benefit costs. Additionally, costs increased due
to travel, recruiting, hiring and training.

Cost of services revenues increased 104% from $5.0 million in 1998 to $10.2
million in 1999. The increase was attributable to the increase in resources
in our professional services group. Approximately 86% of the increase was
attributable to increased compensation costs for continued increases in head
count. Further, increased costs resulted from establishing a training
organization and the introduction of training programs in December 1998.
Additionally, costs increased due to travel, recruiting and facilities costs.

       RESEARCH AND DEVELOPMENT EXPENSES

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

Research and development expenses increased 199% from $6.3 million in 1999 to
$19.0 million in 2000. The increase was due principally to the research and
development expenses associated with our Dynamo 5 e-Business Platform, which
we announced in July 2000 and began shipping in September 2000. Approximately
73% of the increase was related to compensation and benefit costs.
Additionally, costs increased due to travel, recruiting, hiring and training.

Research and development expenses increased 89% from $3.4 million in 1998 to
$6.3 million in 1999. Approximately 79% of the increase was due to growth in
hiring engineers into the group and related costs including salaries and
related benefits. The remainder of the increase was primarily due to
increased facilities costs.

For the years ended December 31, 2000, 1999 and 1998, research and
development expenses as a percentage of total revenues were 12%, 20% and 27%,
respectively. The percentage decrease principally reflected growth in the
level of our total revenues. We expect that research and development
expenses, in absolute dollars, will increase as we expand our research and
development hiring efforts subsequent to the Dynamo 5 general release. We
expect that research and development expenses will represent a greater
percentage of total revenues in 2001 than in 2000. We anticipate, however,
that research and development expenses will fluctuate as a percentage of
total revenues based upon the level of revenue growth.

<PAGE>

       SALES AND MARKETING EXPENSES

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

Sales and marketing expenses increased 360% from $15.9 million in 1999 to
$73.3 million in 2000. The increase was associated primarily with
international sales and marketing expansion, global hiring, advertising
efforts, branding and increased commissions. Approximately 47% of the
increase was related to compensation and benefit costs, and 28% of the
increase was related to marketing and promotional expenses. Additionally,
costs increased due to travel, recruiting, hiring and training.

Sales and marketing expenses increased 291% from $4.1 million in 1998 to
$15.9 million in 1999. Approximately 44% of the increase was due to a
significant increase in the number of sales and marketing personnel and
related expenses, and 29% of the increase was related to new and increased
marketing program expenditures.

For the years ended December 31, 2000, 1999 and 1998, sales and marketing
expenses as a percentage of total revenues were 45%, 50% and 34%,
respectively. We expect that sales and marketing expenses will increase in
absolute dollars as we continue to execute our strategy for expansion of our
sales and marketing efforts, both domestically and internationally. We will
continue to hire and train new sales personnel, open additional sales
offices, increase marketing and promotional spending and execute our global
branding initiatives. We expect that sales and marketing expenses will
represent a smaller percentage of total revenues in the next year than in
2000. We anticipate, however, that sales and marketing expenses will
fluctuate as a percentage of total revenues depending on the level and timing
of global expansion, program spending, the rate at which newly hired sales
personnel become productive and the level of revenue growth.

       GENERAL AND ADMINISTRATIVE EXPENSES

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

General and administrative expenses increased 328% from $5.3 million in 1999
to $22.8 million in 2000. Approximately 48% of the increase was related to
increases in personnel and related expenses, driven by expansion both
domestically and internationally. Approximately 13% of the increase was
related to an increase in consultant expenses. Additionally, the increase was
the result of recording additional allowances for doubtful accounts as a
result of the significant increases in revenues and the potential for a
slowdown in the economy.

General and administrative expenses increased 132% from $2.3 million in 1998
to $5.3 million in 1999. Approximately 30% of the increase was related to the
hiring of additional professionals to manage the growth of the company
resulting in increased salaries and benefits. Approximately 19% of the
increase was due to increased consulting services and approximately 13% of
the increase was due to costs related to hiring and training new personnel.

For the years ended December 31, 2000, 1999 and 1998, general and
administrative expenses as a percentage of total revenues were 14%, 17% and
19%, respectively. We plan to continue investing in infrastructure and
personnel to help support our planned growth. As a result, we expect an
increase, in absolute dollars, in general and administrative costs for the
next year. We expect that general and administrative expenses will represent
a smaller percentage of total revenues in the foreseeable future than in
2000. We anticipate, however, that general and administrative

<PAGE>

expenses will fluctuate as a percentage of total revenues depending upon the
rate of growth in expenditures and total revenues.

       STOCK-BASED COMPENSATION

Since the fourth quarter of 1998, we have recorded total deferred stock based
compensation of $4.9 million in connection with stock option grants. These
amounts represent the difference between the exercise price of certain stock
option grants and the deemed fair value for accounting purposes of our common
stock at the time of such grants. Additionally, in July 2000, we recorded
deferred stock-based compensation of $2.0 million for unvested stock options
acquired in connection with the acquisition of The Toronto Technology Group,
Inc. We are amortizing these amounts over the vesting periods of the
applicable options. These amounts have been reduced due to the recipients of
these grants terminating employment with the Company.

Stock-based compensation expense increased 18% from $1.1 million in 1999 to
$1.3 million in 2000. This increase was due to the timing of our recording of
stock-based compensation and the options acquired in connection with the
acquisition of The Toronto Technology Group, Inc. We expect stock-based
compensation expense to increase to approximately $1.5 million in 2001.

Stock-based compensation expense increased 953% from $107,000 in 1998 to $1.1
million in 1999. This was due to the timing of our recording of stock-based
compensation.

       INTEREST INCOME (EXPENSE)

Interest income increased 350% from $2.0 million in 1999 to $9.0 million in
2000. The increase is primarily the result of the completion of our initial
public offering in July 1999 and a follow-on public offering in November
1999, from which we received net proceeds of approximately $153.3 million
that we invested primarily in cash, cash equivalents and marketable
securities. Additionally, the positive cash flow from operations has
contributed to the increase in interest income.

Interest expense decreased from $121,000 in 1999 to zero in 2000. The
decrease was related to the repayment of outstanding indebtedness in 1999
with the proceeds from our initial public offering.

Interest income increased from $54,000 in 1998 to $2.0 million in 1999. The
increase was the result of the completion of our initial and follow-on public
offerings completed in July and November 1999, from which we received net
proceeds of approximately $153.3 million that was invested primarily in cash,
cash equivalents and marketable securities.

Interest expense decreased 27% from $165,000 in 1998 to $121,000 in 1999. The
decrease was primarily related to the repayment of outstanding indebtedness
with the proceeds from our initial public offering.

       PROVISION FOR INCOME TAXES

As a result of achieving profitability in 2000, we recorded a provision for
income taxes of $3.4 million, which represents an effective tax rate of
18.9%. Our effective tax rate for 2000 was below the statutory rate due
primarily to the utilization of net operating loss carryforwards. As of
December 31, 2000, all net operating loss carryforwards have been benefited
for financial reporting purposes. We expect our effective tax rate for 2001
to be approximately 40%. We incurred losses in 1998 and 1999. Accordingly,
there was no provision for income taxes for these periods.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements relate primarily to facilities, infrastructure for
new hires and working capital requirements. Historically, we have funded our
cash requirements primarily through the public and private sale of equity
securities, commercial credit facilities and capital leases. In 2000, we
began to fund our cash requirements in part from operations. At February 28,
2001, we had $51.5 million in cash and cash equivalents and $65.8 million in
marketable securities.

Cash provided by operating activities was $18.3 million in 2000. This
consisted of operating income of $14.5 million and changes in working capital
including cash provided by increases in accrued expenses of $24.7 million and
deferred revenue of $14.4 million offset by cash used to fund an increase in
accounts receivable was $39.9 million. Cash used in operating activities was
$2.0 million for 1999. This represented an operating loss of $13.1 million
and changes in working capital items consisting primarily of cash provided by
deferred revenue, accounts payable and accrued expenses, including the $8.0
million license fee which was paid to BroadVision in February 2000. The cash
provided by the change in deferred revenue was primarily the result of $5.0
million we received from an original equipment manufacturer, of which $2.9
million was included in deferred revenue as of December 31, 1999.

Our investing activities for the year ended December 31, 2000 consisted
primarily of capital expenditures of $21.7 million, net purchases of
marketable securities of $66.4 million and the purchase of The Toronto
Technology Group, Inc. and Petronio Technology Group which utilized a total
of $5.8 million of cash. In the second quarter of 2000 we acquired Petronio
Technology Group and, pursuant to the acquisition agreement, made an initial
cash payment of $600,000 and may be obligated to make two additional
contingent payments of $300,000 each. In addition, in July 2000 we acquired
The Toronto Technology Group for $12.0 million in cash, options and
exchangeable shares of common stock. We paid $5.2 million in cash upon the
closing of this acquisition and will pay the remainder of the purchase price
in options and exchangeable shares through 2003. To support growth in
headcount and global expansion, assets acquired both in 1999 and 2000
consisted principally of leasehold improvements, computer hardware and
software. We expect that our capital expenditures will continue to increase
significantly as our employee base grows. We expect that capital expenditures
will total approximately $45.0 million over the next twelve months.  Our
investing activities in 1999 consisted primarily of capital expenditures of
$5.6 million and increases in other assets for facilities deposits and
similar items of $690,000, in addition to the net purchase of marketable
securities of $24.5 million.

