##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year Ended December 31,
    2002                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 000-26679



---

Art Technology Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                         |  |                                            
|---------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                 |  | 04-3141918                                 
|(State or other jurisdiction of
    incorporation or organization)                       |  | (I.R.S. Employer
    Identification Number)
|                                                                                        
|25 First Street
    Cambridge, Massachusetts(Address of principal executive
    offices) |  | 02141(Zip Code)                            

(617) 386-1000

(Registrants telephone number, including
area code)


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

None


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

Common Stock, $0.01 par value with


Associated Preferred Stock Purchase
Rights


(Title of Class)




---

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

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

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$70,516,000 based on the closing price of the registrants
common stock on the Nasdaq National Market on June 28, 2002.

The number of shares of the registrants
common stock outstanding as of March 21, 2003, was
70,987,449.

Documents Incorporated by Reference

Portions of the registrants proxy statement
for its annual meeting of stockholders to be held on
May 21, 2003 are incorporated by reference in
Items 10, 11, 12 and 13 of Part III.



---






---

TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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 6. Selected 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. Information About Executive Compensation                                                      
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13. Certain Relationships and Related Transactions                                                
|                                                 | Item 14. Controls and Procedures                                                                       
|PART IV                                         
|                                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                                      
|Ex-10.5 Lease dated 10/6/99                     
|Ex-10.6 First Amendment to Lease dated 12/30/99 
|Ex-10.7 Second Amendment to Lease dated 12/28/00
|Ex-10.8 Third Amendment to Lease dated 12/22/00 
|Ex-10.9 Lease dated 3/19/01                     
|Ex-10.15 Amended Offer Letter                   
|Ex-10.18 Change in Control Agreement            
|Ex-10.19 Offer Letter                           
|Ex-10.20 Securities Account Control Agreement   
|Ex-10.21 Second Loan Modification Agreement     
|Ex-10.22 Letter Agreement                       
|Ex-23.1 Consent of Independent Auditors         
|Ex-99.1 Certifications of CEO and CFO           



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

INDEX TO FORM 10-K

|           |  |                                                                                                    |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                    |    | Page
|           |  |                                                                                                    |    |     
|PART I    
|Item 1.    |  | Business                                                                                           |    |      | 2  | 
|Item 2.    |  | Properties                                                                                         |    |      | 19 | 
|Item 3.    |  | Legal Proceedings                                                                                  |    |      | 19 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 20 | 
|PART II   
|Item 5.    |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |    |      | 21 | 
|Item 6.    |  | Selected Financial Data                                                                            |    |      | 21 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 23 | 
|Item 7a    |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 36 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                        |    |      | 37 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 68 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                 |    |      | 68 | 
|Item 11.   |  | Executive Compensation                                                                             |    |      | 68 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 68 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                     |    |      | 68 | 
|Item 14.   |  | Controls and Procedures                                                                            |    |      | 68 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |    |      | 69 | 
|SIGNATURES
|Signatures |  |                                                                                                    | 71 |     

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

1



---



##### Table of Contents






PART I






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

Overview

We develop and market software that enables
consumer, retail and financial services companies to dynamically
market, sell and provide services to their customers online. We
offer proven, flexible online marketing, sales, and self-service
software applications for consumer facing e-commerce sites. We
also offer our clients related professional services including
support, education and implementation services.

Our applications are designed to help businesses
gain information about their online customers and provide them
the tools that enable them to build long-term relationships with
their customers. In particular we believe that businesses want
to optimize their consumer relations throughout the whole
lifecycle of marketing to sales to post-sale services, whether
online or offline. We seek to differentiate ourselves by
designing products that make it simpler to develop and maintain
user profile information across multiple complex data sources,
easier to model and influence desired user behavior, and faster
to develop and maintain dynamic web content with a smaller
investment than otherwise possible.

As of December 31, 2002, we had an installed
base of more than 550 customers, with 52% in the United
States, 42% in Europe and the remainder in other countries. Our
principal target markets are Global 2000 companies, government
organizations and other businesses that have large numbers of
online users and utilize the Internet as a primary business
channel. We have historically focused on providing our software
and services to businesses in financial services, retail, media
and entertainment, telecommunications, consumer products and
services industries. We have delivered online solutions to
companies such as Aetna Services, Alcatel, American Airlines,
Barclays Global Investors, Best Buy, BMG Direct, Eastman Kodak,
Ford Motor Credit, HSBC, J. Crew, Sun Microsystems,
Walgreens, and Wells Fargo.

We offer businesses software products and related
services in three functional areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our marketing applications are designed to allow
    businesses to attract new customers, promote new offerings to
    existing customers, and improve the cost-effectiveness of
    existing marketing expenditures. Our clients use our tools to
    integrate their online marketing activities with related sales
    and self-service initiatives. Our tools are designed to allow
    businesses to increase marketing effectiveness by visually
    defining desired customer experience activities and events that
    will drive desirable customer behavior.
|
| |  | Our online sales applications are used by our
    clients to facilitate transactions with consumers and our
    clients channel partners. These commerce offerings are
    designed for the development of large consumer-facing e-commerce
    sites and channel partner extranets. We believe that using our
    online sales and marketing solutions together, our customers can
    create sophisticated promotions and offers that can drive
    incremental sales.                                                                                             
|
| |  | Our self-service solutions are designed to
    decrease call-center service costs, to improve the speed with
    which customer needs are met, and to increase customer loyalty
    and satisfaction. We believe our self-service solutions become
    more useful through the use of our advanced personalization
    capabilities, that are designed to increase the likelihood that
    customer inquiries will be managed online avoiding the need for
    costly call center inquiry.                                                                            

Our Strategy

Our objective is to be the industry leader in
providing consumer-based companies with software that integrates
the whole customer lifecycle, from marketing and selling to
service, including the automation of online and offline
transactions. We intend to achieve this objective by
implementing the following key components of our strategy:



| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on Commerce and Self-Service
    Applications.We believe the
    functionality and performance of our personalization and
    scenario servers historically have provided us with a
    significant differentiator for our products, and we plan to
    focus our enhancement efforts on these applications. In order to

2



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | enhance these applications we will seek to add
    additional functionality that we believe will drive higher
    customer satisfaction and greater reliability, usability and
    scalability. We also will seek to offer our commerce and
    self-service capabilities as Web services where practical, in
    order to help our customers extend their enterprises and
    generate new revenue sources and cost savings.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Increase Penetration of Key Vertical
    Markets.We plan to focus our
    development and marketing efforts on consumer branded companies
    by developing complete solutions marketing capability that is
    specific to individual industries. These industries are
    characterized by complex transaction-oriented product offerings
    with sophisticated marketing needs. We believe that by
    optimizing our products to meet the needs of companies in these
    industries we can increase the benefits that we offer to these
    companies and in turn increase our revenues and market shares in
    the targeted industries.                                                                                                                                                                                                                                
|
| |  | Support Open Application Server
    Infrastructure.We support the
    adoption of open application server infrastructure by our old
    and new customers. Our current product suite fully supports
    application server platforms from BEA Services and IBM, our two
    principal competitors in the platform market. We plan to work
    closely with BEA Services and IBM to increase the value both new
    and existing customers receive from our products regardless of
    the platform they select. We plan to further invest in careful
    integration of our most valuable product components with the
    development tools, application integration and portal
    infrastructure capabilities of these platforms.                                                                                                                                            
|
| |  | Continue Focused Marketing
    Initiatives.We are continuing to
    invest in promoting our company, technology, applications and
    solution sets through focused initiatives such as direct
    marketing, public relations, seminars, trade shows, speaking
    opportunities, web marketing, business alliance co-marketing,
    case studies, ATG Innovatormagazine and the ATG Open
    User Conference. As we add industry solutions, we will develop
    complete solutions marketing capability that is specific to each
    industry we choose.                                                                                                                                                                                                                                                                                                                     
|
| |  | Leverage Existing Sales
    Channels.We sell our products
    directly to end-users and through value-added resellers. In
    addition, approximately one-half of our product revenue is
    co-sold with a variety of business entities, including systems
    integrators, solution providers, technology partners and
    value-added resellers. We currently have a broad range of
    business alliances throughout the world, including large system
    integrators like Accenture, Cap Gemini Ernst & Young, EDS,
    Fujitsu Consulting, HP Consulting, and SAIC, as well as regional
    integrators such as Analysts International, E-Tree, Rikei,
    Thales-IS and SBI. Our goal is to maintain close relationships
    directly with our customers and to motivate systems integrators
    to implement our applications in their projects and solution
    sets.
|
| |  | Leverage and Expand Service
    Capabilities.We have extensive
    experience in Web application development and integration
    services. Through our Professional and Educational Services
    organizations, we provide services to train our systems
    integrators, value added resellers and complementary software
    vendors in the use of our products and offer consulting services
    to assist with customer implementations. We seek to motivate our
    business allies and sales forces to provide joint implementation
    services to our end user customers. We intend to continue to
    seek additional opportunities to increase revenues from product
    sales by expanding our base of partners trained in the
    implementation and application of our products.                                                                                  

Products

The market for our products is changing rapidly.
When we first began to develop software products, many of the
innovative and high performance elements of the application and
development platform that we now use were not readily available
in the market. We therefore had to create a high performance
application server and many of the middle tier elements of our
platform to provide for a building block style of rapid
development, where one component makes use of the capabilities
of another in an additive sense.

Our product strategy has also long supported
customer adoption of the whole ATG product platform as a highly
reusable system of Web development components. Our customers
apply high performance ATG technologies in the areas of
transaction management, personalization, process modeling, and
web development

3



---



##### Table of Contents



to go faster and further with their development
activities at a much lower cost than is possible using
comparable custom Web development methods. Inevitably, some of
the innovative methods and technologies that once differentiated
us are coalescing into industry standards and are being subsumed
by capabilities offered by the major operating system and
infrastructure vendors.


Our products include the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ATG Relationship Management Platform.The ATG Relationship Management
    Platform provides a rich set of features to enable online
    marketing, sales, and service solutions. The functionality of
    the ATG Relationship Management Platform provides businesses
    with insight into customer behavior and the capability to
    respond quickly to changing customer and market needs. The ATG
    Relationship Management Platform is distinguished from similar
    products by its robust data access capabilities -the Data
    Anywhere Architecture- and its means of modeling and
    responding to consumer behavior. We plan to build upon our
    marketing platform capabilities through a combination of
    internal development and external partnering and product
    sourcing.
|
| | ATG Commerce.ATG
    Commerce offers a commerce solution for selling to business
    customers, channel partners, and consumers. Using ATG Commerce,
    companies can manage multiple phases of the end user
    lifecycle  marketing, sales, and service 
    while also leveraging our personalization functionality to more
    effectively manage relationships. ATG Commerce is built on an
    adaptable, flexible framework and our data access capability,
    and is sold bundled with the ATG Relationship Management
    Platform.                                                                                                                                                                                                                                                         
|
| | Online Self-Service with ATG Portal.The ATG Portal offers rich
    relationship management and personalization features on a proven
    platform that includes tools for developing, deploying, and
    managing customer, partner, and employee portals. It features a
    set of application building blocks called portlets,
    pre-built sample applications, and a suite of administrative
    tools. ATG Portal is sold bundled with the ATG Relationship
    Management Platform.                                                                                                                                                                                                                                                                                                              

Customers from many industry segments can develop
self-service applications using various combinations of the ATG
Relationship Management Platform, ATG Portal, and ATG Commerce
products. We plan to work with our customers and partners to
further create industry solution frameworks from these
successful customer-developed applications.

Application Services:

ATG Publishing.The
ATG Publishing module provides a customizable workflow engine so
that non-technical people can create, manage, preview, and
deploy content while ensuring proper quality control. The
publishing tools provide the means to create product catalogs,
post updates to knowledge base articles, and design targeted
e-mail marketing campaigns.

ATG Search.Through
our agreement with Autonomy, we offer powerful search
capabilities that help customers, partners, and employees find
the information they need, thereby lowering order abandonment,
reducing call center costs, enhancing customer satisfaction, and
increasing employee productivity.

Our products are fully compatible with the BEA
WebLogic Application Server, and the IBM WebSphere Application
Server, and also run on our ATG Dynamo Application Server.

Services

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

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



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Structured Enabling
    Services.Working with a client or
    designated team, we offer Structured Enabling Services to
    facilitate project success. This is our preferred delivery model.

4



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Packaged Offerings.We leverage the e-business expertise we have gained through
    hundreds of projects in order to offer a variety of packaged
    services to our customers. Packages range from services designed
    to help customers gain momentum with their portal or commerce
    project, to assessing the benefits of upgrading to the latest
    version of our applications and to technical implementation
    programs.                                                                                                                                                                                                                                                                                                                                        
|
| | Custom Solutions.We
    offer customized professional services solutions tailored to
    meet the specific needs of our customers across an entire
    project. Consulting services can include a combination of system
    architecture design, project management, web design, technical
    training and business consulting services.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Express Services.Our Express Services offerings are short-term engagements
    designed to help our customers with a specific component of
    their project. Consulting services may consist of system
    architecture design, project management, web design, or
    technical training and support.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Comprehensive Business
    Innovations.Our Comprehensive
    Business Innovations are full life cycle solution project
    services with an emphasis on deploying innovative, mission
    critical technologies related to our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Education.We
    provide a broad selection of educational programs designed to
    train customers and partners on our applications. This
    curriculum addresses the educational needs of developers,
    technical managers, business managers, page designers, and
    system administrative personnel/ deployment engineers. ATG
    Education also offers an online learning program that
    complements our instructor-led training. Developers can become
    certified by completing the ATG Certified Dynamo Developer
    examination. We also offer end user training to complete the
    roll out of a customers application. We provide a full
    range of instructor-led and self-paced training solutions to
    assist customers with this key initiative.
|
| | Customer Support Services.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 access to technical support engineers
    24 hours a day, seven days per week, for customers
    deploying mission critical applications. Customers are entitled
    to receive software updates, maintenance releases, online
    documentation and bug reports, and technical support for an
    annual maintenance fee.                                                                                                                                                                                                                                         

Customers

As of December 31, 2002, we had an installed
base of more than 550 customers. Our principal target markets
are Global 2000 companies, government organizations and other
businesses that have large number of online users and utilize
the Internet as a primary business channel. Our customers
represent a broad spectrum of enterprises within diverse
industry sectors. The following is a partial list:

|                                |  |                    
|------------------------------- |  | -------------------
|Consumer Retail                 |  | Manufacturing      
|                                |  |                    
|Best Buy Companies, Inc.        |  | Alcatel            
|Cabelas                        |  | Abbott Laboratories
|Eastman Kodak                   |  | Eastman Kodak      
|J. Crew                         |  | General Motors     
|Martha Stewart Living Omnimedia |  | Newell Rubbermaid  
|Neiman Marcus                   |  | Procter & Gamble   
|Restoration Hardware            |  |                    
|Target Corporation              |  |                    
|The Finish Line                 |  |                    
|Walgreens                       |  |                    

5



---



##### Table of Contents



|                            |  |                           
|--------------------------- |  | --------------------------
|Financial Services          |  | Communication & Technology
|                            |  |                           
|A.G. Edwards                |  | Adobe                     
|John Hancock Funds          |  | Alcatel                   
|KeyBank                     |  | BellSouth                 
|Citibank                    |  | EMC                       
|Ford Motor Credit           |  | Handspring                
|Charles Schwab & Co., Inc.  |  | Hewlett Packard           
|HSBC                        |  | Intuit                    
|Barclays Global Investors   |  | Sun Microsystems          
|MFS Investment Management   |  |                           
|Dreyfus Service Corporation |  |                           
|Merrill Lynch               |  |                           
|Pioneer Investments         |  |                           
|Zurich Scudder Investments  |  |                           

|                            |  |                                
|--------------------------- |  | -------------------------------
|International               |  | Travel, Media and Entertainment
|                            |  |                                
|Benetton                    |  | American Airlines              
|Kingfisher PLC              |  | BMG Direct                     
|Direkt Anlage Bank          |  | Gameplay GB Ltd.               
|Pirelli                     |  | Hilton Hotels Corporation      
|BBC Technology Service      |  | Hyatt                          
|Philips                     |  | Meredith Corporation           
|Heidelberger Druckmaschinen |  | Nintendo                       
|Lavazza                     |  | Readers Digest                
|Roche France                |  | Sega.com                       
|Premier Farnell             |  | Six Continents Hotels          
|Consignia                   |  | Sony Online Entertainment Inc. 
|Sasol                       |  | The MTVi Group                 
|Vodafone                    |  |                                

Technology

We believe we are a technology leader in
providing online marketing, sales and service applications due
to our use of the Java programming language, our own strong
component model, and our enterprise integration tools and
methods.

Java Foundation.Our
products are written in Java and support Java programming for
customization and extension, except for a few integration and
installation modules that must be implemented in other
programming languages. We have performed internal tests to
certify that our ATG 6.0 Relationship Management Platform
supports the current 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.
|
| |  | 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                                                                                                                                                                             

6



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 our ATG Nucleus system.
The ATG Nucleus system 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.

Research and Development

Our research and development group is responsible
for core technology, product architecture, product development,
quality assurance, documentation and third-party software
integration. This group also assists with pre-sale, customer
support activities and quality assurance tasks supporting the
Professional Services 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. We continue to focus our efforts on developing new and
innovative products, as well as integrating our products with
external enterprise systems and third party application servers.
Our research and development expenses were $21.7 million in
2002, $30.1 million in 2001, and $19.0 million in
2000. The systems we integrate with include relational
databases, content management systems, search engines, and
credit card payment servers.

Sales Coverage Model

Our principal target markets are leading
organizations with large constituencies who use the Internet as
a primary business channel. We target these potential customers
through our direct sales force and through channel partners,
including systems integrators and other technology partners. We
currently have approximately 160 business alliances throughout
the world.

We employ one group of sales professionals who
are compensated based on product and services sales made
directly to end-users and through business partners, and another
group of sales professionals who are dedicated to recruiting,
training, developing business plans and joint selling and
marketing with business

7



---



##### Table of Contents



alliances such as system integrators and value
added resellers. We train and assist our business partners 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 ATG suite of products
for commerce and self-service projects for their clients.


Our co-marketing relationships are with major
hardware vendors, software providers, systems integrators and
other consulting firms that serve the market for information
system products and services. The objective of this co-marketing
strategy is to assist our partners in creating demand for our
products and extend our presence globally and regionally.

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

North America

Accenture

Analysts International


Autonomy


Bell Canada


Blast Radius


Cap Gemini Ernst & Young


ClearCommerce


CEI America


Covansys


Critical Mass


Documentum


EDS


Fujitsu Consulting


GTSI (Fed Government)

Hewlett Packard


IBM


Immix Technology (Fed Government)


McFayden Consulting


Meritage


Montage-DMC


NCR


RTGX (Fed Government)


SAIC (Fed Government)


SBI & Company


Sun Microsystems


TIBCO Systems


Unisys (Fed Government)


International

Accenture

Cap Gemini Ernst & Young


Dimension Data


EDB


EDS


E-Tree


ETC

Fujitsu Consulting


HP  Japan


Thales IS


Rikei


As of December 31, 2002, in addition to
offices throughout the United States, we had sales personnel
located in Australia, Canada, England, France, Germany, Japan,
the Netherlands and Sweden. Our revenues from sources outside
the United States were $30.1 million, or 30% of total
revenue, in 2002, $47.6 million, or 34% of total revenue,
in 2001, and $37.6 million, or 23% of total revenue, in
2000. During the past year, we have established relationships
with new international partners and have added key international
accounts.

Competition

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



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | platform vendors such as BEA Systems and IBM, who
    are also our partners;                                                              
|
| |  | Microsoft, with whom we compete in commerce
    applications and, less directly, in the platform arena;                                   
|
| |  | commerce-oriented vendors, such as Blue Martini
    and BroadVision, which compete on various levels including
    portals and e-commerce;

8



---



##### Table of Contents





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | commerce, marketing and self-service vendors such
    as Chordiant, E.piphany and Kana, which may or may not have a
    vertical industry focus; and
|
| |  | in-house development efforts by potential
    customers or partners.                                                                                

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

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

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

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

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

As described above under Our
Strategy, we support the adoption of open application
server infrastructure by our old and new customers and plan to
work closely with other platform vendors to increase the value
customers receive from our products regardless of the platform
they select. We intend to focus our future development and
marketing efforts on applications rather than our platform, and
as a result we expect our business and operating results will be
less affected by our competition with platform vendors such as
BEA Systems and IBM. We cannot assure you, however, that open
application server infrastructure will not result in increased
competition, or other changes in the competitive landscape, in
the market for applications.

Proprietary Rights and Licensing

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

9



---



##### Table of Contents



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


Employees

As of December 31, 2002, we had a total of
555 employees. Of our employees, 137 were in research and
development, 176 in sales and marketing, 171 in professional
services and 71 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.

RISK FACTORS THAT MAY AFFECT RESULTS

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

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

Risks Related To Our Business

We may not be able to sustain or increase our
revenue or attain profitability on a quarterly or annual
basis.

We incurred a loss in each quarter of fiscal
2002. As of December 31, 2002, we had an accumulated
deficit of $199.9 million. Our revenues decreased 28% to
$101.5 million in 2002 from $140.3 million in 2001. In
addition, we believe the current economic downturn within the
software industry could continue to have an adverse effect on
demand for our products and services, and therefore adversely
affect our revenues as well. Because we have a limited operating
history, and operate in a rapidly evolving industry, we have
difficulty predicting our future operating results and we cannot
be certain that our revenues will grow or our expenses will
decrease at rates that will allow us to achieve profitability on
a quarterly or annual basis. Additionally, the slowdown in the
software industry and the decrease in spending by companies in
our target markets have reduced the rate of growth of the
Internet as a channel for consumer branded retail and financial
services companies. If current economic conditions continue for
an extended period of time or worsen, we may experience
additional adverse effects on our revenue, net income and cash
flows.

If we are unable to reduce our lease
obligations, we will incur significant cash expenditures that
may impact our cash resources.

We currently have significant lease payment
obligations related to our property lease agreements in numerous
jurisdictions. We have engaged in ongoing negotiations with our
landlords in an effort to reduce these costs with limited
success. These negotiations have included attempts to reduce
payments on occupied premises and efforts to negotiate buyouts
of existing leases on unoccupied premises. We cannot assure you
that these activities will be implemented without delay, if
ever. In addition, we are currently engaged in litigation over
leased premises in Germany as described in Item 3. Legal
Proceedings. We cannot assure you that we will not be subject to
additional legal proceedings related to our leases. If we are
unable to reduce our

10



---



##### Table of Contents



lease obligations, we will incur significant cash
expenditures, which will decrease our cash reserves and may
divert cash resources that we intend to utilize in implementing
our business strategy.


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 our expectations and those 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:



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

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 may encounter disruptions to our operations
or sales as a result of turnover in management and/or our sales
force.

Members of our senior management team, including
our two founders, our former Chief Executive Officer and
President and other senior managers, have left us during the
past two years for a variety of reasons and we cannot assure you
that there will not be additional departures. Key members of the
current management team, including Robert Burke, our Chief
Executive Officer and President who joined us in December 2002,
have had limited experience working together and may be
unsuccessful in developing or executing on a business strategy
for us. These changes in management, and any future similar
changes, may be disruptive to our operations. An important part
of our total compensation program for management includes stock
options. The volatility or lack of positive performance of our
stock price may from time to time adversely affect our ability
to retain our management team.

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

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

11



---



##### Table of Contents



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.

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.

The market for Internet online marketing,
sales, and service applications is intensely competitive, and we
expect competition to intensify in the future.

The market for online marketing, sales and
services applications is intensely competitive, and we expect
competition to intensify in the future. This level of
competition could reduce our revenues and result in increased
losses or reduced profits. Our primary competition currently
comes from in-house development efforts by potential customers
or partners, as well as from other vendors of Web-based
application software. We currently compete with Internet
application software vendors such as BroadVision. We also
compete with platform application server products and vendors
such as BEA Systems, IBMs Websphere products, and
Microsoft, among others. In addition, we compete indirectly with
portal software vendors such as Vignette (through their
acquisition of Epicentric), SAP Portals, a subsidiary of SAP,
and Plumtree and customer relationship management vendors such
as Siebel and Peoplesoft.

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

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

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

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

12



---



##### Table of Contents



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 depend on our relationships with value
added resellers.

We license products through value added resellers
and encourage them to service and support our products. In we
are unable to find qualified resellers, are unable to convince
qualified resellers to license our products to end users, fail
to adequately train a sufficient number of resellers or if
resellers choose to devote their efforts to reselling our
competitors products, our revenues could be reduced and
our operating results could be harmed.

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

We sell products through resellers and original
equipment manufacturers. In some instances, we target our direct
selling efforts toward markets that are also served by some of
these 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.

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

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

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

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,
which was completed as of December 31, 2002.

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

13



---



##### Table of Contents



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



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

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

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

As of December 31, 2002 we had offices in
Australia, Canada, England, France, Germany, Japan, the
Netherlands, and Sweden. We derived 30% of our total revenues
from customers outside the United States for the year ending
December 31, 2002. In December 2002, we initiated a
restructuring plan, which included the closing of our offices in
Australia, Canada, and the Netherlands at varying times during
the first quarter of 2003. Our operations outside North America
are subject to additional risks, including:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | changes in regulatory requirements, exchange
    rates, tariffs and other barriers;                                             
|
| |  | longer payment cycles and problems in collecting
    accounts receivable;                                                       
|
| |  | political and economic instability;                                                                                             
|
| |  | difficulties in managing systems integrators and
    technology partners;                                                       
|
| |  | difficulties in staffing and managing foreign
    subsidiary operations;                                                        
|
| |  | differing technology standards;                                                                                                 
|
| |  | difficulties and delays in translating products
    and product documentation into foreign languages;                           
|
| |  | reduced protection for intellectual property
    rights in some of the countries in which we operate or plan to
    operate; and
|
| |  | potentially adverse tax consequences.                                                                                           

14



---



##### Table of Contents



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

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

Complex software products such as ours often
contain errors or defects, particularly when first introduced or
when new versions or enhancements are released. We began
shipping the latest version of ATG 6.0 suite of products,
in the fourth quarter of 2002. 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 approximately $1.2 million and Toronto Technology Group
Inc. in July 2000 for approximately $12.0 million. These
acquisitions did not produce the revenues and synergies we
expected. We incurred approximately $5.3 million in
restructuring charges during the year ended December 31,
2001 related to the write off of unamortized goodwill and the
settlement of restricted stock in connection with these
acquisitions. In addition, we also incurred additional
restructuring charges during the year ended December 31,
2001 in reducing headcount related to the Toronto Technology
Group Inc. acquisition.

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 cash or debt financing, our
financial liquidity would be reduced. We may be required to
capitalize a significant amount of intangibles, including
goodwill, which may lead to significant amortization charges. In
addition, we may incur significant, one-time write-offs and
amortization charges. These amortization charges and write-offs
could decrease our future earnings or increase our future losses.

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

In January 2003, we announced a corporate
restructuring involving a workforce reduction of approximately
125 people, or 23% of our workforce, which was focused in our
professional services, general and

15



---



##### Table of Contents



administrative staff and internal sales and
operations, and the closing and consolidation of office
facilities in selected locations. These actions resulted in
recording a restructuring charge of approximately
$19.1 million, in the fourth quarter of 2002. In addition,
we recorded a restructuring charge of $76.9 million in 2001
relating to previous restructuring activities. These
restructuring activities require that we close facilities,
maintain sales efforts and provide continuing customer support
and service in regions where the sales and support staff has
been reduced or eliminated, reallocate workload among continuing
employees, and seek to reduce liability for idle lease space.
The outcomes of such restructuring activities are difficult to
predict. While we believe our restructuring and consolidation
activities will reduce our cost structure, we may not achieve
the cost reductions that we are expecting. In addition, our
restructuring activities may result in lower revenues as a
result of the decreased staff in our sales and marketing and
professional services groups or other adverse impacts on
productivity that we did not anticipate.