We have a revolving line of credit with Silicon Valley Bank, which provides
for borrowings of up to the lesser of $12.5 million or 80% of eligible
accounts receivable. The line of credit bears interest at the bank's prime
rate (8.5% at February 28, 2001). At February 28, 2001, we had approximately
$4.1 million available under the line of credit based upon our borrowing
base, no outstanding borrowings and $8.4 million of outstanding letters of
credit which apply against our availability. The line of credit is secured by
all of our tangible and intangible intellectual and personal property and is
subject to financial covenants and restrictions, including minimum liquidity
requirements and a prohibition on the payment of dividends. We currently are
in compliance with all related financial covenants and restrictions. We are
negotiating with Silicon Valley Bank to increase the aggregate amount
available under this facility from $12.5 million to $25.0 million.

In September 2000, we entered into a non-recourse receivables purchase
agreement with Silicon Valley Bank, under which we can sell up to $10.0
million of our accounts receivable to the bank. Under the terms of the
receivables purchase agreement, we can sell certain accounts receivable,
subject to acceptance by the bank, on a non-recourse basis. Upon purchase,
the bank assumes the risk of collection for the acquired accounts receivable
except in the event we violate the terms of the receivables purchase
agreement or the customer asserts a discount, allowance, warranty claim or
right of return. The accounts receivable are sold at a discount to reflect a
minimum of 45 days and a maximum of 135 days at the bank's prime rate plus
1%. This agreement will expire in September 2001. During the year ended
December 31, 2000, we sold $9.6 million of accounts receivable to the bank
under the receivables purchase agreement. As of February 28, 2001, all of the
sold receivables have been collected. For the year ended December 31, 2000,
we incurred approximately $166,000 in expenses related to this transaction.

<PAGE>

Net cash provided by financing activities was $3.6 million in 2000,
principally representing proceeds from stock option exercises and the
employee stock purchase plan, offset in part by payments on long-term
obligations to Broadvision. Net cash provided by financing activities was
$153.4 million for 1999, primarily resulting from the net proceeds from our
initial and follow-on public offerings, which generated $153.3 million.

We believe that with our existing financial resources and commercial credit
facilities together with cash generated by our operations, will be able to
meet our cash requirements for at least the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES, which supercedes SFAS No. 125. SFAS No. 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
The Company does not expect the adoption of SFAS No. 140 to have a material
impact on the results of its consolidated financial position or results of
operations.

In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. As amended in June 1999 by SFAS No. 137,
the statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES
which is a significant amendment to SFAS No. 133. SFAS No. 133 and its
amendments establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. The Company does not expect the adoption of these statements to
have a material impact on its consolidated financial position or results of
operations.

       Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. dollars. However, we
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. The impact of fluctuations in the relative
value of other currencies was not material for each of the three years ended
December 31, 2000. We do not use derivative financial instruments for
investment purposes and only invest in financial investments that meet high
credit quality standards, as specified in our investment policy guidelines;
the policy also limits the amount of credit exposure to any one issue,
issuer, and type of instrument.

<PAGE>


               Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                           ART TECHNOLOGY GROUP, INC

                   Report of Independent Public Accountants

To the Stockholders and Board of Directors of
Art Technology Group, Inc.

We have audited the accompanying consolidated balance sheets of Art
Technology Group, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 2000 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Art
Technology Group, Inc. and subsidiaries as of December 31, 1999 and 2000, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.

                                                    /s/ Arthur Andersen LLP

Boston, Massachusetts
January 24, 2001



<PAGE>


Art Technology Group, Inc. Consolidated Balance Sheets
(In thousands, except share and per share information)

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                   -------------
                                                                   1999     2000
                                                                   ----     ----
<S>                                                            <C>      <C>
                                     ASSETS
Current Assets:
   Cash and cash equivalents.................................. $124,711  $53,255
   Marketable securities......................................    5,137   73,218
   Accounts receivable, net of reserves of approximately
      $460 and $2,655 at December 31, 1999 and 2000,
      respectively............................................   12,539   52,440

   Unbilled services..........................................      782    1,273
   Prepaid expenses and other current assets..................    1,908    4,222
   Deferred tax asset.........................................        -    3,556
                                                               --------  -------
      Total current assets....................................  145,077  187,964
                                                               --------  -------
Property and Equipment, Net...................................    5,465   23,492
Long-Term Marketable Securities...............................   19,394   17,734
Other Assets..................................................    7,799   13,246
Deferred Tax Asset............................................        -   17,079
                                                               --------  -------
                                                               $177,735 $259,515
                                                               ========  =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Current maturities of long-term obligations................ $  3,000 $  2,000
   Accounts payable...........................................   11,285   11,375
   Accrued expenses...........................................    4,728   29,402
   Deferred revenue...........................................    8,337   22,765
                                                               --------  -------
      Total current liabilities...............................   27,350   65,542
                                                               --------  -------
Long-Term Obligations, Less Current Maturities................    4,000    2,000
                                                               --------  -------
Commitments and Contingencies (Note 3 and 8)
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--100,000,000 shares and 500,000,000
         shares at December 31, 1999 and 2000,
         respectively
      Issued and outstanding--65,551,024 shares
         and 67,894,357 shares at December 31, 1999 and 2000,
         respectively.........................................      656      679
   Additional paid-in capital.................................  178,218  209,338
   Deferred compensation......................................   (3,628)  (3,670)
   Accumulated deficit........................................  (28,861) (14,374)
                                                               --------  -------
        Total stockholders' equity............................  146,385  191,973
                                                               --------  -------
                                                               $177,735 $259,515
                                                               ========  =======

</TABLE>

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


<PAGE>


Art Technology Group, Inc. Consolidated Statements of Operations
(In thousands, except per share information)

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                           -------------------------
                                                            1998      1999      2000
                                                            ----      ----      ----
<S>                                                       <C>       <C>       <C>
Revenues:
   Product license....................................... $ 4,059   $18,590   $121,525
   Services..............................................   8,078    13,487     41,817
                                                          -------   -------   --------
      Total revenues.....................................  12,137    32,077    163,342
                                                          -------   -------   --------
Cost of Revenues:
   Product license.......................................      30     8,160      3,426
   Services..............................................   5,020    10,232     34,739
                                                          -------   -------   --------
      Total cost of revenues.............................   5,050    18,392     38,165
                                                          -------   -------   --------
      Gross profit.......................................   7,087    13,685    125,177
                                                          -------   -------   --------
Operating Expenses:
   Research and development..............................   3,355     6,343     18,966
   Sales and marketing...................................   4,074    15,921     73,261
   General and administrative............................   2,291     5,323     22,791
   Stock-based compensation..............................     107     1,127      1,273
                                                          -------   -------   --------
      Total operating expenses...........................   9,827    28,714    116,291
                                                          -------   -------   --------
      Income (loss) from operations......................  (2,740)  (15,029)     8,886
Interest Income..........................................      54     2,018      8,979
Interest Expense.........................................    (165)     (121)        --
                                                          -------   -------   --------
      Income (loss) before provision for income taxes....  (2,851)  (13,132)    17,865

Provision for Income Taxes...............................      --        --      3,378
                                                          -------   -------   --------
      Net income (loss)..................................  (2,851)  (13,132)    14,487
Accretion of Dividends, Discount and Offering Costs on
   Preferred Stock.......................................  (1,594)   (4,395)        --
                                                          -------   -------   --------

      Net income (loss) available for common
          stockholders................................... $(4,445) $(17,527)   $14,487
                                                          =======   =======   ========
Net Income (Loss) Per Share:
   Basic................................................. $ (0.25)   $(0.45)      $.22
                                                          =======   =======   ========
   Diluted............................................... $ (0.25)   $(0.45)      $.20
                                                          =======   =======   ========
Weighted Average Common Shares Outstanding:
   Basic.................................................  17,934    38,777     66,932
                                                          =======   =======   ========
   Diluted...............................................  17,934    38,777     73,138
                                                          =======   =======   ========

</TABLE>

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


<PAGE>



ART TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                       SERIES A&C
                                                        CONVERTIBLE
                                                      PREFERRED STOCK      COMMON STOCK
                                                     -----------------   ----------------
                                                     NUMBER                          $0.01   ADDITIONAL
                                                       OF     CARRYING    NUMBER      PAR     PAID-IN      DEFERRED
                                                     SHARES    VALUE     OF SHARES   VALUE    CAPITAL    COMPENSATION
                                                     ------   --------   ---------   -----   ----------  ------------
<S>                                                <C>         <C>       <C>         <C>     <C>         <C>