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

We write our software in the Java computer
programming language developed by Sun Microsystems and we
incorporate J2EE, Java Runtime Environment, Java Naming and
Directory Interface, Java Servlet Development Kit, Java
Foundation Classes, JavaMail and JavaBeans Activation Framework
into our products under licenses granted to us by Sun. Our
ATG 6.0 Relationship Management Platform has been designed
to support Suns J2EE standards. If Sun were to decline to
continue to allow us to use these technologies for any reason,
we would be required to (a) license the equivalent
technology from another souce, (b) rewrite the technology
ourselves, or (c) rewrite portions of our software to
accommodate the change or no longer use the technology.

While a number of companies have introduced Web
applications based on Java, Java could fall out of favor, and
support by Sun Microsystems or other companies could decline.
Moreover, our new ATG 6.0 Relationship Management Platform
is designed to support Suns Java 2 Platform, Enterprise
Edition, or J2EE, standards for developing modular Java programs
that can be accessed over a network. We have licensed the J2EE
brand and certification tests from Sun. There can be no
assurance that these standards will be widely adopted, that we
can continue to support J2EE standards established by Sun from
time to time or that the J2EE brand will continue to be made
available to us on commercially reasonable terms. If Java or
J2EE support decreased or we could not continue to use Java or
related Java technologies or to support J2EE, we might have to
rewrite the source code for our entire product line to enable
our products to run on other computer platforms. Also, changes
to Java or J2EE standards or the loss of our license to the J2EE
brand could require us to change our products and adversely
affect the perception of our products by our customers. If we
were unable to develop or implement appropriate modifications to
our products on a timely basis, we could lose revenue
opportunities and our business could be harmed.

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

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

16



---



##### Table of Contents



Risks Related To The Internet
Industry

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

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

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

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

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

Businesses use our ATG Scenario Personalization
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. ATG Scenario
Personalization product tracks both explicit user profile data
supplied by the user as well as implicit profile attributes
derived from the users behavior on the Web site. Privacy
concerns may cause visitors to resist providing the personal
data or 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 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

17



---



##### Table of Contents



knowledge. Cookies are generally removable by the
user, although removal could affect the content available on a
particular site. Germany has imposed laws limiting the use of
cookies, and a number of Internet commentators and governmental
bodies in the United States and other countries have urged
passage of laws limiting or abolishing the use of cookies. If
such laws are passed or if users begin to delete or refuse
cookies as a common practice, demand for our personalization
products could be reduced.


Risks Related To The Securities Markets And
Our Stock

Our stock price may continue to be
volatile.

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



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

We may incur significant costs from class
action litigation.

We currently are the subject of securities class
action litigation. If a court awards damages to the plaintiffs,
the total amount could exceed the limit of our existing
insurance. This litigation also may divert managements
attention and resources. We may be the target of similar
litigation in the future if the market for our stock becomes
volatile. For a further description of the pending litigation,
see Item 3. Legal Proceedings.

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

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



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

18



---



##### Table of Contents



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






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

Our principal administrative, research and
development, sales, consulting, training and support facilities
occupy approximately 91,000 square feet in Cambridge,
Massachusetts, pursuant to leases expiring through 2007. Our
west coast headquarters occupy approximately 40,000 square feet
in San Francisco, California pursuant to a lease expiring in
2011. Our European headquarters are located in Apex Plaza,
Reading UK where we lease approximately 15,600 square feet
pursuant to a lease expiring in 2009. Our Asia Pacific
headquarters are located in North Sydney, Australia where we
currently lease 8,600 square feet pursuant to a lease
expiring in 2003. Our German headquarters are located in
Frankfurt, Germany where we currently lease 38,500 square
feet pursuant to a lease expiring in 2007.

At December 31, 2002, we also had offices in
Australia, Canada, France, Japan, the Netherlands and Sweden.
During 2002 and 2001, we undertook plans to restructure our
operations, which included the closing of our offices in
Australia, Canada and the Netherlands at various times during
the first quarter of 2003. In addition, these restructurings
included the abandonment of approximately 30,500 square
feet of our Cambridge, Massachusettss headquarters,
3,000 square feet of our San Francisco, California
headquarters, and all of the square footage in Frankfurt,
Germany, and North Sydney, Australia. All of these locations
have been released for sub-lease and we are also pursuing
termination arrangements with our landlords.

For further information concerning our lease
restructuring activities and concerning our obligations under
all operating leases, see Note 11 and Note 7,
respectively, of the Notes to our Consolidated Financial
Statements contained in Item 8 of this Annual Report on
Form 10-K.






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

We [and certain officers] have been named
defendants in seven purported class action suits currently
pending in the United States District Court for the District of
Massachusetts. Each of these cases alleges that we [and the
named officers] have violated Sections 10(b) and 20(a) of
the Securities Exchange Act and SEC Rule 10b-5, which
generally may subject issuers of securities and persons
controlling those issuers to civil liabilities for fraudulent
actions or defects in the public disclosure required by
securities laws. Four of the cases were filed on various dates
in October 2001 in the U.S. District Court for the District
of Massachusetts. Three of the cases were initially filed in the
Central District of California on various dates in August and
September 2001. These three California actions were consolidated
and transferred to the District of Massachusetts on or about
November 27, 2001. On December 13, 2001, the Court
issued an Order of Consolidation in which it consolidated all
actions filed against us and appointed certain individuals as
lead plaintiffs in the consolidated action. It also appointed
two law firms as co-lead counsel, and a third law firm as
liaison counsel. Counsel for the plaintiffs has filed a
Consolidated Amended Complaint applicable to all of the
consolidated actions. On April 19, 2002 we filed a motion
to dismiss the case. The plaintiffs have filed their opposition
to the motion, and we have submitted a response. While
management believes the claims against us are without merit and
intends to defend the action vigorously, the litigation is in
the preliminary stage.

A breach of contract claim was filed in Germany
by DIFA Deutsche Immobilien Fonds AG against Art Technology
Group GMBH, a subsidiary of the Company, on July 18, 2002.
The suit alleges that ATG GmbH failed to pay rent on office
space leased by the plaintiff and failed to deliver a bank
guarantee, thereby breaching its lease obligations to plaintiff.
The German court returned a ruling on January 22, 2003
adverse to ATG and found in favor of the plaintiff in the
approximate amount of 1.4 million euros (approximately
$1,486,000 as of March 21, 2003) plus 8% interest and the
delivery of a security deposit in the form of a bank guarantee
in the amount of approximately 675,000 euros (approximately
$717,000 as of March 21, 2003). The judgment amount
represents unpaid rent from February to June 2002, which was
accrued as part of the restructuring charges recorded in 2001
and remains accrued at December 31, 2002. At the
plaintiffs option, it may seek to institute suit in the
future for additional rents that have accrued since the date
established in the ruling. The prevailing party in a German
lawsuit is also entitled to collect court costs and
attorneys fees from

19



---



##### Table of Contents



the non-prevailing party according to a fee and
cost schedule established by law. The fees and costs in this
case total approximately 65,000 euros (approximately $69,000 as
of March 21, 2003), (exclusive of fees and costs associated
with a potential appeal). ATG filed an appeal to the suit on
February 6, 2003. ATGs appeal of the suit is based,
in part, on interpretations of law made by the first judge
relating to alleged modifications to the original agreement with
plaintiff.


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






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

None.

20



---



##### Table of Contents






PART II

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

Our common stock trades on the Nasdaq National
Market under the symbol ARTG. 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, 2001 |                |      |   |       |  |  |   |      
|                              | First quarter  |      | $ | 43.94 |  |  | $ | 15.86 | 
|                              | Second quarter |      |   | 12.16 |  |  |   | 4.05  | 
|                              | Third quarter  |      |   | 5.22  |  |  |   | 0.65  | 
|                              | Fourth quarter |      |   | 4.72  |  |  |   | 0.58  | 
|Year ending December 31, 2002 |                |      |   |       |  |  |   |      
|                              | First quarter  |      | $ | 5.15  |  |  | $ | 1.85  | 
|                              | Second quarter |      |   | 2.30  |  |  |   | 0.78  | 
|                              | Third quarter  |      |   | 1.30  |  |  |   | 0.85  | 
|                              | Fourth quarter |      |   | 1.84  |  |  |   | 0.86  | 

On March 21, 2003 the last reported sale
price on the Nasdaq National Market for our common stock was
$0.90 per share. On March 21, 2003, there were
approximately 20,000 holders of record of our common stock.

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.




Item 6.Selected
Financial Data

Consolidated Statements of Operations
Data:

|                  |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |        |         | 
|----------------- | ---------------- | ----------------------- | - | ------------------------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------- | ------- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                  |                  |                        
|                  |                  | Year Ended December 31,
|                  |                  |                        
|                  |                  | 1998(1)                 |   | 1999(1)                               |        | 2000 |   | 2001   |        | 2002
|                  |                  |                         |   |                                       |        |      |   |        |        |     
|                  |                  |                         |   |                                       |        |     
|                  |                  |                         |   | (In thousands, except per share data) |        |     
|Revenues:         |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |       
|                  | Product license  |                         | $ | 4,059                                 |        |      | $ | 18,590 |        |      | $ | 121,525 |         |  | $ | 76,631 |         |  | $ | 48,796 |        
|                  | Services         |                         |   | 8,078                                 |        |      |   | 13,487 |        |      |   | 42,917  |         |  |   | 63,707 |         |  |   | 52,697 |        
|                  |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |       
|                  |                  | Total revenues          |   |                                       | 12,137 |      |   |        | 32,077 |      |   |         | 164,442 |  |   |        | 140,338 |  |   |        | 101,493 | 
|Cost of Revenues: |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |       
|                  | Product licenses |                         |   | 30                                    |        |      |   | 8,160  |        |      |   | 3,426   |         |  |   | 4,616  |         |  |   | 4,278  |        
|                  | Services         |                         |   | 5,020                                 |        |      |   | 10,232 |        |      |   | 35,839  |         |  |   | 47,361 |         |  |   | 33,441 |        
|                  |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |       
|                  |                  | Total cost of revenues  |   |                                       | 5,050  |      |   |        | 18,392 |      |   |         | 39,265  |  |   |        | 51,977  |  |   |        | 37,719  | 
|                  |                  |                         |   |                                       |        |      |   |        |        |      |   |         |         |  |   |        |         |  |   |       
|                  |                  | Gross profit            |   |                                       | 7,087  |      |   |        | 13,685 |      |   |         | 125,177 |  |   |        | 88,361  |  |   |        | 63,774  | 

21



---



##### Table of Contents



|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |        |         |  
|-------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ------ | ------------------------------------- | ------ | ---- | ------- | ------ | ------- | ---- | ----- | ------ | ------- |  | -------- | ------ | -------- | - | ------- | ------ | ------- | -
|                                                                           |                                       |                                                        
|                                                                           |                                       | Year Ended December 31,                                
|                                                                           |                                       |                                                        
|                                                                           |                                       | 1998(1)                                                 |        | 1999(1)                               |        | 2000 |         | 2001   |         | 2002
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |     
|                                                                           |                                       |                                                         |        |                                       |        |     
|                                                                           |                                       |                                                         |        | (In thousands, except per share data) |        |     
|Operating Expenses:                                                        |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           | Research and development              |                                                         |        | 3,355                                 |        |      |         | 6,343  |         |      |       | 18,966 |         |  |          | 30,119 |          |   |         | 21,717 |        
|                                                                           | Sales and marketing                   |                                                         |        | 4,074                                 |        |      |         | 15,921 |         |      |       | 73,261 |         |  |          | 93,186 |          |   |         | 42,913 |        
|                                                                           | General and administrative            |                                                         |        | 2,291                                 |        |      |         | 5,323  |         |      |       | 22,791 |         |  |          | 23,952 |          |   |         | 10,987 |        
|                                                                           | Amortization of deferred compensation |                                                         |        | 107                                   |        |      |         | 1,127  |         |      |       | 1,273  |         |  |          | 1,280  |          |   |         | 942    |        
|                                                                           | Restructuring                         |                                                         |        |                                      |        |      |         |       |         |      |       |       |         |  |          | 76,945 |          |   |         | 19,005 |        
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           |                                       | Total operating expenses                                |        |                                       | 9,827  |      |         |        | 28,714  |      |       |        | 116,291 |  |          |        | 225,482  |   |         |        | 95,564  |  
|Income (loss) from operations                                              |                                       |                                                         | (2,740 | )                                     |        |      | (15,029 | )      |         |      | 8,886 |        |         |  | (137,121 | )      |          |   | (31,790 | )     
|                                                                           | Interest and other income, net        |                                                         |        | (111                                  | )      |      |         | 1,897  |         |      |       | 8,979  |         |  |          | 4,967  |          |   |         | 2,300  |        
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           |                                       | Net income (loss) before provision for income
    taxes |        |                                       | (2,851 | )    |         |        | (13,132 | )    |       |        | 17,865  |  |          |        | (132,154 | ) |         |        | (29,490 | )
|Provision for income taxes                                                 |                                       |                                                         |       |                                       |        |      |        |        |         |      | 3,378 |        |         |  | 23,851   |        |          |   |        |       
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           |                                       | Net income (loss)                                       |        |                                       | (2,851 | )    |         |        | (13,132 | )    |       |        | 14,487  |  |          |        | (156,005 | ) |         |        | (29,490 | )
|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  |  |          | $      | (156,005 | ) |         | $      | (29,490 | )
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|Net income (loss) per share:                                               |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           | Basic                                 |                                                         | $      | (0.25                                 | )      |      | $       | (0.45  | )       |      | $     | 0.22   |         |  | $        | (2.27  | )        |   | $       | (0.42  | )      
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           | Diluted                               |                                                         | $      | (0.25                                 | )      |      | $       | (0.45  | )       |      | $     | 0.20   |         |  | $        | (2.27  | )        |   | $       | (0.42  | )      
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|Weighted average common shares outstanding:                                |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           | Basic                                 |                                                         |        | 17,394                                |        |      |         | 38,777 |         |      |       | 66,932 |         |  |          | 68,603 |          |   |         | 69,921 |        
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       
|                                                                           | Diluted                               |                                                         |        | 17,394                                |        |      |         | 38,777 |         |      |       | 73,138 |         |  |          | 68,603 |          |   |         | 69,921 |        
|                                                                           |                                       |                                                         |        |                                       |        |      |         |        |         |      |       |        |         |  |          |        |          |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reimbursement of out-of-pocket expenses for 1998
    and 1999 have not been reclassified and included in revenue and
    cost of services as required by EITF 01-14 because we
    cannot readily obtain the appropriate information. We do not
    expect the reclass of these amounts to be material.

Consolidated Balance Sheet Data:

|                                                                |  |              |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                |  |             
|                                                                |  | December 31,
|                                                                |  |             
|                                                                |  | 1998         |        | 1999 |  | 2000 |         | 2001 |  | 2002
|                                                                |  |              |        |      |  |      |         |      |  |     
|Cash, cash equivalents and short term marketable
    securities |  | $            | 4,093  |      |  | $    | 129,848 |      |  | $    | 126,473 |  |  | $ | 63,550  |  |  | $ | 68,558  | 
|Working capital                                                 |  |              | 3,649  |      |  |      | 117,727 |      |  |      | 122,422 |  |  |   | 37,993  |  |  |   | 37,966  | 
|Restricted cash                                                 |  |              |       |      |  |      |        |      |  |      |        |  |  |   | 16,757  |  |  |   |        | 
|Long-term marketable securities                                 |  |              |       |      |  |      | 19,394  |      |  |      | 17,734  |  |  |   |        |  |  |   |        | 
|Total assets                                                    |  |              | 7,766  |      |  |      | 177,735 |      |  |      | 259,515 |  |  |   | 137,488 |  |  |   | 106,862 | 
|Long-term obligations, less current maturities                  |  |              | 322    |      |  |      | 4,000   |      |  |      | 2,000   |  |  |   |        |  |  |   |        | 
|Redeemable convertible preferred stock                          |  |              | 8,313  |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total stockholders equity (deficit)                            |  |              | (4,034 | )    |  |      | 146,385 |      |  |      | 191,973 |  |  |   | 42,909  |  |  |   | 16,023  | 

22



---



##### Table of Contents








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

Overview

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

We were founded in December 1991. From 1991
through 1995, we devoted our efforts principally to building,
marketing and selling our professional services capabilities and
to research and development activities related to our software
products. Beginning in 1996, we began to focus on selling our
software products.

To date, we have enhanced and released several
versions of our products. We market and sell our products
worldwide through our direct sales force, systems integrators,
technology alliances and original equipment manufacturers.

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

We recognize revenue in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognitionand 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. Revenue earned on software arrangements involving
multiple elements which qualify for separate element accounting
treatment is allocated to each undelivered element using the
relative fair values of those elements based on vendor specific
objective evidence with the remaining value assigned to the
delivered element, the software license. Typically our software
licenses do not include significant post-delivery obligations to
be fulfilled by us and payments are due within a three-month
period from the date of delivery. Consequently, license fee
revenue is generally recognized when the product is shipped.
Revenues from software maintenance agreements are recognized
ratably over the term of the maintenance period, which is
typically one year. We enter into reseller arrangements that
typically provide for sublicense fees payable to us based upon a
percentage of our list price. Revenues are recognized under
reseller agreements as earned for guaranteed minimum royalties,
generally ratably over one year, 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

23



---



##### Table of Contents



have been earned by us in advance of billings.
Deferred revenue primarily consists of advance payments related
to support and maintenance and service agreements.


As of December 31, 2002 we had offices in
Australia, Canada, England, France, Germany, Japan, the
Netherlands, Sweden, and the United States. Revenues from
customers outside the United States accounted for 30% of our
total revenues in 2002, 34% in 2001 and 23% in 2000. In December
2002, we initiated a restructuring plan, which included the
closing of our offices in Australia, Canada, and the Netherlands
at varying times during the first quarter of 2003.

Critical Accounting Policies and
Estimates

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

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

Revenue
Recognition

Not only is revenue recognition a key component
of our results of operations, the timing of our revenue
recognition also determines the timing of certain expenses, such
as commissions. In measuring revenues, we follow the specific
guidelines of SOP 97-2 and SOP 98-9. SOP 97-2
requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement
exists via a signed license agreement; (2) physical or
electronic delivery has occurred including the availability of
license keys or services rendered; (3) the fee is fixed or
determinable representing amounts that are due unconditionally
with no future obligations under customary payment terms; and
(4) collectibility is probable. In addition, revenue
results are difficult to predict and any shortfall or delay in
recognizing revenue could cause our operational results to vary
significantly from quarter to quarter and could result in future
operating losses.

Accounts
Receivable and Bad Debt

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

Research and
Development Costs

We account for research and development costs in
accordance with FAS 2, Accounting for Research and
Development Costs(FAS 2), and FAS 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed (FAS 86), which specifies
that costs incurred internally to develop computer software
products should be charged to expense as incurred until
technological feasibility is reached for the product. Once
technological feasibility is reached, all software costs should
be capitalized until the product is made available for general
release to customers. Judgment is required in determining when
technological feasibility is established. We believe that the
time period from reaching technological feasibility until the
time of general

24



---



##### Table of Contents



product release is very short. Costs incurred
after technological feasibility is reached are not material, and
accordingly, all such costs are charged to research and
development expense as incurred.


Restructuring
Expenses

During 2002 and 2001, we recorded restructuring
charges of $19.0 million and $76.9 million,
respectively, pertaining to the closure and consolidation of
excess facilities, impairment of assets as discussed below,
employee severance benefits, and settling of certain contractual
obligations. The charges were recorded in accordance with ETIF
94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), FAS 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefitsand SAB 100, (Restructuring and Impairment Charges).In determining the charges to record, we made certain
estimates and judgments surrounding the amounts ultimately to be
paid for the actions we have taken. At December 31, 2002,
there are various accruals recorded for the costs to exit
certain facilities and lease obligations, which may be adjusted
periodically for either resolution of certain contractual
commitments or changes in estimates of sub-lease income or the
period of time the facilities will be vacant and sub-leased.
Although we do not anticipate significant changes to our
restructuring accruals, the actual costs may differ from those
recorded in the event that the subleasing assumptions require
adjustment due to changes in economic conditions surrounding the
real estate market or we are successful in terminating our lease
obligations prior to the scheduled termination date. Such
changes could have a material impact to our operating results.

Impairment or
Disposal of Long Lived Assets

We review our long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable. Recoverability of these
assets is measured by comparison of their carrying amount to
future undiscounted cash flows the assets are expected to
generate. If such assets are considered impaired, the impairment
to be recognized is equal to the amount by which the carrying
value of the assets exceed the fair market value determined by
either a quoted market price, if any, or a value determined by
utilizing a discounted cash flow technique. In assessing
recoverability, we must make assumptions regarding estimated
future cash flows and discount factors. If these estimates or
related assumptions change in the future, we may be required to
record impairment charges.

As a result of our restructuring activities in
2002 and 2001, we evaluated the realizability of our long-lived
assets including fixed assets and leasehold improvements related
to our restructured facility leases and intangible assets
consisting primarily of unamortized goodwill. In 2002, we
determined that $1.7 million of furniture and fixtures,
computer equipment and software were impaired as a result of our
decision to abandon the assets because of the termination of
employees and related closures of offices in our 2002 and 2001
restructuring plans.

These assets are no longer being used or will not
be used in the future upon completion of the 2002 restructuring
plan, which is expected to be substantially complete by the end
of the first quarter of 2003. In addition, $909,000 of leasehold
improvements were deemed to be impaired due to exiting certain
office locations and the estimated sub-lease income was not
sufficient to recover the assets carrying value. In 2001, we
determined that $7.7 million of leasehold improvements and
$2.2 million of furniture, fixtures and equipment were
impaired as a result of these restructured operating leases. In
addition we determined that approximately $1.4 million of
purchased software was impaired due to our revised product
development strategy. Lastly we wrote-off the remaining
unamortized goodwill of $4.0 million due to the closure and
abandonment of two professional service acquisitions completed
in fiscal year 2000.

Accounting
for Income Taxes

We account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes(FAS 109) which requires that
deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the
book and tax bases of recorded

25



---



##### Table of Contents



assets and liabilities. FAS 109 also requires
that deferred tax assets be reduced by a valuation allowance if
it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We evaluate quarterly
the realizability of our deferred tax assets by assessing our
valuation allowance and by adjusting the amount of such
allowance, if necessary.


At December 31, 2002 and 2001, we have
provided a full valuation allowance against our deferred tax
assets due to the uncertainty of their realizability.

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

Results of Operations

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

|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |    |     | 
|--------------------------------------------------- | -------------------------- | ------------------------ | --- | ---- | --- | ---- | ---- | -- | --- |  | -- | -- | --- | 
|                                                    |                            |                         
|                                                    |                            | Year Ended              
|                                                    |                            | December 31,            
|                                                    |                            |                         
|                                                    |                            | 2002                     |     | 2001 |     | 2000
|                                                    |                            |                          |     |      |     |     
|Revenues:                                           |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    | Product license            |                          |     | 48   | %   |      |      | 55 | %   |  |    | 74 | %  
|                                                    | Services                   |                          |     | 52   |     |      |      | 45 |     |  |    | 26 |    
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    |                            | Total revenues           |     |      | 100 |      |      |    | 100 |  |    |    | 100 | 
|Cost of revenues:                                   |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    | Product license            |                          |     | 4    |     |      |      | 3  |     |  |    | 2  |    
|                                                    | Services                   |                          |     | 33   |     |      |      | 34 |     |  |    | 22 |    
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    |                            | Total cost of revenues   |     |      | 37  |      |      |    | 37  |  |    |    | 24  | 
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    | Gross margin               |                          |     | 63   |     |      |      | 63 |     |  |    | 76 |    
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|Operating expenses:                                 |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    | Research and development   |                          |     | 21   |     |      |      | 21 |     |  |    | 12 |    
|                                                    | Sales and marketing        |                          |     | 42   |     |      |      | 66 |     |  |    | 45 |    
|                                                    | General and administrative |                          |     | 11   |     |      |      | 17 |     |  |    | 14 |    
|                                                    | Stock-based compensation   |                          |     | 1    |     |      |      | 1  |     |  |    | 1  |    
|                                                    | Restructuring              |                          |     | 19   |     |      |      | 55 |     |  |    |   |    
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|                                                    |                            | Total operating expenses |     |      | 94  |      |      |    | 161 |  |    |    | 71  | 
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|Income (loss) from operations                       |                            |                          | (31 | )    |     |      | (98  | )  |     |  | 5  |   
|Interest and other income (expense), net            |                            |                          | 2   |      |     |      | 4    |    |     |  | 5  |   
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|Income (loss) before provision for income
    taxes |                            |                          | (29 | )    |     |      | (94  | )  |     |  | 11 |   
|Provision for income taxes                          |                            |                          |    |      |     |      | 17   |    |     |  | 2  |   
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   
|Net income (loss)                                   |                            |                          | (29 | )%   |     |      | (111 | )% |     |  | 9  | % 
|                                                    |                            |                          |     |      |     |      |      |    |     |  |    |   

26



---



##### Table of Contents



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

|                                 |  |              |    |      |  |      |    |   |  |  |    |  
|-------------------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                 |  |             
|                                 |  | Year Ended  
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2002         |    | 2001 |  | 2000
|                                 |  |              |    |      |  |     
|Cost of product license revenues |  |              | 9  | %    |  |      | 6  | % |  |  | 3  | %
|Cost of services revenues        |  |              | 63 |      |  |      | 74 |   |  |  | 84 |  

Years Ended
December 31, 2002, 2001 and 2000

Revenues

Total revenues decreased 28% to
$101.5 million in 2002 from $140.3 million in 2001.
The decrease was primarily attributable to the slowing economy,
reduced information technology spending among our customer base,
and lengthening of the sales cycle Revenues generated from
international customers decreased to $30.1 million, or 30%
of total revenues, in 2002, from $47.6 million, or 34% of
total revenues, in 2001. We expect total revenues to decrease
slightly in 2003 and the international revenues as a percentage
of total revenues to be approximately 30%.

Total revenues decreased 15% to
$140.3 million in 2001 from $164.4 million in 2000.
The decrease was primarily attributable to the slowing economy
and reduced information technology spending among our customer
base and increased competition from application server software
companies. Revenues generated from international customers
increased to $47.6 million, or 34% of total revenues, in
2001 from $37.6 million, or 23% of total revenues, in 2000.

No individual customer accounted for more than
10% of total revenues in 2002, 2001, or 2000.

Product
License Revenues

Product license revenues decreased 36% to
$48.8 million in 2002 from $76.6 million in 2001. The
decrease was primarily attributable to the slowing economy,
reduced information technology spending among our customer base
and the lengthening of the sales cycle. Product license revenues
generated from international customers decreased to
$15.4 million in 2002 from $26.4 million in 2001. We
expect product license revenues to increase slightly as a
percent of total revenues and in absolute dollars in 2003.

Product license revenues decreased 37% to
$76.6 million in 2001 from $121.5 million in 2000. The
decrease was primarily attributable to the slowing economy,
reduced information technology spending and the lengthening of
the sales cycle. Product license revenues generated from
international customers decreased slightly to $26.4 million
in 2001 from $27.1 million in 2000.

Product license revenues as a percentage of total
revenues for the years ended December 31, 2002, 2001 and
2000 were 48%, 55% and 74%, respectively. We expect this
percentage to be between the 50% and 55% in 2003.

Services
Revenues

Services revenues decreased 17% to
$52.7 million in 2002 from $63.7 million in 2001. The
decrease was primarily attributable to the slowing economy,
reduced information technology spending, declining product
revenue and a reduction in our services capacity as we increased
our use of channel partners. Additionally, as a result of lower
product sales, support and maintenance revenues and professional
services revenues have decreased. We expect services revenues to
decrease slightly as a percent of total revenue and to decrease
in absolute dollars in 2003.

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

27



---



##### Table of Contents



products. We expect support revenues to decrease
in 2003 due to the fact that some customers are decreasing or
terminating their support coverage.