Balance, December 31, 1997......................   2,509,875   $2,461    17,813,400  $178        $191        $--
Sale of Series C convertible preferred stock....     246,914      400            --    --          --         --
Issuance costs related to sale of Series D
   redeemable convertible preferred stock.......          --       --            --    --          --         --
Accretion of Series B and Series D redeemable
   convertible preferred stock to redemption
   value........................................          --       --            --    --          --         --
Exercise of stock options.......................          --       --       442,710     5          68         --
Deferred compensation related to stock
   option grants................................          --       --            --    --       1,799     (1,799)
Amortization of deferred compensation...........          --       --            --    --          --        107
Warrants issued in connection with the sale
   of Series D redeemable convertible
   preferred stock..............................          --       --            --    --       2,775         --
Issuance of Series B redeemable convertible
   preferred stock warrants.....................          --       --            --    --       1,053         --
Grants of options to consultants (Note 6(b))....          --       --            --    --           4         --
Issuance of warrants (Note 3(d))................          --       --            --    --          58         --
Net loss........................................          --       --            --    --          --         --
                                                   ----------  -------  -----------  ----    --------    --------
Balance, December 31, 1998......................   2,756,789    2,861    18,256,110   183       5,948     (1,692)
Accretion of Series B and Series D
   redeemable convertible preferred stock
   redemption value.............................          --       --            --    --          --         --
Exercise of stock options.......................          --       --     1,956,820    20         815         --
Exercise of warrant.............................          --       --       314,476     3          (3)        --
Deferred compensation related to stock
   option grants................................          --       --            --    --       3,063     (3,063)
Amortization of deferred compensation...........          --       --            --    --          --      1,127
Conversion of preferred stock into
   common stock.................................  (2,756,789)  (2,861)   31,419,278   314      13,436         --
Common stock issued to the holders of
   Series C convertible preferred stock and
   Series D redeemable convertible preferred
   stock in lieu of special payments (Note 5)...          --       --       242,500     2       1,817         --
Initial and follow-on public offerings of
   common stock.................................          --       --    13,361,840   134     153,142         --
Net loss........................................          --       --            --    --          --         --
                                                   ----------  -------  -----------  ----    --------    --------
Balance, December 31, 1999......................          --       --    65,551,024   656     178,218     (3,628)
Exercise of stock options of $23,057 related to
   the income tax benefit of disqualifying
   dispositions.................................          --       --     2,164,234    21      27,705         --
Issuance of common stock in connection with
   the employee stock purchase plan ............          --       --       179,099     2       1,881         --
Options issued in connection with the acquisition
   of Toronto Technology Group, Inc.............          --       --            --    --       2,238     (2,019)
Amortization of deferred compensation ..........          --       --            --    --          --      1,273
Reversal of deferred compensation ..............          --       --            --    --        (704)       704
Net income .....................................          --       --            --    --          --         --
                                                   ----------  -------  -----------  ----    --------    --------
Balance, December 31, 2000 .....................          --      $--    67,894,357  $679    $209,338    $(3,670)
                                                   ==========  =======  ===========  ====    ========    ========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                                                    STOCKHOLDERS'
                                                    ACCUMULATED    EQUITY
                                                    DEFICIT       (DEFICIT)
                                                    ------------  ---------
<S>                                                 <C>           <C>

Balance, December 31, 1997......................     $(6,890)      $(4,060)
Sale of Series C convertible preferred stock....          --           400
Issuance costs related to sale of Series D
   redeemable convertible preferred stock.......        (106)         (106)
Accretion of Series B and Series D redeemable
   convertible preferred stock to redemption
   value........................................        (434)         (434)
Exercise of stock options.......................          --            73
Deferred compensation related to stock
   option grants................................          --            --
Amortization of deferred compensation...........          --           107
Warrants issued in connection with the sale
   of Series D redeemable convertible
   preferred stock..............................          --         2,775
Issuance of Series B redeemable convertible
   preferred stock warrants.....................      (1,053)           --
Grants of options to consultants (Note 6(b))....          --             4
Issuance of warrants (Note 3(d))................          --            58
Net loss........................................      (2,851)       (2,851)
                                                    ---------    ---------
Balance, December 31, 1998......................     (11,334)       (4,034)
Accretion of Series B and Series D
   redeemable convertible preferred stock
   redemption value.............................      (2,576)       (2,576)
Exercise of stock options.......................          --           835
Exercise of warrant.............................          --            --
Deferred compensation related to stock
   option grants................................          --            --
Amortization of deferred compensation...........          --         1,127
Conversion of preferred stock into
   common stock.................................          --        10,889
Common stock issued to the holders of
   Series C convertible preferred stock and
   Series D redeemable convertible preferred
   stock in lieu of special payments (Note 5)...      (1,819)           --
Initial and follow-on public offerings of
   common stock.................................          --       153,276
Net loss........................................     (13,132)      (13,132)
                                                    ---------    ---------
Balance, December 31, 1999......................     (28,861)      146,385
Exercise of stock options, of $23,057 related to
   the income tax benefit of disqualifying
   dispositions.................................          --        27,726
Issuance of common stock in connection with
   the employee stock purchase plan ............          --         1,883
Options issued in connection with the acquisition
   of Toronto Technology Group, Inc.............          --           219
Amortization of deferred compensation ..........          --         1,273
Reversal of deferred compensation ..............          --            --
Net income .....................................      14,487        14,487
                                                    ---------    ---------
Balance, December 31, 2000 .....................    $(14,374)     $191,973
                                                    =========    =========
</TABLE>

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

<PAGE>

Art Technology Group, Inc. Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                 --------------------------
                                                 1998        1999      2000
                                                 ----        ----      ----
<S>                                            <C>        <C>         <C>
Cash Flows from Operating Activities:
   Net income (loss).........................  $(2,851)   $(13,132)   $14,487
   Adjustments to reconcile net
      income (loss) to net cash (used
      in) provided by operating
      activities--
      Stock-based compensation..............       111       1,127      1,273
      Noncash interest expense
        related to issuance of
        warrants.............................       18          40         --
      Depreciation and amortization..........      347         836      3,629
      Tax benefit from the exercise of stock
        options..............................       --          --     23,057
      Loss on disposal of fixed assets, net..       --         120         27
      Changes in operating assets and
        liabilities--
        Accounts receivable, net.............   (1,575)    (10,221)  (39,901)
        Unbilled services....................      (93)       (491)     (491)
        Prepaid expenses and other
           current assets....................     (112)     (1,795)   (2,314)
        Deferred tax assets..................       --          --   (20,635)
        Accounts payable.....................     (128)     10,564        90
        Accrued expenses.....................      827       3,508    24,674
        Deferred revenue.....................      515       7,459    14,428
                                               --------    --------  --------
           Net cash (used in) provided by
              operating activities...........   (2,941)     (1,985)   18,324
                                               --------    --------  --------
Cash Flows from Investing Activities:
   Purchases of marketable securities,
       net...................................       --     (24,531)  (66,421)
   Purchases of property and equipment.......     (623)     (5,579)  (21,683)
   Acquisition of Petronio Technology
      Group, Inc.............................       --          --      (600)
   Acquisition of The Toronto
      Technology Group, Inc..................       --          --    (5,191)
   (Increase) decrease in other assets.......      (44)       (690)      563
                                               --------    --------  --------
          Net cash used in investing
          activities.........................     (667)    (30,800)  (93,332)
                                               --------    --------  --------
Cash Flows from Financing Activities:
   Proceeds from exercise of stock
      options................................       73         835     4,669
   Proceeds from employee stock
      purchase plan..........................       --          --     1,883
   Payments on long term obligations.........       --          --    (3,000)
   Net proceeds from sale of Series C
      convertible preferred stock............      400          --        --
   Net proceeds from sales of
      Series D redeemable convertible
      preferred stock........................    7,394          --        --
   Net proceeds from initial and
      follow-on public offerings of
      common stock...........................       --     153,276        --
   Proceeds from line of credit..............    1,496          --        --
   Payment on line of credit.................   (1,800)         --        --
   Payments on term loan to a bank...........     (167)       (319)       --
   Proceeds from equipment line of
       credit................................      200          --        --
   Payments on capital lease
      obligations............................      (82)       (189)       --
   Payments on equipment line of
      credit.................................       --        (200)       --
                                               --------    --------  --------
           Net cash provided by
           financing activities..............    7,514     153,403     3,552
                                               --------    --------  --------
Net Increase (Decrease) in Cash and
   Cash Equivalents..........................    3,906     120,618   (71,456)
Cash and Cash Equivalents, Beginning
   of Period.................................      187       4,093   124,711
                                               --------    --------  --------
Cash and Cash Equivalents, End of
   Period....................................   $4,093    $124,711   $53,255
                                               ========    ========  ========
Supplemental Disclosure of Cash Flow
   Information:
   Cash paid during the period for
      interest...............................     $143         $87       $--
                                               ========    ========  ========
   Cash paid during the period for
      income taxes...........................      $--         $--      $175
                                               ========    ========  ========

Supplemental Disclosure of Noncash
   Investing and Financing Activities:
   Accretion of dividends, discounts
      and special payments on
      Series B, Series C, and
      Series D convertible preferred
      stock..................................     $434      $4,395       $--
                                               ========    ========  ========
   Value ascribed to Series B and
      Series D redeemable convertible
      preferred stock warrants...............   $3,828         $--       $--
                                               ========    ========  ========
   Equipment acquired under capital
      leases.................................      $87         $--       $--
                                               ========    ========  ========
   Original issue discount related to
      warrants issued to a bank..............      $58         $--       $--
                                               ========    ========  ========
   Conversion of preferred stock into
      common stock...........................      $--     $13,750       $--
                                               ========    ========  ========
   Value ascribed to options issued
      in connection with the
      acquisition of The Toronto Technology
      Group Inc..............................      $--         $--    $2,238
                                               ========    ========  ========
   Income tax effect of disqualifying
      dispositions...........................      $--         $--   $23,057
                                               ========    ========  ========
In connection with the acquisition of
   The Toronto Technology Group Inc.,
   the following non-cash transaction
   occurred:
   Fair value of tangible assets acquired....      $--         $--      $699
   Intangible assets acquired................       --          --     5,124
   Liabilities assumed.......................       --          --      (632)
                                               --------    --------  --------
   Cash paid for acquisition
      including acquisition costs............      $--         $--    $5,191
                                               ========    ========  ========

</TABLE>

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


<PAGE>


Art Technology Group, Inc. Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Art Technology Group, Inc. (ATG or the Company) is a Delaware company which
was incorporated on December 31, 1991. ATG offers an integrated suite of
Internet customer relationship management and electronic commerce software
applications, as well as related application development, integration and
support services.

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

     (a) Principles of Consolidation

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

     (b) Use of Estimates

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

     (c) Public Offerings of Common Stock

         On July 26, 1999, ATG closed its initial public offering of 10,000,000
         shares of common stock at a public offering price of $6 per share. The
         net proceeds to ATG from the offering were approximately $54,302,000.
         On July 30, 1999, in connection with the exercise of the underwriters'
         over-allotment option, ATG issued an additional 336,000 shares of
         common stock at the initial public offering price of $6 per share. Net
         proceeds to ATG from the exercise of the over-allotment option were
         approximately $1,875,000. In connection with ATG's initial public
         offering in July 1999, all shares of preferred stock were converted
         into 31,419,278 shares of common stock.

         On November 10, 1999, ATG closed its follow-on public offering of
         9,000,000 shares of common stock, of which 2,850,000 shares were sold
         by the Company at a public offering price of $33.75. The net proceeds
         to ATG from the offering were approximately $91,428,000. On November
         22, 1999, in connection with the exercise of the underwriters'
         over-allotment option, ATG issued an additional 175,840 shares of
         common stock at the public offering price of $33.75 per share. Net
         proceeds to ATG from the exercise of the over-allotment option were
         approximately $5,671,000.

     (d) Revenue Recognition

         ATG recognizes product license revenue from licensing the rights to
         use its software to end-users. ATG also generates service revenues
         from integrating its software with its customers' operating
         environments, the sale of maintenance services and the sale of certain
         other consulting and development services. ATG generally has separate
         agreements with its customers, which

<PAGE>



         govern the terms and conditions of its software license, consulting
         and support and maintenance services. These separate agreements, along
         with ATG's price list and business practices, provide the basis for
         establishing vendor-specific objective evidence of fair value. This
         allows ATG to appropriately allocate fair value among the multiple
         elements in an arrangement.

         ATG recognizes revenue in accordance with Statement of Position (SOP)
         No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, MODIFICATION OF
         SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
         TRANSACTIONS. Revenues from software product license agreements are
         recognized upon execution of a license agreement and delivery of the
         software, provided that the fee is fixed or determinable and deemed
         collectible by management. If conditions for acceptance are required
         subsequent to delivery, revenues are recognized upon customer
         acceptance if such acceptance is not deemed to be perfunctory. In
         multiple element arrangements, ATG uses the residual value method in
         accordance with SOP 97-2 and SOP 98-9. Revenues from software
         maintenance agreements are recognized ratably over the term of the
         maintenance period, which is typically one year. ATG enters into
         reseller arrangements that typically provide for sublicense fees
         payable to ATG based upon a percentage of ATG's list price. Revenues
         are recognized under reseller agreements as earned, which is generally
         ratably over the life of the reseller agreement, for guaranteed
         minimum royalties or based upon actual sales by the resellers. ATG does
         not grant its resellers the right of return or price protection.
         Revenues from professional service arrangements are recognized on
         either a time-and-materials or percentage-of-completion basis as the
         services are performed, provided that amounts due from customers are
         fixed or determinable and deemed collectible by management. Amounts
         collected or billed prior to satisfying the above revenue recognition
         criteria are reflected as deferred revenue. Unbilled services
         represent service revenues that have been earned by ATG in advance of
         billings.

     (e) Net Income (Loss) Per Share

         Net income (loss) per share is computed under Statement of Financial
         Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Basic net
         income (loss) per share is computed by dividing net income (loss)
         available for common stockholders by the weighted average number of
         shares of common stock outstanding during the period. Diluted net
         income (loss) per share is computed by dividing net income (loss)
         available for common stockholders by the weighted average number of
         shares of common stock outstanding, including potential common shares
         from exercise of stock options and warrants using the treasury stock
         method, if dilutive. The following table sets forth basic and diluted
         net income (loss) per share computational data for the years ended
         December 31, 1998, 1999 and 2000 (in thousands, except per share
         amounts):


<PAGE>



<TABLE>
<CAPTION>
                                                           1998        1999      2000
                                                           ----        ----      ----
<S>                                                      <C>        <C>         <C>
Net income (loss) available
   for common stockholders............................   $(4,445)   $(17,527)   $14,487
                                                         ========== =========   =======
Weighted average common shares outstanding used
   in computing basic net income (loss) per share.....    17,934      38,777     66,932
Weighted average common equivalent shares outstanding:
   Employee common stock options(1)(2)................        --          --      6,206
                                                         ---------- ----------  -------
Total weighted average common and common equivalent
   shares outstanding used in computing diluted net
   income (loss) per share............................    17,934      38,777     73,138
                                                         ========== =========   =======
Basic net income (loss) per share.....................    $(0.25)     $(0.45)     $0.22
                                                         ========== =========   =======
Diluted net income (loss) per share...................    $(0.25)     $(0.45)     $0.20
                                                         ========== =========   =======
</TABLE>

     (1) Options and warrants to purchase a total of 11,366,000 and 8,348,000
         common shares have been excluded from the computation of diluted
         weighted average shares outstanding for the years ended December 31,
         1998 and 1999, as the effect of their inclusion would have been
         anti-dilutive.

     (2) Options to purchase a total of 3,902,173 weighted shares of common
         stock outstanding for the year ended December 31, 2000 were excluded
         from the calculation of diluted net income per share because the
         exercise prices of those options exceeded the average market price of
         common stock during the periods, as the effect of their inclusion
         would have been anti-dilutive.

(f)  Cash, Cash Equivalents and Marketable Securities

     ATG accounts for investments under SFAS No. 115, ACCOUNTING FOR CERTAIN
     INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, investments
     for which ATG has the positive intent and the ability to hold to maturity,
     consisting of cash equivalents and marketable securities, are reported at
     amortized cost, which approximates fair market value. Cash equivalents are
     highly liquid investments with original maturities of less than 90 days.
     Marketable securities are investment grade securities with original
     maturities of greater than 90 days. At December 31, 1999 and 2000, all of
     ATG's marketable securities were held in commercial paper and corporate
     bonds and were classified as held-to-maturity. The average maturity of
     ATG's marketable securities is approximately 13.6 months and 11.4 months at
     December 31, 1999 and 2000, respectively. At December 31, 1999 and 2000,
     the difference between the amortized cost and market value of ATG's
     marketable securities was approximately $24,000 and $181,000, respectively.
     At December 31, 1999 and 2000, ATG's cash, cash equivalents and marketable
     securities consisted of the following:


<PAGE>



<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  ------------
                                                                1999     2000
                                                                ----     ----
                                                                (IN THOUSANDS)
<S>                                                             <C>         <C>
Cash and cash equivalents--
   Cash.......................................................  $    884    $ 4,880
   Money market accounts.....................................    123,827     35,314
   Corporate securities.......................................        --     13,061
                                                                --------    -------
      Total cash and cash equivalents.........................  $124,711    $53,255
                                                                ========    =======
Marketable securities--
   Corporate securities.......................................   $24,531    $90,952
                                                                --------    -------
      Total marketable securities.............................   $24,531    $90,952
                                                                ========    =======
</TABLE>

(g)  Property and Equipment

     Property and equipment are stated at cost, net of accumulated depreciation
     and amortization. ATG provides for depreciation and amortization using the
     straight-line method and it charges to operations the amounts estimated to
     allocate the cost of the assets over their estimated useful lives.

     Property and equipment at December 31, 1999 and 2000 consisted of the
     following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             --------------
                                                ESTIMATED
ASSET CLASSIFICATION                           USEFUL LIFE   1999       2000
--------------------                           -----------   ----       ----
                                                             (IN THOUSANDS)
<S>                                         <C>              <C>     <C>

Computer equipment..........................     3 years     $3,577  $ 9,786
Leasehold improvements......................    Lesser of
                                              useful life or
                                               life of lease  1,721   11,990
Furniture and fixtures......................     7 years      1,321    4,496
Computer software...........................     3 years        530    2,011
                                                            -------  -------
                                                              7,149   28,283
Less--Accumulated depreciation
    and amortization........................                  1,684    4,791
                                                            -------  -------
                                                             $5,465  $23,492
                                                            =======  =======

</TABLE>

     Depreciation expense included in the accompanying statements of operations
     was approximately $347,000, $836,000 and $3,768,000 for the years ended
     December 31, 1998, 1999 and 2000, respectively.

(h)  Research and Development Expenses for Software Products

     ATG has evaluated the establishment of technological feasibility of its
     products in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF
     COMPUTER SOFTWARE TO BE SOLD, LEASED, OR

<PAGE>



     OTHERWISE MARKETED. ATG sells products in a market that is subject to rapid
     technological change, new product development and changing customer needs;
     accordingly, ATG has concluded that technological feasibility is not
     established until the development stage of the product is nearly complete.
     ATG defines technological feasibility as the completion of a working model.
     The time period during which costs could be capitalized, from the point of
     reaching technological feasibility until the time of general product
     release, is very short and, consequently, the amounts that could be
     capitalized are not material to ATG's financial position or results of
     operations. Therefore, ATG has charged all such costs to research and
     development in the period incurred.

(i)  Income Taxes

     ATG accounts for income taxes in accordance with the provisions of SFAS No.
     109, ACCOUNTING FOR INCOME TAXES. This statement requires ATG to recognize
     a current tax asset or liability for current taxes payable or refundable
     and to record a deferred tax asset or liability for the estimated future
     tax effects of temporary differences and carryforwards to the extent that
     they are realizable. A deferred tax provision or benefit results from the
     net change in deferred tax assets and liabilities during the year. A
     deferred tax valuation allowance is required if it is more likely than not
     that all or a portion of the recorded deferred tax assets will not be
     realized (see Note 4).