Services revenues increased 48% to
$63.7 million in 2001 from $42.9 million in 2000. The
increase in services revenues was primarily attributable to
growth in our services customer base, an increase in the
resources of our professional services staff and support
renewals resulting from an expanded installed customer base.

Support and maintenance revenues were 51% of
total service revenues in 2001 as compared to 40% in 2000. The
increase is directly related to the increase in product revenues.

Services revenues as a percentage of total
revenues for the years ended December 31, 2002, 2001, and
2000 were 52%, 45% and 26%, respectively. We expect this
percentage to be between 45% and 50% in 2003.

Cost
of Product License Revenues

Cost of product license revenues decreased 7% to
$4.3 million in 2002 from $4.6 million in 2001. This
decrease is primarily related to lower product revenues. 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 agreed to pay BroadVision a total of
$15.0 million in license fees, which are being accounted
for as cost of product license revenues. For 2002, approximately
half of our cost of product license revenues related to the
BroadVision settlement that was fully paid as of
December 31, 2002. Accordingly we expect cost of product
license revenues to decrease in 2003 as compared with 2002.

Cost of product license revenues increased 35% to
$4.6 million in 2001 from $3.4 million in 2000. This
increase primarily related to increased compensation and benefit
costs associated with sustaining engineering activities. 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 agreed to pay BroadVision a total of
$15.0 million in license fees, which are being accounted
for as cost of product license revenues. For 2001, approximately
half of our cost of product license revenues related to the
BroadVision settlement.

For 2002, 2001 and 2000, cost of product license
revenues as a percentage of total revenues was 4%, 3% and 2%,
respectively. We anticipate the cost of product license
revenues, as a percentage of total revenues, to be between 2%
and 4% in 2003.

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 decreased 29% to
$33.4 million in 2002 from $47.4 million in 2001. The
decrease was primarily attributable to a reduction in our
professional services workforce. Approximately 45% of the
decrease was attributable to decreased compensation costs due to
a reduction in our work force. The remaining 55% of the decrease
was due to a decrease in operating expenses as a result of our
restructuring efforts and cost containment initiatives.

Cost of services revenues increased 32% to
$47.4 million in 2001 from $35.8 million in 2000.
Approximately 50% of the increase was related to compensation
and benefit costs attributable to continued growth in our
professional services group resources. Facility and other
allocated fixed costs such as rent, depreciation, and
telecommunication costs increased by approximately 60%. Travel,
entertainment and recruiting costs decreased by approximately
10%.

28



---



##### Table of Contents



For 2002, 2001 and 2000, cost of services
revenues as a percentage of total revenues were 33%, 34% and
22%, respectively. We anticipate the cost of services revenues,
as a percentage of total revenues, to be in the 30% to 35% range
in 2003.

Research
and Development Expenses

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

Research and development expenses decreased 28%
to $21.7 million in 2002 from $30.1 million in 2001.
The decrease was primarily attributable to reduction in our
workforce. Approximately 51% of the decrease is related to
decreased salaries and related benefits. Approximately 12% of
the decrease was due to a reduction in the use of third party
contractors. The remaining 37% of the decrease was due to a
decrease in operating expenses as a result of our restructuring
efforts and cost containment initiatives. In 2003, we expect our
research and development costs to decrease slightly as a percent
of revenue and in absolute dollars over 2002.

Research and development expenses increased 59%
to $30.1 million in 2001 from $19.0 million in 2000.
The increase was primarily due to the research and development
expenses associated with our ATG 5.5 products and our ATG
Portals server which we began shipping in the third quarter of
2001. Approximately 50% of the increase was attributable to
compensation and benefits. Approximately 10% of the increase was
attributable to use of third party contractors. The remaining
40% increase related primarily to facility and other allocated
fixed costs such as rent, depreciation, and telecommunications
costs.

For 2002, 2001 and 2000, research and development
expenses as a percentage of total revenues were 21%, 21% and
12%, respectively. Based on cost reduction initiatives, we
anticipate that research and development expenses as a
percentage of total revenues will remain in the 20% to 22% range
in 2003.

Sales
and Marketing Expenses

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

Sales and marketing expenses decreased 54% to
$42.9 million in 2002 from $93.2 million in 2001. The
decrease is primarily attributable to cost saving initiatives
that resulted from a reduction of our sales and marketing group.
Approximately 37% of the decrease was related to a decrease in
compensation and benefits costs, and 27% of the decrease was
related to a reduction in our marketing and promotional
expenses. The remaining 36% was due to a decrease in operating
expenses as a result of our restructuring efforts and cost
containment initiatives.

Sales and marketing expenses increased 28% to
$93.2 million in 2001 from $73.3 million in 2000.
Approximately 50% of the increase was due to increased
compensation and benefits costs, and the remaining 50% of the
increase was related to increased facilities and other allocated
fixed costs such as rent, depreciation and telecommunications
costs.

For 2002, 2001 and 2000, sales and marketing
expenses as a percentage of total revenues were 42%, 66% and
45%, respectively. We expect that sales and marketing expenses
in 2003 will be in the range of 38% to 41% as a percentage of
total revenues. However sales and marketing expenses can
fluctuate as a percentage of total revenues depending on
economic conditions, level and timing of global expansion,
program spending, the rate at which new sales personnel become
productive and the level of revenue.

General
and Administrative Expenses

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

General and administrative expenses decreased 54%
to $11.0 million in 2002 from $24.0 million in 2001.
Approximately 38% of the decrease was related to decreases in
compensation and benefit costs, and 12% of the

29



---



##### Table of Contents



decrease was related to a reduction in our
professional fees. Approximately 26% of the decrease was
attributed to a decrease in recruiting, hiring, travel, training
and direct office expenses while, approximately 24% of the
decrease was related to a decrease in our provision for doubtful
accounts due to favorable collections experience resulting in
changes in our estimates of required reserves. We expect general
and administrative expenses to trend slightly lower in 2003.


General and administrative expenses increased 5%
to $24.0 million in 2001 from $22.8 million in 2000.
The increase was primarily related to compensation and benefit
costs.

For 2002, 2001 and 2000, general and
administrative expenses as a percentage of total revenues were
11%, 17% and 14%, respectively. Due to cost reduction
initiatives we anticipate that general and administrative
expenses will trend slightly lower as a percentage of total
revenues and in absolute dollars in 2003.

Stock-Based
Compensation

From the fourth quarter of 1998 through 1999, we
had recognized total deferred stock-based compensation within
Stockholders Equity 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 these 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. The number of these stock options has been reduced due to
the recipients of these grants terminating their employment with
us. We are amortizing these amounts over the vesting periods of
the applicable options.

Stock-based compensation expense decreased 26% to
$942,000 in 2002 from $1.3 million in 2001 due to the
restructuring activities that took place during 2002 and 2001.

Stock-based compensation expense remained
consistent at $1.3 million in 2001 and 2000. We expect
stock-based compensation expense to decrease significantly as
the period they are expensed over ends in the first quarter of
2003.



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

As a result of a global slowdown in information
technology spending, ATG undertook plans to restructure its
operations during 2001. Actions taken by ATG included:
consolidation of excess facilities, a worldwide workforce
reduction, the write-off of certain unrealizable assets and
settling certain obligations that have no future benefit. In the
second quarter ATG recorded a restructuring charge of
$44.2 million, and in the fourth quarter of 2001, ATG
recorded a restructuring charge of $32.7 million. Total
restructuring charges for 2001 totaled $76.9 million.

30



---



##### Table of Contents



The significant components of the 2001
restructuring charge (in thousands):

Restructuring Charges

|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |               |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  
|---------------------------------------------- |  | -------- | ------ | ------------ |  | ------------ | ------ | ------------- |  | ------------- | ------ | -------------- |  | -------------- | ------ | ------------- |  | ------------- | ------ |  |  | - | ---- | - |  | - | --- |  |  | - | ----- |  |  | - | ------ | -
|                                               |  |          |        |              |  |              |        |               |  |               |        | 2001           |  | 2001           |        |               |  |              
|                                               |  |          |        |              |  |              |        | Payments or   |  | Accrued       |        | Adjustments in |  | Adjustments in |        |               |  | Accrued 2001 
|                                               |  |          |        |              |  |              |        | Write-Offs in |  | Restructuring |        | Estimate made  |  | Estimate made  |        |               |  | Restructuring
|                                               |  | Quarter  |        | Quarter      |  |              |        | Twelve Months |  | Charges       |        | in Quarter     |  | in Quarter     |        |               |  | Charges      
|                                               |  | Ended    |        | Ended        |  | Year Ended   |        | Ended         |  | as of         |        | Ended          |  | Ended          |        |               |  | as of        
|                                               |  | June 30, |        | December 31, |  | December 31, |        | December 31,  |  | December 31,  |        | June 20,       |  | December 31,   |        | Payments      |  | December 31, 
|                                               |  | 2001     |        | 2001         |  | 2001         |        | 2001          |  | 2001          |        | 2002           |  | 2002           |        | or Write-Offs |  | 2002         
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |               |  |              
|Facilities-related costs and impairments       |  | $        | 38,100 |              |  | $            | 22,818 |               |  | $             | 60,918 |                |  | $              | 16,208 |               |  | $             | 44,710 |  |  | $ | 447  |   |  | $ | 907 |  |  | $ | 9,016 |  |  | $ | 37,048 |  
|Employee severance, benefits and related costs |  |          | 4,757  |              |  |              | 3,181  |               |  |               | 7,938  |                |  |                | 6,748  |               |  |               | 1,190  |  |  |   |     |   |  |   |    |  |  |   | 920   |  |  |   | 270    |  
|Asset impairments                              |  |          | 212    |              |  |              | 5,358  |               |  |               | 5,570  |                |  |                | 5,570  |               |  |               |       |  |  |   |     |   |  |   |    |  |  |   |      |  |  |   |        |  
|Exchangeable share settlement                  |  |          |       |              |  |              | 1,263  |               |  |               | 1,263  |                |  |                | 1,263  |               |  |               |       |  |  |   |     |   |  |   |    |  |  |   |      |  |  |   |       |  
|Marketing costs                                |  |          | 851    |              |  |              |       |               |  |               | 851    |                |  |                | 851    |               |  |               |       |  |  |   | (536 | ) |  |   |    |  |  |   |      |  |  |   | (536   | )
|Legal and accounting costs                     |  |          | 315    |              |  |              | 90     |               |  |               | 405    |                |  |                | 232    |               |  |               | 173    |  |  |   |     |   |  |   |    |  |  |   | 173   |  |  |   |       |  
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |               |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  
|Total                                          |  | $        | 44,235 |              |  | $            | 32,710 |               |  | $             | 76,945 |                |  | $              | 30,872 |               |  | $             | 46,073 |  |  | $ | (89  | ) |  | $ | 907 |  |  | $ |      |  |  | $ | 36,782 |  
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |               |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  

The facilities-related cost component consisted
of idle lease space and termination payments for offices
worldwide, which were no longer required due to the reduction in
personnel. In determining the facilities-related costs, ATG has
estimated the vacancy period and sublease income. A component of
the fourth quarter facility-related cost was a change in
estimate of the second quarter facility-related restructuring
charge. The net change in estimate was an additional charge of
$1.5 million in the fourth quarter. Of the
$1.5 million charge, a credit of $8.2 million was
realized due to the buy out of a lease included in the second
quarter charge of $9.3 million, which is being paid ratably
over 4.5 years. This credit was offset by an increase of
approximately $9.7 million due to updated assumptions, as a
result of a market analysis indicating lower sublease rates and
longer vacancy periods for two leases provided for in the second
quarter. Included in the facility-related costs was the
write-off of the abandoned leasehold improvements and fixed
assets of $7.7 million and $2.2 million, respectively.
These fixed assets were directly related to the restructured
excess office facilities.

The employee severance cost component of the
restructuring charge was related to reductions in personnel. As
part of the restructuring ATG terminated the employment of
530 employees, or 46% of ATGs workforce.
Approximately 47% of these employees were from sales and
marketing, 22% from services, 19% from general and
administrative and 12% from research and development. In
addition, ATG settled 11,762 exchangeable shares with a certain
employee. Upon settlement, ATG recorded $1.3 million as a
charge to restructuring.

The asset impairment-related costs included the
write-off of the remaining unamortized goodwill of approximately
$4.0 million, which was related to the two professional
service acquisitions completed in 2000. In addition, the Company
determined that approximately $1.4 million of purchased
software was deemed impaired due to ATGs revised product
development strategy.

During the second quarter of 2002, ATG recorded a
net charge increasing the 2001 restructured lease obligation
accruals by $447,000. The Company increased one lease obligation
estimate by $1.3 million as a result of adjusting the
estimated sublease income and vacancy assumptions due to the
continued weakening of the real estate market in that location.
Offsetting this increase, ATG recognized a benefit of $853,000
from two other restructured lease obligation accruals due to
favorable sublease transactions consummated during the second
quarter. This net charge has been offset by the Company
receiving a refund of $536,000 relating to the marketing
component of the restructuring charge recorded in fiscal 2001,
resulting in a net credit to income of $89,000 for the quarter
ended June 30, 2002. Also, during the fourth quarter of
2002, ATG recorded a charge of $907,000 to increase charges
recorded in 2001 for lease obligations of idle locations.

31



---



##### Table of Contents



As a result of the continued weakness in global
information technology spending, ATG undertook plans to
restructure its operations during 2002. Actions taken by ATG
included: consolidation and closure of excess facilities, a
worldwide workforce reduction and the write-down of certain idle
assets. In the second quarter ATG recorded a restructuring
credit of $89,000, due to a change in the 2001 estimated
restructuring charge, and in the fourth quarter of 2002, ATG
recorded a restructuring charge of $19.1 million. Total
restructuring charges for 2002 totaled $19.0 million.

The significant components of the 2002
restructuring charge (in thousands):

Restructuring Charges

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

During the fourth quarter of 2002, the Company
recorded a restructuring charge of $19.1 million, which
consisted of actions initiated in the fourth quarter of 2002 and
an adjustment of $907,000 to increase the charges recorded in
2001 for lease obligations of idle locations. The
facilities-related charge associated with the 2002 fourth
quarter action was $13,476,000, comprising $12,021,000 for
operating leases related to office space that is either idle or
will be vacated during the first quarter of 2003 and $1,455,000
of leasehold improvement and furniture and fixtures written down
to their estimated fair value. The Company also recorded a
charge of $3,553,000 for severance and benefit costs related to
cost reduction actions taken across the worldwide employee base,
and as a result of this action and the actions taken in 2001,
the Company wrote-off $1,158,000 of computer equipment and
software, which were no longer being used due to the reduction
in personnel and office locations.