(j)  Stock-Based Compensation

     SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
     measurement of the fair value of stock options or warrants to be included
     in the statement of operations or disclosed in the notes to financial
     statements. ATG has determined that it will continue to account for
     stock-based compensation for employees under the Accounting Principles
     Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and elect
     the disclosure-only alternative under SFAS No. 123 (see Note 6(b)).

(k)  Comprehensive Income (Loss)

     ATG's comprehensive income (loss) is equal to its reported consolidated net
     income (loss) for all periods presented.

(l)  Fair Value of Financial Instruments

     Financial instruments consist mainly of cash and cash equivalents,
     marketable securities, accounts receivable, accounts payable and long-term
     obligations. The carrying amounts of these instruments approximate their
     fair value.

(m)  Concentrations of Credit Risk

     SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
     OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF
     CREDIT RISK, requires disclosure of any significant off-balance-sheet and
     credit risk concentrations. ATG has no significant off-balance-sheet
     concentrations such as foreign exchange contracts, option contracts or
     other foreign hedging arrangements. To reduce its credit risk, the Company
     routinely assesses the financial strength of its customers. ATG maintains
     an allowance for potential credit losses but historically has not
     experienced any significant losses related to individual customers or
     groups of customers in any particular industry or geographic area. ATG
     places its cash, cash equivalents and marketable securities in several
     accredited financial institutions. ATG has not experienced any material
     losses to date.


<PAGE>




     For the years ended December 31, 1999 and 2000, no customers accounted for
     more than 10% of the Company's total revenues. For the year ended
     December 31, 1998, three customers each accounted for 17%, 10% and 10% of
     the Company's total revenues.

     As of December 31, 2000, no customers accounted for greater than 10% of
     accounts receivable. As of December 31, 1999, one customer accounted for
     12% of accounts receivable.

(n)  Long-Lived Assets

     The Company assesses the realizeability of intangible assets in
     accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
     LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under
     SFAS No. 121, the Company is required to assess the valuation of its
     long-lived assets, including intangible assets, based on the estimated
     cash flows to be generated by such assets. The Company believes that no
     material impairment of long-lived assets exist at December 31, 2000.

(o)  Foreign Currency Translation

     The financial statements of the Company's foreign subsidiaries are
     translated in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION.
     The functional currency of the Company's foreign subsidiaries is the
     U.S. dollar. Accordingly, all assets and liabilities of the foreign
     subsidiaries are translated using the exchange rate at the balance sheet
     date, except for property and equipment, other assets and stockholders'
     equity, which are translated at historical rates. Revenues and expenses
     are translated at historical rates. Translation gains and losses arising
     from the translations, were not material to the financial statements taken
     as a whole for the year ended December 31, 2000.

(p)  Recent Accounting Pronouncements

     In September 2000, the Financial Accounting Standards Board (FASB) issued
     SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
     AND EXTINGUISHMENT OF LIABILITIES, which supercedes SFAS No. 125. SFAS No.
     140 provides accounting and reporting standards for transfers and servicing
     of financial assets and extinguishments of liabilities. SFAS No. 140 is
     effective for transfers and servicing of financial assets and
     extinguishments of liabilities occurring after March 31, 2001 and for
     recognition and reclassification of collateral and for disclosures relating
     to securitization transactions and collateral for fiscal years ending after
     December 15, 2000. The Company does not expect the adoption of SFAS No. 140
     to have a material impact on the results of its consolidated financial
     position or results of operations.

     In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
     INSTRUMENTS AND HEDGING ACTIVITIES. As amended in June 1999 by SFAS
     No. 137, the statement is effective for all fiscal quarters of all
     fiscal years beginning after June 15, 2000. In June 2000, the FASB
     issued SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
     CERTAIN HEDGING ACTIVITIES which is a significant amendment to SFAS
     No. 133. SFAS No. 133 and its amendments establish accounting and
     reporting standards for derivative instruments, including certain
     derivative instruments embedded in other contracts (collectively referred
     to as derivatives) and for hedging activities. The Company does not expect
     the adoption of these statements to have a material impact on its
     consolidated financial position or results of operations.


<PAGE>


(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

     SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision-maker, or decision-making group, in making decisions how to allocate
resources and assess performance. The Company's chief operating decision-makers,
as defined under SFAS No. 131, is its executive management team. To date, the
Company has viewed its operations and manages its business as principally one
segment with two product offerings: software licenses and services. The Company
evaluates these product offerings based on their respective gross margins. As a
result, the financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segment.

     Revenues from sources outside of the United States were approximately
$850,000, $2,245,000, and $37,569,000 in 1998, 1999 and 2000, respectively.
ATG's revenues from international sources were primarily generated from
customers located in Europe and Asia/Pacific. All of the ATG's product sales
for the years ended December 31, 1998, 1999 and 2000 were delivered from its
headquarters located in the United States.

     The following table represents the percentage of total revenues by
geographic region from customers for 1998,1999 and 2000:

<TABLE>
<CAPTION>
                                                             YEARS ENDED
                                                             DECEMBER 31,
                                                             ------------
                                                         1998    1999     2000
                                                         ----    ----     ----
<S>                                                      <C>     <C>    <C>
United States.....................................        93%     93%    77%
Europe, Middle East and Africa....................         4       6     19
Asia Pacific......................................        --       1      2
Other.............................................         3      --      2
                                                        ----    ----   ----
                                                         100%    100%   100%
                                                        ====    ====   ====
</TABLE>

(3) LONG-TERM OBLIGATIONS

(a)  Credit Facility

     ATG has a working capital line-of-credit agreement with a bank, which
     provides for borrowings of up to the lesser of $12,500,000 or 80% of
     eligible accounts receivable. The line of credit bears interest at the
     bank's prime rate (9.5% at December 31, 2000) and expires in 2001. As of
     December 31, 2000 approximately $5,077,000 was available for future
     borrowings. The working capital line of credit is secured by all of ATG's
     tangible and intangible intellectual and personal property and is subject
     to financial covenants and restrictions, including minimum liquidity
     requirements and a prohibition on the payment of dividends. As of December
     31, 2000, ATG was in compliance with all covenants.


<PAGE>



     As of December 31, 2000, there were no amounts outstanding under the
     working capital line of credit; however, ATG had commitments totaling
     approximately $7,423,000 in the form of outstanding standby letters of
     credit in favor of ATG's various landlords to secure obligations under
     ATG's facility leases.

(b)  Non-Recourse Receivables Purchase Agreement with a Bank

     In September 2000, ATG entered into a Non-Recourse Receivables Purchase
     Agreement with a bank (the Receivables Agreement), whereby ATG can sell up
     to $10.0 million of its accounts receivable to the bank. Under the terms of
     the Receivables Agreement, ATG can sell certain accounts receivable,
     subject to acceptance by the bank, on a non-recourse basis. Upon purchase,
     the bank assumes the risk of collection for the acquired accounts
     receivable except in the event that ATG violates the terms of the
     receivables purchase agreement or the customer asserts a discount,
     allowance, warranty claim or right of return. The accounts receivable are
     sold at a discount to reflect a minimum of 45 days and a maximum of 135
     days at the bank's prime rate (9.5% at December 31, 2000) plus 1%. This
     agreement will expire in September 2001. In September 2000, ATG sold $9.6
     million of accounts receivable to the bank under the Receivables
     Agreement. ATG has determined that, in accordance with SFAS No. 125
     ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL  ASSETS AND
     EXTINGUISHMENTS OF LIABILITIES and SFAS No. 140, the  transaction is
     accounted for as a sale of accounts receivable and accordingly has reduced
     accounts receivable by the amount of the accounts receivable which have
     been sold in the accompanying consolidated balance sheets. As
     of December 31, 2000, $3,906,000 of the sold receivables were
     uncollected. For the year ended December 31, 2000, ATG incurred
     approximately $166,000 in expenses related to this transaction.

(c)  Equipment Line of Credit

     On July 2, 1998, ATG entered into an equipment line of credit with a bank.
     Under the equipment line of credit, ATG could borrow up to $200,000 for
     capital expenditures. During 1998, ATG borrowed $199,915, all of which
     was outstanding as of December 31, 1998. Borrowings bore interest at the
     bank's prime rate plus 1.25%. In July 1999, in connection with ATG's
     initial public offering, ATG repaid all outstanding amounts under the line
     of credit.

     In April 1999, ATG entered into an additional equipment line of credit with
     the same bank. Under the equipment line of credit, ATG may borrow up to
     $200,000 for capital expenditure purchases. Borrowings bear interest at the
     bank's prime rate (9.5% at December 31, 2000) plus 0.75%. Interest accrues
     and is payable monthly. Principal is due in 30 monthly installments
     following a six-month interest-only period. The equipment line of credit
     expired during the year ended December 31, 2000.