The lease charge is for office space the Company
is vacating and intends to sub-lease. The amount of the
operating lease charge is based on assumptions from current real
estate market data for sub-lease income rates and vacancy rates
at each respective location. The severance and benefit costs
were for 125 employees, or 23% of the Companys
workforce, consisting of 53 employees from sales and
marketing, 45 from services, 19 from general and administrative
and 8 from research and development. The Company accrued
employee benefits pursuant to ongoing benefits plans and
statutory minimum requirements in foreign locations. The Company
began the termination process on January 6, 2003. As a
result of a reduction of employees on a worldwide basis in the
2002 and 2001 restructuring actions, as well as the closure of
certain office locations, the Company wrote-off computer
equipment and software and furniture and fixtures that it has
abandoned and will not be used in the future. These assets have
been written down to their fair value based on the expected cash
flows they will generate over their remaining economic life. Due
to the short remaining economic life and current market
conditions for such assets, the fair value of these assets has
been estimated as zero. In addition, the Company wrote-off
leasehold improvements related to the facilities it is
attempting to sub-lease because the estimated cash flows to be
generated from those locations are not sufficient to recover the
carrying value of the assets. The Company expects to
substantially complete the above actions by the end of the first
quarter of 2003. Once fully complete, we anticipate the
restructuring activities will result in annual savings of
approximately $12 million to $16 million.

As of December 31, 2002, the Company had an
accrued restructuring liability of $52.4 million, of which
$36.8 million relates to 2001 restructuring charges and
$15.6 million relates to 2002 restructuring charges. The

32



---



##### Table of Contents



long-term portion of the accrued restructuring
liability was $32.5 million. A summary of the short and
long-term accrued restructuring is as follows (in thousands):


Accrued Restructuring

|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ------------- |  | ------------- | ------ | ------------- |  | -------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|                                               |  |              |        | Payments or   |  |               |        | Restructuring |  | Payments or    |        |              
|                                               |  | Twelve       |        | Write-offs in |  | Accrued       |        | Charges for   |  | Write-Offs for |        | Accrued      
|                                               |  | Months       |        | the Twelve    |  | Restructuring |        | the Twelve    |  | the Twelve     |        | Restructuring
|                                               |  | Ended        |        | Months Ended  |  | Charges as of |        | Months Ended  |  | Months Ended   |        | Charges as of
|                                               |  | December 31, |        | December 31,  |  | December 31,  |        | December 31,  |  | December 31,   |        | December 31, 
|                                               |  | 2001         |        | 2001          |  | 2001          |        | 2002          |  | 2002           |        | 2002         
|                                               |  |              |        |               |  |               |        |               |  |                |        |              
|Facilities-related costs and impairments       |  | $            | 60,918 |               |  | $             | 16,208 |               |  | $              | 44,710 |               |  | $ | 15,988 |   |  | $ | 11,629 |  |  | $ | 49,069 |  
|Employee severance, benefits and related costs |  |              | 7,938  |               |  |               | 6,748  |               |  |                | 1,190  |               |  |   | 3,553  |   |  |   | 920    |  |  |   | 3,823  |  
|Asset impairments                              |  |              | 5,570  |               |  |               | 5,570  |               |  |                |       |               |  |   |       |   |  |   |       |  |  |   |       |  
|Exchangeable share settlement                  |  |              | 1,263  |               |  |               | 1,263  |               |  |                |       |               |  |   |       |   |  |   |       |  |  |   |        |  
|Marketing costs                                |  |              | 851    |               |  |               | 851    |               |  |                |       |               |  |   | (536   | ) |  |   |       |  |  |   | (536   | )
|Legal and accounting costs                     |  |              | 405    |               |  |               | 232    |               |  |                | 173    |               |  |   |       |   |  |   | 173    |  |  |   |       |  
|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  
|Total                                          |  | $            | 76,945 |               |  | $             | 30,872 |               |  | $              | 46,073 |               |  | $ | 19,005 |   |  | $ | 12,722 |  |  | $ | 52,356 |  
|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  



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

Interest and other income net, decreased 54% to
$2.3 million in 2002 from $5.0 million in 2001. The
decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2002 as compared to 2001,
coupled with lower earned interest rates. Offsetting the
decrease in interest income in 2002 were gains of $950,000 from
foreign currency exchange transactions and the re-measurement of
foreign currency denominated assets and liabilities into the
functional currency of various subsidiaries. Foreign currency
related gains in 2002 increased from $58,000 for the year ended
December 31, 2001.

Interest income decreased 45% to
$5.0 million in 2001 from $9.0 million in 2000. The
decrease was primarily due to a decrease in our average cash and
marketable securities balances in 2001 as compared to 2000,
coupled with lower earned interest rates.



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

As a result of net operating losses incurred in
2002 and 2001, and after evaluating our anticipated performance
over our normal planning horizon, we have provided a full
valuation allowance for our net operating loss carryforwards and
other net deferred tax assets. Due to the uncertainty
surrounding the utilization of our net deferred tax assets, net
operating losses and research credits carryforwards, we have
recorded a 100% valuation allowance. The provision in 2001
includes a $54.9 million charge recorded in the fourth
quarter to reverse income tax benefits recognized in the first
three quarters of 2001 and to establish a valuation allowance
against our net deferred tax assets due to a change in our
assessment of the realizability of these assets.

Liquidity and Capital Resources

Our capital requirements relate primarily to
facilities, employee infrastructure and working capital
requirements. Historically, we have funded our cash requirements
primarily through the public and private sales of equity
securities, commercial credit facilities and capital leases. In
2002, we also funded our cash requirements in part from
operations. At February 28, 2003, we had $50.2 million
in cash and cash equivalents and $15.0 million in
marketable securities.

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

33



---



##### Table of Contents



Cash used in operating activities was
$54.6 million in 2001. This consisted of operating losses
of $156.0 million, which was offset by reductions in
accounts receivable of $21.9 million, deferred income taxes
of $23.9 million, an increase in accrued restructuring of
$42.7 million, and depreciation and amortization of
$9.4 million.

Our investing activities for 2002 consisted
primarily of capital expenditures of $945,000, net purchases of
marketable securities of $8.7 million offset by a reduction
in restricted cash of $16.8 million, and a reduction in
other assets of $3.1 million. Our investing activities for
2001 consisted primarily of capital expenditures of
$12.6 million and restricted cash of $16.8 million,
offset by net sales of marketable securities of
$76.9 million and a reduction in other assets of
$2.8 million. To support growth in headcount and global
expansion, assets acquired in both 2002 and 2001 consisted
principally of leasehold improvements, computer hardware and
software. We expect that capital expenditures will total
approximately $2.0 million over the next twelve months.

Effective December 24, 2002, we modified our
existing working capital facility with Silicon Valley Bank (the
Bank). Our eligible line of credit was increased to
$20 million from $15 million. The new line is no
longer tied to 80% of eligible accounts receivable. While there
were no outstanding borrowings under the facility at
December 31, 2002, we have issued letters of credit
(LCs) totaling $13.9 million, which are supported by
this facility. The line of credit bears interest at the
Banks prime rate (4.25% at December 31, 2002). As of
December 31, 2002, approximately $6.1 million was
available for future borrowings. The line of credit is secured
by all of our tangible and intangible intellectual and personal
property and is subject to financial covenants including
liquidity coverage and profitability. The liquidity covenant
mandates ATG maintain $40 million in cash at the end of
each month throughout the duration of the facility. The
profitability covenant allows for net losses not to exceed;
$4.5 million for the fourth quarter of 2002,
$4.0 million for the first quarter of 2003,
$2.0 million for the second quarter of 2003,
$1.0 million for the third and fourth quarters of 2003. The
Bank has granted additional provisions, to be used if necessary,
for a maximum $25 million in restructuring charges for the
duration of the facility. Of the $25 million, a maximum of
$7.5 million may be taken as a cash expense during the term
of the facility; a second provision is made for a maximum of
$12.0 million in cash to be paid toward real estate
buy-outs. We are required to maintain $27 million in
unrestricted cash with the Bank at all times, and in the event
the balance should decrease, we will be required to pay fees and
expenses to compensate the Bank for lost income. As of
December 31, 2002, we were in compliance with all related
financial covenants. In the event that we do not comply with any
of the covenants within the line of credit or default on any of
our provisions, the Banks significant remedies include:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Declaring all obligations immediately due and
    payable;                                                                                                   
|
| |  | Ceasing to advance money or extend credit for our
    benefit;                                                                                               
|
| |  | Applying to the obligations any balances and
    deposits held by us or any amount held by the Bank owing to or
    for the credit or the account of us; and,
|
| |  | Putting a hold on any deposit account held as
    collateral.                                                                                                

If the agreement expires, or is not extended, the
Bank will require outstanding LCs at that time to be cash
secured on terms acceptable to the Bank. The revolving line of
credit expires on December 23, 2003.

As of December 31, 2002, we had commitments
totaling approximately $13.9 million in the form of
outstanding LCs in favor of our various landlords to
secure obligations under our facility leases pursuant to leases
expiring in 2003 through 2009. As of December 31, 2002, all
of the LCs were secured under our line of credit.

Net cash provided by financing activities was
$933,000 in 2002, principally representing proceeds from stock
option exercises and the employee stock purchase plan, offset in
part by payments on long-term obligations to BroadVision.
Additionally, $1.1 million was received in the Tudor
Settlement (related to the preferred stock litigation that was
settled in May 2002). Net cash provided by financing activities
was $706,000 in 2001, principally representing proceeds from
stock option exercises and the employee stock purchase plan,
offset in part by payments on long-term obligations to
BroadVision.

34



---



##### Table of Contents



We lease our facilities under operating leases
that expire between 2003 and 2011. The aggregate minimum annual
rental payment under these leases is $92.6 million, which
includes approximately $18.8 million payable in 2003. Of
the $92.6 million, $70.7 million is included in the
combined 2002 and 2001 restructuring charges. The
$70.7 million was reduced to a $46.9 million
restructuring charge after taking into consideration estimated
sublease income and estimated vacancy periods. For additional
information relating to our commercial and contractual
commitments, see Notes 7 and 11 to our Consolidated
Financial Statements contained in Item 8 of this Annual
Report on Form 10-K.



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

At December 31, 2002, our contractual cash
obligations, which consist solely of operating leases, were as
follows (in thousands):

|                        |  |                        |        |           |  |           |        |           |  |         |        |  |  |   |        |  |  |   |        | 
|----------------------- |  | ---------------------- | ------ | --------- |  | --------- | ------ | --------- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                        |  |                       
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  |                        |        | Less Than |  |           |        | After    
|Contractual Obligations |  | Total                  |        | 1 Year    |  | 1-3 Years |        | 4-5 Years |  | 5 Years
|                        |  |                        |        |           |  |           |        |           |  |        
|Lease Commitments       |  | $                      | 92,627 |           |  | $         | 18,788 |           |  | $       | 31,573 |  |  | $ | 23,484 |  |  | $ | 18,782 | 

We believe that our existing financial resources,
together with cash generated by our operations, will be able to
meet our cash requirements for at least the next twelve months.
However, our actual cash requirements will depend on many
factors, including particularly, overall economic conditions
both domestically and abroad. We may seek additional external
funds through public or private securities offerings, strategic
alliances or other financing sources. There can be no assurance
that if we seek external funding, it will be available on
favorable terms, if at all.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards
Board, or FASB, issued FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities(FAS 146),
which addresses financial accounting and reporting for costs
associated with exit or disposal activities. FAS 146
supercedes EITF 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), and establishes when a liability for a cost
associated with an exit or disposal activity must be recognized,
which is at the time the liability is incurred. Severance pay,
in many cases, would be recognized over time rather than up
front. If the benefit arrangement requires employees to render
future service beyond a minimum retention period a
liability should be recognized as employees render service over
the future service period even if the benefit formula used to
calculate an employees termination benefit is based on
length of service. FAS 146 is effective for exit or
disposal activities initiated after December 31, 2002, and
is not expected to have a material impact on our consolidated
financial statements.

On December 31, 2002, the FASB issued FAS
148, Accounting for Stock-Based Compensation 
Transition and Disclosure(FAS 148). FAS 148 amends
FAS 123, Accounting for Stock-Based Compensation(FAS 123), to provide alternative methods of transition
to FAS 123s fair value method of accounting for
stock-based employee compensation in the event companies adopt
FAS 123 and account for stock options under the fair value
method. FAS 148 also amends the disclosure provisions of
FAS 123 and APB Opinion No. 28, Interim Financial
Reporting(APB 28), to require disclosure in the
summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the
Statement does not amend FAS 123 to require companies to
account for employee stock options using the fair value method,
the disclosure provisions of FAS 148 are applicable to all
companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value
method of FAS 123 or the intrinsic value method of APB
Opinion No. 25 Accounting for Stock Issued to Employees(APB 25). As of December 31, 2002, we have adopted
the disclosure requirements of FAS 148 as disclosed in the Notes
to our Consolidated Financial Statements included in Item 8
of this Annual Report on Form 10-K.

35



---



##### Table of Contents



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

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






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

We maintain an investment portfolio consisting
mainly of investment grade money market funds, corporate
obligations and government obligations with a weighted average
maturity of less than one year. These held-to-maturity
securities are subject to interest rate risk, however, a 10%
change in interest rates would not have a material impact to the
fair values of these securities primarily due to their short
maturity and our intent to hold the securities to maturity.
There have been no significant changes since December 31,
2002.

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. Relative to
foreign currency exposures existing at December 31, 2002, a
10% movement in foreign exchange rates would not expose us to
significant gains or losses in earnings or cash flows. To date,
foreign currency fluctuations have not had a material effect on
our operating results. We may use derivative instruments to
manage the risk of exchange rate fluctuations, however, at
December 31, 2002, there were no outstanding derivative
instruments. We do not use derivative instruments for trading or
speculative purposes.

36



---



##### Table of Contents








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

REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Art Technology Group, Inc.


We have audited the accompanying consolidated
balance sheet of Art Technology Group, Inc. as of
December 31, 2002 and the related consolidated statements
of operations, stockholders equity and comprehensive
income (loss) and cash flows for the year then ended. 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 audit. The
financial statements of Art Technology Group, Inc. as of
December 31, 2001 and for each of the two years then ended
were audited by other auditors who have ceased operations and
whose report dated January 22, 2002 expressed an
unqualified opinion on those statements before the
reclassification adjustments and disclosures described in
Note 1.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Art Technology
Group, Inc. as of December 31, 2002 and the results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States.

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

As discussed above, the consolidated financial
statements of Art Technology Group, Inc. as of December 31,
2001 and for each of the two years then ended were audited by
other auditors who have ceased operations. As described in
Note 1(q), these consolidated financial statements have
been revised to reflect restricted cash in the balance sheet at
December 31, 2001 and the cash flow statement for the year
ended December 31, 2001, and the statements of operations
for the years ended December 31, 2001 and 2000 have been
restated to conform to the 2002 presentation of including
reimbursed expenses in revenue and cost of services revenue in
accordance with Emerging Issues Task Force 01-14, Income
Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. We audited the
adjustments that were applied to restate the balance sheet at
December 31, 2001 and statement of cash flows for the year
then ended and the statements of operations for the years ended
December 31, 2001 and 2000. Our procedures included
(a) agreeing the adjusted amounts for restricted cash,
revenue and cost of services revenue to the Companys
underlying records obtained from management, and
(b) testing the mathematical accuracy in computing the
restated consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. In
addition, as described in Note 1(q), restricted cash has
been disclosed as a separate line in Note 1(e) and in
Note 9, accrued taxes have been disclosed as a separate
line item comprising accrued expenses. We audited the
adjustments that were applied to restate the disclosures
reflected in Note 1(e) and Note 9 at December 31,
2001. Our procedures included (a) agreeing the adjusted
amounts for restricted cash and accrued taxes to the
Companys underlying records obtained from management, and
(b) testing the mathematical accuracy in computing the
restated disclosures contained in the notes to the consolidated
financial statements. In our opinion, the disclosures in
Note 1(e) and Note 9 for 2001 are appropriate.
Further, as described in Note 1(q), these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the
disclosures in Note 1(p) with respect to 2001 and 2000
included (a) agreeing the previously reported net loss

37



---



##### Table of Contents



in 2001 and net income in 2000 to the previously
issued financial statements and the adjustments to reported net
loss in 2001 and net income in 2000 representing amortization
expense (including any tax effects) recognized in those periods
related to goodwill to the Companys underlying records
obtained from management, and (b) testing the mathematical
accuracy of the reconciliation of adjusted net loss in 2001 and
adjusted net income in 2000 to reported net loss in 2001 and
reported net income in 2000, and the related earning
(loss)-per-share amounts. In our opinion, the disclosures for
2001 and 2000 in Note 1(p) are appropriate. However, we
were not engaged to audit, review, or apply any procedures to
the 2001 and 2000 financial statements of the Company other than
with respect to such adjustments and disclosures as described in
Note 1 and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.




| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Boston, Massachusetts

January 20, 2003, except for Note 14, as


to which the date is March 24, 2003


38



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

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

To the Stockholders and Board of Directors of

Art Technology Group, Inc.:


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

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

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



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts

January 22, 2002


39



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                             |                                                                                                                      |                             |         |          |        |   |         |          |        | 
|-------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | -------- | ------ | - | ------- | -------- | ------ | 
|                                             |                                                                                                                      |                            
|                                             |                                                                                                                      | December 31,               
|                                             |                                                                                                                      |                            
|                                             |                                                                                                                      | 2002                        |         | 2001    
|                                             |                                                                                                                      |                             |         |         
|                                             |                                                                                                                      |                            
|                                             |                                                                                                                      | (In thousands, except share
|                                             |                                                                                                                      | and per-share information) 
|ASSETS                                      
|Current Assets:                              |                                                                                                                      |                             |         |          |        |   |         |         
|                                             | Cash and cash equivalents                                                                                            |                             | $       | 45,829   |        |   | $       | 49,493   |       
|                                             | Marketable securities                                                                                                |                             |         | 22,729   |        |   |         | 14,057   |       
|                                             | Accounts receivable, net of reserves of $1,941
    ($3,539 in 2001)                                                  |                             |         | 25,221   |        |   |         | 30,532   |       
|                                             | Unbilled services                                                                                                    |                             |         | 5        |        |   |         | 274      |       
|                                             | Prepaid expenses and other current assets                                                                            |                             |         | 2,484    |        |   |         | 5,541    |       
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|                                             |                                                                                                                      | Total current assets        |         |          | 96,268 |   |         |          | 99,897 | 
|Restricted Cash (Note 3)                     |                                                                                                                      |                             |        |          |        |   | 16,757  |         
|Property and Equipment, Net                  |                                                                                                                      |                             | 6,998   |          |        |   | 16,171  |         
|Other Assets                                 |                                                                                                                      |                             | 1,569   |          |        |   | 4,663   |         
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|                                             |                                                                                                                      | $                           | 104,835 |          |        | $ | 137,488 |         
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY    
|Current Liabilities:                         |                                                                                                                      |                             |         |          |        |   |         |         
|                                             | Current maturities of long-term obligations                                                                          |                             | $       |         |        |   | $       | 2,000    |       
|                                             | Accounts payable                                                                                                     |                             |         | 2,563    |        |   |         | 4,160    |       
|                                             | Accrued expenses                                                                                                     |                             |         | 18,219   |        |   |         | 24,718   |       
|                                             | Deferred revenue                                                                                                     |                             |         | 15,674   |        |   |         | 17,628   |       
|                                             | Accrued restructuring, short-term                                                                                    |                             |         | 19,819   |        |   |         | 13,398   |       
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|                                             |                                                                                                                      | Total current liabilities   |         |          | 56,275 |   |         |          | 61,904 | 
|Accrued Restructuring, less current portion  |                                                                                                                      |                             | 32,537  |          |        |   | 32,675  |         
|Commitments and Contingencies (Note 3 and 7) |                                                                                                                      |                             |         |          |        |   |         |         
|Stockholders Equity:                        |                                                                                                                      |                             |         |          |        |   |         |         
|                                             | Preferred stock, $0.01 par value                                                                                     |                             |         |          |        |   |         |          |       
|                                             | Authorized  10,000,000 shares                                                                                       |                             |         |          |        |   |         |          |       
|                                             | Issued and outstanding  no shares                                                                                   |                             |         |         |        |   |         |         |       
|                                             | Common stock, $0.01 par value                                                                                        |                             |         |          |        |   |         |          |       
|                                             | Authorized  500,000,000 shares                                                                                      |                             |         |          |        |   |         |          |       
|                                             | Issued and outstanding  70,941,478
    shares and 68,982,030 shares at December 31, 2002 and 2001,
    respectively |                             |         | 709      |        |   |         | 689      |       
|                                             | Additional paid-in capital                                                                                           |                             |         | 217,288  |        |   |         | 214,597  |       
|                                             | Deferred compensation                                                                                                |                             |         | (394     | )      |   |         | (1,558   | )     
|                                             | Accumulated deficit                                                                                                  |                             |         | (199,869 | )      |   |         | (170,379 | )     
|                                             | Accumulated other comprehensive loss                                                                                 |                             |         | (1,711   | )      |   |         | (440     | )     
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|                                             |                                                                                                                      | Total stockholders equity  |         |          | 16,023 |   |         |          | 42,909 | 
|                                             |                                                                                                                      |                             |         |          |        |   |         |         
|                                             |                                                                                                                      | $                           | 104,835 |          |        | $ | 137,488 |         
|                                             |                                                                                                                      |                             |         |          |        |   |         |         

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

40



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |         |         | 
|------------------------------------------- | --------------------------------------------------- | ------------------------------- | ----- | ------- | ------- | ---- | ------ | -------- | -------- | - | ----- | ------- | ------- | 
|                                            |                                                     |                                
|                                            |                                                     | Year Ended December 31,        
|                                            |                                                     |                                
|                                            |                                                     | 2002                            |       | 2001    |         | 2000
|                                            |                                                     |                                 |       |         |         |     
|                                            |                                                     |                                
|                                            |                                                     | (In thousands, except per-share
|                                            |                                                     | information)                   
|Revenues:                                   |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Product license                                     |                                 | $     | 48,796  |         |      | $      | 76,631   |          |   | $     | 121,525 |        
|                                            | Services                                            |                                 |       | 52,697  |         |      |        | 63,707   |          |   |       | 42,917  |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            |                                                     | Total revenues                  |       |         | 101,493 |      |        |          | 140,338  |   |       |         | 164,442 | 
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|Cost of Revenues:                           |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Product license                                     |                                 |       | 4,278   |         |      |        | 4,616    |          |   |       | 3,426   |        
|                                            | Services                                            |                                 |       | 33,441  |         |      |        | 47,361   |          |   |       | 35,839  |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            |                                                     | Total cost of revenues          |       |         | 37,719  |      |        |          | 51,977   |   |       |         | 39,265  | 
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            |                                                     | Gross profit                    |       |         | 63,774  |      |        |          | 88,361   |   |       |         | 125,177 | 
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|Operating Expenses:                         |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Research and development                            |                                 |       | 21,717  |         |      |        | 30,119   |          |   |       | 18,966  |        
|                                            | Sales and marketing                                 |                                 |       | 42,913  |         |      |        | 93,186   |          |   |       | 73,261  |        
|                                            | General and administrative                          |                                 |       | 10,987  |         |      |        | 23,952   |          |   |       | 22,791  |        
|                                            | Stock-based compensation                            |                                 |       | 942     |         |      |        | 1,280    |          |   |       | 1,273   |        
|                                            | Restructuring                                       |                                 |       | 19,005  |         |      |        | 76,945   |          |   |       |        |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            |                                                     | Total operating expenses        |       |         | 95,564  |      |        |          | 225,482  |   |       |         | 116,291 | 
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            |                                                     | Income (loss) from operations   |       |         | (31,790 | )    |        |          | (137,121 | ) |       |         | 8,886   | 
|Interest and other Income, net              |                                                     |                                 | 2,300 |         |         |      | 4,967  |          |          |   | 8,979 |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Income (loss) before provision for income
    taxes |                                 |       | (29,490 | )       |      |        | (132,154 | )        |   |       | 17,865  |        
|Provision for Income Taxes                  |                                                     |                                 |      |         |         |      | 23,851 |          |          |   | 3,378 |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Net income (loss)                                   |                                 | $     | (29,490 | )       |      | $      | (156,005 | )        |   | $     | 14,487  |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|Net Income (Loss) Per Share:                |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Basic                                               |                                 | $     | (0.42   | )       |      | $      | (2.27    | )        |   | $     | 0.22    |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Diluted                                             |                                 | $     | (0.42   | )       |      | $      | (2.27    | )        |   | $     | 0.20    |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|Weighted Average Common Shares Outstanding: |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Basic                                               |                                 |       | 69,921  |         |      |        | 68,603   |          |   |       | 66,932  |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        
|                                            | Diluted                                             |                                 |       | 69,921  |         |      |        | 68,603   |          |   |       | 73,138  |        
|                                            |                                                     |                                 |       |         |         |      |        |          |          |   |       |        

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

41



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)