(d)  Term Note Payable to a Bank

     ATG entered into a term note payable with a bank under which ATG could have
     borrowed up to $500,000 based upon certain conditions, as defined.
     Borrowings bore interest at the bank's prime rate plus 1%. During July
     1999, in connection with ATG's initial public offering, all amounts were
     repaid. In connection with


<PAGE>


     the term note payable, ATG issued warrants to purchase 56,296 shares of
     Series C convertible preferred stock to the bank. One warrant provided for
     the purchase of 46,296 shares at an exercise price of $1.62 per share and
     the other warrant provided for the purchase of 10,000 shares at an
     exercise price of $0.01 per share. These warrants vested immediately. ATG
     valued the warrants at $58,000, using the Black-Scholes option pricing
     model and the following assumptions: fair market value of the stock of
     $1.62; risk free interest rate of 4.74%; an expected volatility factor of
     70%; an expected life of four years; and an expected dividend yield of
     zero. The warrants were recorded as a debt discount. For the years ended
     December 31, 1998 and 1999, ATG amortized $18,000 and $40,000,
     respectively. In July 1999, in connection with ATG's accelerated debt
     repayment, ATG amortized the remainder of the debt discount. In connection
     with ATG's initial public offering, the warrants were converted into
     warrants to purchase 342,970 shares of common stock. In July 1999, the
     warrants to purchase 342,970 shares of common stock were exercised through
     a cashless exercise resulting in the net issuance of 314,476 shares of
     common stock.

(e)  BroadVision Settlement

     In connection with a settlement of the patent infringement claim by
     BroadVision, ATG acquired a perpetual, paid-up license for BroadVision's
     patented technology. ATG paid $11,000,000 during the year ended December
     31, 2000 and will pay the remaining $4,000,000 over the next two years in
     quarterly installments of $500,000. At December 31, 1999, these payments
     are included in the accompanying consolidated balance sheet as follows:
     $8,000,000 in accounts payable, $3,000,000 in current maturities of
     long-term obligations and $4,000,000 in long-term obligations. At December
     31, 2000, these payments are included in the accompanying consolidated
     balance sheet as follows: $2,000,000 in current maturities of long-term
     obligations and $2,000,000 in long-term obligations. ATG expensed
     $8,000,000 and $2,333,000 of the settlement as cost of service revenues in
     the years ended December 31, 1999 and 2000, respectively, and is amortizing
     the remainder over its remaining estimated life of two years.

(4) INCOME TAXES

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

                                            Years Ended December 31,
                                         1998         1999         2000
                                       --------     --------     --------
Domestic                                $(2,851)    $(13,132)     $16,651
Foreign                                      -            -         1,214
                                       --------     --------     --------
   Total                                $(2,851)    $(13,132)     $17,865
                                       ========     ========     ========

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

                                            Years Ended December 31,
                                         1998         1999         2000
                                       --------     --------     --------
Federal
 Current                               $     -      $     -        $8,780
 Deferred                                    -            -        (7,385)

State
 Current                                     -            -         1,789
 Deferred                                    -            -        (1,533)

Foreign
 Current                                     -            -         1,727
                                       --------     --------     --------
                                       $     -      $     -        $3,378
                                       ========     ========     ========

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

                                            Years Ended December 31,
                                         1998         1999         2000
                                       --------     --------     --------
Federal tax at statutory rate              34.0%        34.0%        35.0%
State taxes net of federal benefit          6.0          6.0          6.5
Meals and entertainment                     -            -            6.1
Deferred compensation                       -            -            4.9
Other                                       -            -            1.8
Valuation allowance                       (40.0)       (40.0)       (35.4)
                                       --------     --------     --------
                                            -  %         -  %        18.9%
                                       ========     ========     ========

The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets are as follows (in thousands):

                                            December 31,
                                         1999         2000
                                       --------     --------
Deferred tax assets                     $   -        $20,846
Deferred tax liabilities                    -           (211)
                                       --------     --------
                                        $   -        $20,635
                                       ========     ========

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

                                              December 31,
                                           1999         2000
                                         --------     --------
Cummulative temporary differences         $ 4,154      $ 6,882
US Income tax credits                         642          642
Net operating losses                        3,555       14,110
Acquisition related                            -          (999)
Valuation allowance                        (8,351)          -
                                         --------     --------
                                          $    -       $20,635
                                         ========     ========

As of December 31, 2000, ATG had net operating loss carryforwards of
approximately $42.2 million for federal income tax purposes and approximately
$49.6 million for state income tax purposes. Approximately $31.8 million of
the federal and state income tax net operating loss carryforwards relate to
the exercise of incentive and nonqualified stock options which are treated as
compensation deductions for federal and state income tax purposes. ATG also
has available federal tax credit carryforwards of approximately $642,000. If
not utilized, these carryforwards will expire at various dates beginning 2011
and ending 2020. If substantial changes in ATG's ownership should occur, as
defined by Section 382 of the Internal Revenue Code (the Code), there could
be annual limitations on the amount of carryforwards that can be realized in
future periods. ATG has completed several refinancings since its inception
and has incurred ownership changes, as defined under the Code. ATG does not
believe that those changes in ownership will have a material impact on its
ability to use its net operating loss and tax credit carryforwards.

<PAGE>

(5) PREFERRED STOCK

     As of December 31, 1998, ATG's Board of Directors had authorized 10,000,000
shares of preferred stock and had designated 1,300,000, 851,064, 2,000,000 and
2,343,750 shares as Series A convertible preferred stock (Series A Preferred
Stock), Series B redeemable convertible preferred stock (Series B Preferred
Stock), Series C convertible preferred stock (Series C Preferred Stock) and
Series D redeemable convertible preferred stock (Series D Preferred Stock),
respectively. On July 26, 1999, in conjunction with ATG's initial public
offering, all outstanding shares of preferred stock were converted into shares
of common stock. Additionally, all authorized shares were cancelled.

In conjunction with the issuance of the Series B Preferred Stock in December
1996, ATG issued to a holder of Series B Preferred Stock a performance-based
warrant to purchase up to 425,532 shares of Series B Preferred Stock at $7.05
per share. The performance criteria was based upon sales generated by ATG
from the affiliates of the Series B Stockholder. ATG generated negligible
revenues from the affiliates of the Series B Stockholder; therefore, the
warrant was not measured or recorded. As a condition for obtaining the Series
B Stockholder's approval of the terms of the Series D Preferred Stock
financing in 1999, the warrant was canceled and ATG granted to the Series B
Preferred Stockholder a new warrant to purchase 425,532 shares of ATG's
Series B Preferred Stock at a purchase price of $1.385 per share, which was
immediately exercisable and fully vested. The warrant was to expire on the
earlier of: (1) the closing of a public offering of ATG's common stock, as
defined, at a price of at least $10 per share resulting in gross proceeds to
ATG of at least $10,000,000, (2) the closing of a liquidation, merger, sale
of all or substantially all assets of ATG or other similar event, as defined,
or (3) August 18, 2003. ATG has valued this warrant at $1,053,000, using the
Black-Scholes option pricing model and the following assumptions: a fair
market value of $3.20 per share, a risk-free interest rate of 5.0%, an
expected volatility of 70%, an expected life of five years, and an expected
dividend yield of zero. ATG has recorded the value of the warrant in the
accompanying statement of stockholders' equity (deficit) and as a component
of dividends on preferred stock in computing net loss per share available to
common stockholders for the year ended December 31, 1999.

In addition, in connection with the issuance of the Series D Preferred Stock,
ATG issued to the holders of Series D Preferred Stock, warrants to purchase up
to 4,292,650 shares of ATG's common stock at $0.11 per share, adjusted for
certain dilutive events, as defined. The warrants were to vest 5% per quarter
beginning on September 30, 1998 and expire August 18, 2003. ATG valued these
warrants using the Black-Scholes option pricing model and the following
assumptions: a fair market value of $3.20 per share, a risk free interest rate
of 4.74%, an expected volatility of 70%, an expected life of five years and an
expected dividend yield of zero. ATG allocated the consideration received from
the sale of the Series D preferred stock of $7,500,000 between the Series D
preferred stock and


<PAGE>



warrants on the basis of the fair value of the individual component at the
date of issuance and determined that the warrants were valued at $2,775,000.
These warrants were recorded as a discount to the Series D Preferred Stock
and the resulting discount was amortized over the redemption period in
computing net loss per share. For the years ended December 31, 1999 and 1998,
ATG amortized $2,491,000 and $284,000, respectively. The amortization for the
year ended December 31, 1999 included the accelerated amortization in
connection with the conversion of the Series D Preferred Stock in connection
with the initial public offering.

In conjunction with ATG's initial public offering, the warrants to purchase
Series B Preferred Stock and common stock were canceled and the number of shares
of common stock issuable upon conversion of the Series B and D Preferred Stock
were increased to reflect the shares that would have been received upon exercise
of the warrants based upon the initial public offering price.


(6) STOCKHOLDERS' EQUITY

(a)  Stock Splits and Authorized Shares of Common Stock

     ATG's authorized capital stock at December 31, 2000 consists of 10,000,000
     shares of $0.01 par value preferred stock and 500,000,000 shares of $0.01
     par value common stock.

     On February 28, 2000, ATG's Board of Directors approved a 2-for-1 stock
     split of ATG's common stock. The split was effective on March 10, 2000. In
     addition, on May 10, 1999, ATG's Board of Directors approved a 3-for-2
     stock split of ATG's common stock. The stock split was effective on June
     18, 1999. All share and per share amounts of common stock for all periods
     have been retroactively adjusted to reflect the stock splits.

(b)  Stock Plans

     1996 STOCK OPTION PLAN

     In April 1996, the 1996 Stock Option Plan (the 1996 Plan) was approved by
     ATG's Board of Directors and stockholders. The purpose of the 1996 Plan is
     to reward employees, officers and directors, and consultants and advisors
     to ATG who are expected to contribute to the growth and success of ATG. The
     1996 Plan provides for the award of options to purchase shares of ATG's
     common stock.


<PAGE>



     Stock options granted under the 1996 Plan may be either incentive stock
     options or nonqualified stock options.

     The 1996 Plan is administered by the Board of Directors, which has the
     authority to designate participants, determine the number and type of
     options to be granted, the time at which options are exercisable, the
     method of payment and any other terms or conditions of the options. Options
     generally vest annually over a two- to four-year period and expire 10 years
     from the date of grant.

     While the Board determines the prices at which options may be exercised
     under the 1996 Plan, the exercise price of an incentive stock option shall
     be at least 100% (110% for incentive stock options granted to a 10%
     stockholder) of the fair market value of ATG's common stock on the date of
     grant. A total of 19,600,000 shares of common stock have been reserved for
     options to be granted under the 1996 Plan. As of December 31, 2000, there
     are 4,469,000 shares available for future grant under the 1996 Plan.

     Additionally, in May 1999, ATG granted 150,000 options outside ATG's stock
     option plans to an executive of ATG. At December 31, 2000 these options
     have not been exercised.

     1999 OUTSIDE DIRECTOR STOCK OPTION PLAN

     The 1999 Outside Director Stock Option Plan (Director Plan) was adopted by
     ATG's Board of Directors and approved by stockholders in May 1999. Under
     the terms of the Director Plan, nonemployee directors of ATG receive
     nonqualified options to purchase shares of common stock. A total of 300,000
     shares of common stock have been reserved under the Director Plan.

     Under the terms of the Director Plan, each currently active nonemployee
     director received an option to purchase 10,000 shares of common stock on
     the effective date of the Company's initial public offering at the public
     offering price. Individuals who become directors after the initial public
     offering and are not employees of ATG will receive an option to purchase
     10,000 shares of our common stock on the date of initial election to ATG's
     Board of Directors at an exercise price equal to the then current fair
     market value. In addition, each non-employee director will receive an
     option to purchase 5,000 shares of common stock on the date of each annual
     meeting of stockholders commencing in the year 2000 at an exercise price
     per share equal to the closing price of ATG's common stock on the date of
     grant. All options granted under the Director Plan will be fully vested
     upon grant. As of December 31, 2000, there are 215,000 shares available
     for future grant under the Director Plan.


<PAGE>


     1999 EMPLOYEE STOCK PURCHASE PLAN

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

     ATG accounts for the Stock Purchase Plan in accordance with APB No. 25 and,
     accordingly, no compensation cost has been recognized under the Stock
     Purchase Plan. ATG has elected the "disclosure only" alternative under SFAS
     No. 123.

     The following table summarizes ATG's option activity:
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                                     AVERAGE
                                          NUMBER       EXERCISE      EXERCISE
                                        OF SHARES        PRICE         PRICE
                                        ---------    ------------   ---------
                                     (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S>                                     <C>          <C>            <C>
Outstanding, December 31, 1997.......      4,280     $   .07-.25       $.18
   Granted...........................      3,272             .25        .25
   Exercised.........................       (442)        .07-.25        .17
   Canceled..........................     (1,232)        .07-.25        .22
                                        ---------    ------------   ---------
Outstanding, December 31, 1998.......      5,878         .07-.25        .22
   Granted...........................      4,960      1.00-52.50      14.52
   Exercised.........................     (1,957)       .07-5.75        .40
   Canceled..........................       (543)       .07-5.75       1.20
                                        ---------    ------------   ---------
Outstanding, December 31, 1999.......      8,338       .07-52.50       8.65
   Granted...........................      4,917      .06-120.00      66.93
   Exercised.........................     (2,164)      .07-81.56       2.23
   Canceled..........................       (549)     .06-120.00      22.25
                                        ---------    ------------   ---------
Outstanding, December 31, 2000.......     10,542     $.06-120.00     $36.42
                                        =========    ============   =========

Exercisable, December 31, 2000.......      2,297     $.06-120.00     $13.81
                                        =========    ============   =========
Exercisable, December 31, 1999.......      2,200     $ .07-19.03     $ 1.16
                                        =========    ============   =========
Exercisable, December 31, 1998.......      2,488     $ .07-.25       $  .19
                                        =========    ============   =========

</TABLE>


<PAGE>



     The following table summarizes information relating to currently
outstanding and exercisable options as of December 31, 2000:

<TABLE>
<CAPTION>
                  OUTSTANDING                                    EXERCISABLE
-------------------------------------------------------------  ----------------
                                          WEIGHTED
                                          AVERAGE
                                         REMAINING
                                        CONTRACTUAL  WEIGHTED          WEIGHTED
                               NUMBER      LIFE       AVERAGE  NUMBER   AVERAGE
                                 OF     OUTSTANDING  EXERCISE    OF    EXERCISE
RANGE OF EXERCISE PRICES       SHARES     (YEARS)      PRICE   SHARES    PRICE
-----------------------------  ------   -----------  --------  ------  --------
  (IN THOUSANDS EXCEPT PER SHARE INFORMATION)           (IN THOUSANDS EXCEPT
                                                        PER SHARE INFORMATION
<S>                           <C>           <C>       <C>       <C>     <C>
  $.06-$.08                       150        6.0      $   .08     140   $   .08
        .25                     1,655        7.3          .25     758       .25
  1.00-1.33                       606        8.1         1.14     232      1.14
  1.67-2.00                       119        8.2         1.79      33      1.85
  4.00-6.00                     1,996        8.4         4.85     578      4.94
 11.61-13.41                      214        8.7        13.38      62     13.40
 19.03-28.13                      147        8.8        19.19      34     19.03
 28.56-40.88                      868        9.9        33.88      12     32.37
 44.00-65.69                    2,211        9.2        52.07     311     52.03
 67.88-95.00                    2,127        9.5        79.83     135     74.84
101.94-120.00                     449        9.6       118.00       2    101.94
                              --------  -----------   -------   -----   -------
                               10,542        8.8      $ 36.42   2,297   $ 13.81
                              ========  ===========   =======   =====   =======

</TABLE>

     In the year ended December 31, 1998, ATG granted 30,000 nonqualified stock
options exercisable at $0.25 per share, which are fully vested, to consultants
as payment for services performed. ATG recorded an expense for the year ended
December 31, 1998 related to this grant of $4,000. ATG valued the options issued
in exchange for services based upon the Black-Scholes option pricing model and
the following assumptions: a fair market value of $0.81; risk free interest at
4.74%; an expected volatility factor of 70%; an expected life of four years; and
an expected dividend yield of zero. The options expire 10 years from the date of
grant.

     Since the fourth quarter of 1998, ATG has recorded deferred compensation
of approximately $4.9 million, which represents the aggregate difference
between the exercise price and the fair market value of the common stock, as
determined for accounting purposes. The deferred compensation is being
recognized as an expense

<PAGE>




over the vesting period of the underlying stock options. ATG recorded
compensation expense of $107,000, $1,127,000, and $1,013,000 for the years
ended December 31, 1998, 1999, and 2000, respectively, related to these
options.

     ATG has computed the pro forma disclosures required under SFAS No. 123
for options granted during the years ended December 31, 1998, 1999 and 2000.
The fair value of options granted during the years ended December 31, 1998,
1999 and 2000 was approximately $462,000 or $0.07 per share, $53,234,000 or
$10.84 per share and $256,901,000 or $52.64 per share, respectively. These
amounts will be amortized over the underlying option period. The amounts were
computed using the Black-Scholes option pricing model prescribed by SFAS No.
123. The assumptions used and weighted average calculations are as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                     --------------------------------------
                                                       1998           1999         2000
                                                       ----           ----         ----
<S>                                                  <C>           <C>           <C>
Risk-free interest rate............................    5.00%       5.29-6.06%      5.92%
Expected dividend yield............................      --            --           --
Expected lives.....................................  4 years        4 years      4 years
Expected volatility................................      70%            95%         115%
Weighted average remaining contractual life
   of options outstanding..........................    8.40 years   8.90 years   8.80 years
</TABLE>

     Had compensation expense for ATG's stock option plans been determined
consistent with SFAS No. 123, the pro forma net loss available for common
stockholders and pro forma net loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1998         1999       2000
                                                       ----         ----       ----
                                                 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S>                                                  <C>        <C>         <C>
Net income (loss) available for common stockholders--
   As reported....................................   $(4,445)   $(17,527)   $ 14,487
   Pro forma......................................   $(4,755)   $(20,225)   $(13,786)

Basic net income (loss) per share--
   As reported....................................   $ (0.25)   $  (0.45)   $   0.22
   Pro forma......................................   $ (0.27)   $  (0.52)   $  (0.21)

Diluted net income (loss) per share--
   As reported....................................   $ (0.25)   $  (0.45)   $   0.20
   Pro forma......................................   $ (0.27)   $  (0.52)   $  (0.21)
</TABLE>


<PAGE>


(7) ACQUISITIONS

     On June 1, 2000, ATG completed the acquisition of Petronio Technology
Group, a Boston-based provider of educational training and consulting services.
ATG acquired Petronio Technology Group for $1,200,000, consisting of an initial
payment of $600,000 at the closing and two annual contingent payments of
$300,000 each. The acquisition has been accounted for under the purchase method
of accounting and the results of operations for Petronio Technology Group have
been included in ATG's results from the acquisition date. ATG recorded $600,000
in goodwill that is being amortized over two years and the Company is
recognizing the contingent payments as compensation expense ratably over the
two-year vesting period. For the year ended December 31, 2000, ATG recorded
amortization expense of $188,000 and compensation expense of $188,000.

     On July 17, 2000, ATG completed the acquisition of The Toronto
Technology Group, Inc., a privately held 30-person consulting and educational
services company based in Toronto, Canada, for approximately $12.0 million in
cash, options and shares of common stock. The acquisition has been accounted
for under the purchase method of accounting. Upon the closing of the
transaction, ATG paid $5.2 million in cash, issued 19,634 employee stock
options and also issued 56,237 exchangeable shares of ATG's subsidiary Art
Technology Group (Canada), Inc. The exchangeable shares will become
exchangeable for 56,237 shares of ATG's common stock, subject to a three-year
vesting schedule. As of December 31, 2000, no shares are exchangeable. ATG
allocated $2.75 million of the purchase price to the acquired workforce which
is being amortized over five years. The remainder of the purchase price has
been allocated to goodwill and is being amortized ratably over five years.
Additionally, ATG is recording the value of the stock options and
exchangeable shares of $7.5 million as compensation expense over three years.
For the year ended December 31, 2000, ATG recorded compensation expense
relating to the stock options and exchangeable shares of approximately
$1,228,000. Additionally, amortization expense of approximately $482,000 was
recorded based on the intangible assets.

(8)  COMMITMENTS AND CONTINGENCIES

(a)  Leases

     In August 1999, ATG entered into a new facility lease for its corporate
     headquarters that expires in August 2006. Upon occupancy of the new
     facility, ATG has issued the lessor a letter of credit in the amount of
     $1,500,000 as a security deposit. Additionally, ATG has offices,
     primarily for sales and support personnel, in ten domestic locations as
     well as ten foreign countries.

     The approximate future minimum payments of ATG's facility leases and
     certain operating equipment leases as of December 31, 2000 are as
     follows:


<PAGE>

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,                                     OPERATING LEASES
------------------------                                      ----------------
                                                               (in thousands)
<S>                                                           <C>
2001.....................................................           $9,084
2002.....................................................           10,327
2003.....................................................           10,259
2004.....................................................            8,958
2005.....................................................            9,660
Thereafter...............................................           33,266
                                                                 ----------
   Total future minimum lease payments...................          $81,554
                                                                 ==========

</TABLE>


     Rent expense included in the accompanying statements of operations was
     approximately $810,000, $1,752,000, and $6,029,000 for the years ended
     December 31, 1998, 1999, and 2000 respectively.

(9)  EMPLOYEE BENEFIT PLAN

     Effective January 1, 1997, ATG adopted the Art Technology Group 401(k) Plan
(the 401(k) Plan). All employees, as defined, are eligible to participate in the
401(k) Plan. The 401(k) Plan allows eligible employees to make salary-deferred
contributions of up to 15% of their annual compensation, as defined, subject to
certain Internal Revenue Service limitations. ATG may contribute to the 401(k)
Plan at its discretion. No discretionary employer contributions were made to the
Plan for the years ended December 31, 1998 or 1999. For the year ended December
31, 2000, ATG made a discretionary contribution to the Plan of approximately
$888,000.

(10) ACCRUED EXPENSES

     Accrued expenses at December 31, 1999 and 2000 consist of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            ------------------
                                                              1999       2000
                                                            --------   --------
                                                               (IN THOUSANDS)
<S>                                                         <C>        <C>
Payroll and related costs..........................          $3,066    $18,006
Accrued accounts payable...........................             817      1,376
Other..............................................             845     10,020
                                                            --------   --------
                                                             $4,728    $29,402
                                                            ========   ========

</TABLE>



<PAGE>




(11) VALUATION AND QUALIFYING ACCOUNTS

     The following is a rollforward of ATG's allowance for doubtful accounts (in
thousands):

<TABLE>
<CAPTION>
                                           BALANCE AT      ADDITIONS     DEDUCTIONS     BALANCE AT END
                                          BEGINNING OF                                    OF PERIOD
                                            PERIOD
                                          ------------     ---------     ----------     --------------
<S>                                          <C>            <C>            <C>           <C>
Year Ended December 31, 1998........          $ 21           $  265         $ (36)        $  250
                                          ============    ==========     ==========     ==============
Year Ended December 31, 1999........          $250           $  210         $  --         $  460
                                          ============    ==========     ==========     ==============
Year Ended December 31, 2000........          $460           $2,976         $(781)        $2,655
                                          ============    ==========     ==========     ==============
</TABLE>

(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1999 and 2000:


<TABLE>
<CAPTION>
                                        Year Ended December 31, 1999
                                        ----------------------------
                             First          Second         Third         Fourth
                            Quarter        Quarter        Quarter        Quarter
                            -------        -------        -------        -------
<S>                          <C>            <C>            <C>           <C>
Total revenues............   $4,420         $6,233         $8,140        $13,284
Gross profit..............    2,607          3,985          5,532          1,561
Net loss..................     (877)        (1,396)        (1,382)        (9,477)
Net loss per share
             Basic........    (0.06)         (0.08)         (0.10)         (0.15)
           Diluted........    (0.06)         (0.08)         (0.10)         (0.15)

</TABLE>


<TABLE>
<CAPTION>
                                        Year Ended December 31, 2000
                                        ----------------------------
                             First          Second         Third         Fourth
                            Quarter        Quarter        Quarter        Quarter
                            -------        -------        -------        -------
<S>                          <C>            <C>            <C>           <C>
Total revenues............   $21,572         32,629         46,310        62,831
Gross profit..............    15,872         24,867         35,318        49,120
Net income (loss).........      (607)         2,869          5,009         7,216

Net income (loss)
    per share
        Basic.............     (0.01)          0.04           0.07          0.11
      Diluted.............     (0.01)          0.04           0.07          0.10

</TABLE>

<PAGE>



       Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                            AND FINANCIAL DISCLOSURE

None

                                    PART III

           Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                         Item 11. EXECUTIVE COMPENSATION

     Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

             Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All information required by Items 10, 11, 12 and 13 is incorporated herein by
reference to our definitive proxy statement for its annual meeting of
stockholders to be held on May 14, 2001, to be filed with the SEC pursuant to
Regulation 14A.

                                     PART IV

     Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  (1) Financial Statements

The following consolidated financial statements are included in Item 8:
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 1999 and 2000
- Consolidated Statements of Operations for the years ended December 31, 1998,
  1999 and 2000
- Consolidated Statements of Stockholders' Equity (Deficit) for the years
  ended December 31, 1998, 1999 and 2000
- Consolidated Statements of Cash Flows for the years ended December 31, 1998,
  1999 and 2000
- Notes to Consolidated Financial Statements

(a)  (2) Financial Statement Schedule

None

<PAGE>


(a)  (3) EXHIBITS

The following exhibit are included in Item 14(c):


Exhibit
Number   Description
-------  -----------
3.1*     Certificate of Incorporation of the Registrant, as currently in effect.
3.2*     Certificate of Amendment to Certificate of Incorporation of the
         Registrant.
3.4*     Amended and Restated By-Laws of the Registrant.
10.1*    1996 Stock Option Plan of the Registrant, as amended.
10.2*    1999 Outside Director Stock Option Plan of the Registrant.
10.3*    1999 Employee Stock Purchase Plan of the Registrant.
10.4*    Lease between the Registrant and DVPT Limited Partnership, dated
         March 11, 1999.
10.5*    Loan and Security Agreement between the Registrant and Silicon Valley
         Bank, dated November 26, 1997, as amended on March 31, 1998 and
         July 2, 1998.
10.6*    Intellectual Property Security Agreement between the Registrant and
         Silicon Valley Bank, dated November 26, 1997.
10.7*    Registration Rights Agreement betweent the Registrant and certain of
         its stockholders, dated August 18, 1998.
10.8*    Non-Compete Rights Agreement between the Registrant and Jeet Singh,
         dated August 18, 1998.
10.9*    Non-Compete Agreement between the Registrant and Joseph Chung, dated
         August 18, 1998.
10.10*   Fourth Loan Modification Agreement between the Registrant and Silicon
         Valley Bank, dated May 12, 1999
10.11    Registration Rights Agreement between the Registrant and certain of
         its stockholders, dated July 17, 2000.
10.12    Loan and Security Agreement between the Registrant and Silicon
         Valley Bank, dated December 29, 2000.
10.13    Non-Recourse Receivables Purchase Agreement dated September 27, 2000.
21       Schedule of Registrant's Subsidiaries
23       Consent of Independent Public Accountants

------------------
*        Incorporated herein by reference to the Registrant's Registration
         Statement on Form S-1 (File No. 333-78333).
#        Confidential materials omitted and filed separately with the
         Commission.


(b)  REPORTS ON FORM 8-K

The Registrant filed a report on Form 8-K dated March 7, 2000 announcing a
two-for-one stock split of its outstanding shares of common stock.

<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, as of March 27, 2001.

ART TECHNOLOGY GROUP, INC.
(Registrant)


By:    /s/ Jeet Singh
       --------------
       Jeet Singh
       Chief Executive Officer (Principal Executive Officer)



By:    /s/ Ann C. Brady
       ----------------
       Ann C. Brady
       Vice President, Finance and Chief Financial Officer
       (Principal Financial and Accounting Officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities as of March 27, 2001.

            NAME                   TITLE
            ----                   -----


   /s/ Phyllis S. Swersky         Director
   ----------------------
   Phyllis S. Swersky


   /s/ Scott A. Jones             Director
   ------------------
   Scott A. Jones


   /s/ Charles R. Lax             Director
   ------------------
   Charles R. Lax


   /s/ Thomas N. Matlack          Director
   ---------------------
   Thomas N. Matlack


   /s/ Robert F. Walters          Director
   ---------------------
   Robert F. Walters


   /s/ Joseph T. Chung            Chairman of the Board
   ---------------------
   Joseph T. Chung


   /s/ Jeet Singh                 Director and Chief Executive Officer
   ---------------------
   Jeet Singh