|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------ | ---------- | ---------- |  | ------- | --- | ------------ |  | ----------- | ------- | ------------- |  | ------------- | ------ | ------------- |  | - | -------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |              
|                                                                                                                |  | Common Stock                                           |            |            |  |         |     |              |  | Accumulated |         |               |  |              
|                                                                                                                |  |                                                        |            | Additional |  |         |     |              |  | Other       |         | Total         |  |              
|                                                                                                                |  | Number                                                 |            | Par        |  | Paid-in |     | Deferred     |  | Accumulated |         | Comprehensive |  | Stockholders |        | Comprehensive
|                                                                                                                |  | of Shares                                              |            | Value      |  | Capital |     | Compensation |  | Deficit     |         | Loss          |  | Equity        |        | Income (Loss)
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |              
|                                                                                                                |  |                                                       
|                                                                                                                |  | (In thousands, except share and per-share information)
|Balance, December 31, 1999                                                                                      |  |                                                        | 65,551,024 |            |  | $       | 656 |              |  | $           | 178,218 |               |  | $             | (3,628 | )             |  | $ | (28,861  | ) |  | $ |       |   |  | $ | 146,385  |   |  |   |          |  
|Exercise of stock options including $23,057
    related to the income tax benefit of disqualifying dispositions |  |                                                        | 2,164,234  |            |  |         | 21  |              |  |             | 27,705  |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 27,726   |   |  |   |          |  
|Issuance of common stock in connection with
    Employee stock purchase plan                                    |  |                                                        | 179,099    |            |  |         | 2   |              |  |             | 1,881   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,883    |   |  |   |          |  
|Shares and options issued in connection with the
    acquisition of Toronto Technology Group, Inc. (Note 6)     |  |                                                        |           |            |  |         |    |              |  |             | 2,238   |               |  |               | (2,019 | )             |  |   |         |   |  |   |       |   |  |   | 219      |   |  |   |          |  
|Amortization of deferred compensation                                                                           |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               | 1,273  |               |  |   |         |   |  |   |       |   |  |   | 1,273    |   |  |   |          |  
|Reversal of deferred compensation                                                                               |  |                                                        |           |            |  |         |    |              |  |             | (704    | )             |  |               | 704    |               |  |   |         |   |  |   |       |   |  |   |         |   |  |   |          |  
|Comprehensive Income:                                                                                           |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Net income                                                                                                      |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   | 14,487   |   |  |   |       |   |  |   | 14,487   |   |  | $ | 14,487   |  
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Comprehensive income                                                                                            |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   |         |   |  | $ | 14,487   |  
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2000                                                                                      |  |                                                        | 67,894,357 |            |  |         | 679 |              |  |             | 209,338 |               |  |               | (3,670 | )             |  |   | (14,374  | ) |  |   |       |   |  |   | 191,973  |   |  |   |          |  
|Exercise of stock options                                                                                       |  |                                                        | 937,220    |            |  |         | 9   |              |  |             | 1,162   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,171    |   |  |   |          |  
|Issuance of common stock in connection with
    Employee stock purchase plan                                    |  |                                                        | 131,708    |            |  |         | 1   |              |  |             | 1,534   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,535    |   |  |   |          |  
|Shares and options issued in connection with the
    acquisition of Toronto Technology Group, Inc.              |  |                                                        | 18,745     |            |  |         |    |              |  |             | 2,132   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 2,132    |   |  |   |          |  
|Settlement of exchangeable shares                                                                               |  |                                                        |           |            |  |         |    |              |  |             | 1,263   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,263    |   |  |   |          |  
|Amortization of deferred compensation                                                                           |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               | 1,280  |               |  |   |         |   |  |   |       |   |  |   | 1,280    |   |  |   |          |  
|Reversal of deferred compensation                                                                               |  |                                                        |           |            |  |         |    |              |  |             | (832    | )             |  |               | 832    |               |  |   |         |   |  |   |       |   |  |   |         |   |  |   |          |  
|Comprehensive Loss:                                                                                             |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Net loss                                                                                                        |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   | (156,005 | ) |  |   |       |   |  |   | (156,005 | ) |  | $ | (156,005 | )
|Foreign currency translation adjustments                                                                        |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   |         |   |  |   | (440   | ) |  |   | (440     | ) |  |   | (440     | )
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                              |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   |         |   |  | $ | (156,445 | )
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2001                                                                                      |  |                                                        | 68,982,030 |            |  | $       | 689 |              |  | $           | 214,597 |               |  | $             | (1,558 | )             |  | $ | (170,379 | ) |  | $ | (440   | ) |  | $ | 42,909   |   |  |   |          |  
|Exercise of stock options                                                                                       |  |                                                        | 343,006    |            |  |         | 3   |              |  |             | 109     |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 112      |   |  |   |          |  
|Issuance of common stock in connection with
    Employee stock purchase plan                                    |  |                                                        | 1,616,442  |            |  |         | 17  |              |  |             | 1,754   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,771    |   |  |   |          |  
|Tudor Settlement (Note 12)                                                                                      |  |                                                        |           |            |  |         |    |              |  |             | 1,050   |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   | 1,050    |   |  |   |          |  
|Amortization of deferred compensation                                                                           |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               | 942    |               |  |   |         |   |  |   |       |   |  |   | 942      |   |  |   |          |  
|Reversal of deferred compensation                                                                               |  |                                                        |           |            |  |         |    |              |  |             | (222    | )             |  |               | 222    |               |  |   |         |   |  |   |       |   |  |   |         |   |  |   |          |  
|Comprehensive Loss:                                                                                             |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Net loss                                                                                                        |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   | (29,490  | ) |  |   |       |   |  |   | (29,490  | ) |  | $ | (29,490  | )
|Foreign currency translation adjustments                                                                        |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   |         |   |  |   | (1,271 | ) |  |   | (1,271   | ) |  |   | (1,271   | )
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                                              |  |                                                        |           |            |  |         |    |              |  |             |        |               |  |               |       |               |  |   |         |   |  |   |       |   |  |   |         |   |  | $ | (30,761  | )
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2002                                                                                      |  |                                                        | 70,941,478 |            |  | $       | 709 |              |  | $           | 217,288 |               |  | $             | (394   | )             |  | $ | (199,869 | ) |  | $ | (1,711 | ) |  | $ | 16,023   |   |  |   |          |  
|                                                                                                                |  |                                                        |            |            |  |         |     |              |  |             |         |               |  |               |        |               |  |   |          |   |  |   |        |   |  |   |          |   |  |   |          |  

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

42



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |         |         |         |  
|---------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------ | -------- | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                                                                                 |                                                                                                                  |                                               
|                                                                                                                 |                                                                                                                  | Years Ended December 31,                      
|                                                                                                                 |                                                                                                                  |                                               
|                                                                                                                 |                                                                                                                  | 2002                                           |                                                         | 2001    |        | 2000   
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |        
|                                                                                                                 |                                                                                                                  |                                               
|                                                                                                                 |                                                                                                                  | (In thousands)                                
|Cash Flows from Operating Activities:                                                                            |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Net income (loss)                                                                                                |                                                | $                                                       | (29,490 | )      |         | $      | (156,005 | )      |         | $       | 14,487  |        
|                                                                                                                 | Adjustments to reconcile net income
    (loss) to net cash (used in) provided by operating
    activities       |                                                |                                                         |         |        |         |        |          |        |         |         |         |        
|                                                                                                                 |                                                                                                                  | Stock-based compensation                       |                                                         |         | 942    |         |        |          | 1,280  |         |         |         | 1,273   |        
|                                                                                                                 |                                                                                                                  | Depreciation and amortization                  |                                                         |         | 7,147  |         |        |          | 9,414  |         |         |         | 3,629   |        
|                                                                                                                 |                                                                                                                  | Noncash restructuring charge                   |                                                         |         | 2,613  |         |        |          | 16,733 |         |         |         |        |        
|                                                                                                                 |                                                                                                                  | Tax benefit from the exercise of stock options |                                                         |         |       |         |        |          |       |         |         |         | 23,057  |        
|                                                                                                                 |                                                                                                                  | Loss on disposal of fixed assets, net          |                                                         |         | 198    |         |        |          | 801    |         |         |         | 27      |        
|                                                                                                                 | Changes in operating assets and
    liabilities                                                                 |                                                |                                                         |         |        |         |        |          |        |         |         |         |        
|                                                                                                                 |                                                                                                                  | Accounts receivable, net                       |                                                         |         | 5,311  |         |        |          | 21,907 |         |         |         | (39,901 | )      
|                                                                                                                 |                                                                                                                  | Unbilled services                              |                                                         |         | 269    |         |        |          | 998    |         |         |         | (491    | )      
|                                                                                                                 |                                                                                                                  | Prepaid expenses and other current assets      |                                                         |         | 3,057  |         |        |          | (1,318 | )       |         |         | (2,314  | )      
|                                                                                                                 |                                                                                                                  | Deferred tax assets                            |                                                         |         |       |         |        |          | 23,851 |         |         |         | (20,635 | )      
|                                                                                                                 |                                                                                                                  | Accounts payable                               |                                                         |         | (1,597 | )       |        |          | (7,417 | )       |         |         | 90      |        
|                                                                                                                 |                                                                                                                  | Accrued expenses                               |                                                         |         | (6,499 | )       |        |          | (2,358 | )       |         |         | 24,674  |        
|                                                                                                                 |                                                                                                                  | Deferred revenue                               |                                                         |         | (1,954 | )       |        |          | (5,136 | )       |         |         | 14,428  |        
|                                                                                                                 |                                                                                                                  | Accrued restructuring                          |                                                         |         | 6,779  |         |        |          | 42,689 |         |         |         |        |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 |                                                                                                                  |                                                | Net cash provided by (used in) operating
    activities |         |        | (13,224 | )      |          |        | (54,561 | )       |         |         | 18,324  |  
|Cash Flows from Investing Activities:                                                                            |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | (Purchases) Sales of marketable securities, net                                                                  |                                                |                                                         | (8,672  | )      |         |        | 76,895   |        |         |         | (66,421 | )      
|                                                                                                                 | Decrease (increase) in restricted cash                                                                           |                                                |                                                         | 16,757  |        |         |        | (16,757  | )      |         |         |        |        
|                                                                                                                 | Purchases of property and equipment                                                                              |                                                |                                                         | (945    | )      |         |        | (12,616  | )      |         |         | (21,683 | )      
|                                                                                                                 | Acquisition of Petronio Technology Group,
    Inc.                                                               |                                                |                                                         |        |        |         |        |         |        |         |         | (600    | )      
|                                                                                                                 | Acquisition of The Toronto Technology Group,
    Inc.                                                            |                                                |                                                         |        |        |         |        |         |        |         |         | (5,191  | )      
|                                                                                                                 | Decrease in other assets                                                                                         |                                                |                                                         | 3,094   |        |         |        | 2,789    |        |         |         | 563     |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 |                                                                                                                  |                                                | Net cash provided by (used in) investing
    activities |         |        | 10,234  |        |          |        | 50,311  |         |         |         | (93,332 | )
|Cash Flows from Financing Activities:                                                                            |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Tudor settlement (Note 12)                                                                                       |                                                |                                                         | 1,050   |        |         |        |         |        |         |         |        |        
|                                                                                                                 | Proceeds from exercise of stock options                                                                          |                                                |                                                         | 112     |        |         |        | 1,171    |        |         |         | 4,669   |        
|                                                                                                                 | Proceeds from employee stock purchase plan                                                                       |                                                |                                                         | 1,771   |        |         |        | 1,535    |        |         |         | 1,883   |        
|                                                                                                                 | Payments on long-term obligations                                                                                |                                                |                                                         | (2,000  | )      |         |        | (2,000   | )      |         |         | (3,000  | )      
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 |                                                                                                                  |                                                | Net cash provided by financing activities               |         |        | 933     |        |          |        | 706     |         |         |         | 3,552   |  
|Effects of Foreign Exchange Rate Changes On Cash
    and Cash Equivalents                                        |                                                                                                                  |                                                | (1,607                                                  | )       |        |         | (218   | )        |        |         |        |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|Net Increase (Decrease) in Cash and Cash
    Equivalents                                                         |                                                                                                                  |                                                | (3,664                                                  | )       |        |         | (3,762 | )        |        |         | (71,456 | )      
|Cash and Cash Equivalents, Beginning of Period                                                                   |                                                                                                                  |                                                | 49,493                                                  |         |        |         | 53,255 |          |        |         | 124,711 |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|Cash and Cash Equivalents, End of Period                                                                         |                                                                                                                  | $                                              | 45,829                                                  |         |        | $       | 49,493 |          |        | $       | 53,255  |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|Supplemental Disclosure of Cash Flow Information:                                                                |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Cash paid during the period for interest                                                                         |                                                | $                                                       |        |        |         | $      | 135      |        |         | $       |        |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Cash paid during the period for income taxes                                                                     |                                                | $                                                       | 447     |        |         | $      | 330      |        |         | $       | 175     |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|Supplemental Disclosure of Noncash Investing and
    Financing Activities:                                       |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Value ascribed to options issued in connection
    with the acquisition of The Toronto Technology Group
    Inc. |                                                | $                                                       |        |        |         | $      |         |        |         | $       | 2,238   |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Reversal of deferred compensation                                                                                |                                                | $                                                       | 222     |        |         | $      | 832      |        |         | $       | 704     |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|                                                                                                                 | Income tax effect of disqualifying dispositions                                                                  |                                                | $                                                       |        |        |         | $      |         |        |         | $       | 23,057  |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        
|In connection with the acquisition of The Toronto
    Technology Group Inc., the following 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   |        
|                                                                                                                 |                                                                                                                  |                                                |                                                         |         |        |         |        |          |        |         |         |        

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

43



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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

Art Technology Group, Inc. (ATG or the Company)
is a Delaware company which was incorporated on
December 31, 1991. ATG offers an integrated suite of
Internet online marketing, sales and service 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) | 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 govern the terms and conditions of its
software license, consulting and support and maintenance
services. These separate agreements, along with ATGs price
list and business practices of selling products and services,
separately, provide the basis for establishing vendor-specific
objective evidence of fair value. This allows ATG to
appropriately allocate fair value among the multiple elements in
an arrangement.

ATG recognizes revenue in accordance with
Statement of Position (SOP) No. 97-2, Software Revenue
Recognitionand 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. Revenue earned on software arrangements involving
multiple elements which qualify for separate element accounting
treatment is allocated to each undelivered element using the
relative fair values of those elements based on vendor specific
objective evidence with the remaining value assigned to the
delivered element, the software license. Typically, the
Companys software licenses do not include significant
post-delivery obligations to be fulfilled by the Company and
payments are due within a three-month period from the date of
delivery. Consequently, license fee revenue is generally
recognized when the product is shipped. Revenues from software
maintenance agreements are recognized ratably over the term of
the maintenance period, which is typically one year. ATG enters
into reseller arrangements that typically provide for sublicense
fees payable to ATG based upon a percentage of ATGs list
price. Revenues are recognized under reseller agreements as
earned for guaranteed minimum royalties, generally ratably over
one year, or based upon actual sales by the resellers. ATG does
not grant its resellers the right of return or price protection.

44



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. Unbilled
services represent service revenues that have been earned by ATG
in advance of billings. Amounts collected or billed prior to
satisfying the above revenue recognition criteria are reflected
as deferred revenue. Deferred revenue primarily consists of
advance payments related to support and maintenance and service
agreements.



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

Net income (loss) per share is computed in
accordance with Statement of Financial Accounting Standards
(FAS) 128, Earnings Per Share. Basic net income
(loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common
stock outstanding during the period. Diluted net income
(loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common
stock outstanding, plus the dilutive effect of common stock
equivalents, which consist of stock options using the treasury
stock method.

The following table sets forth basic and diluted
net income (loss) per share computational data for the
years ended December 31, 2002, 2001 and 2000 (in thousands,
except per-share amounts):

|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------ | 
|                                                                                                                                     |  | 2002 |         | 2001 |  | 2000
|                                                                                                                                     |  |      |         |      |  |     
|Net income (loss)                                                                                                                    |  | $    | (29,490 | )    |  | $    | (156,005 | ) |  | $ | 14,487 | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|Weighted average common shares outstanding used
    in computing basic net income (loss) per share                                   |  |      | 69,921  |      |  |      | 68,603   |   |  |   | 66,932 | 
|Weighted average common equivalent shares
    outstanding:                                                                           |  |      |         |      |  |      |          |   |  |   |        | 
|Employee common stock options                                                                                                        |  |      |        |      |  |      |         |   |  |   | 6,206  | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|Total weighted average common and common
    equivalent shares outstanding used in computing diluted net
    income (loss) per share |  |      | 69,921  |      |  |      | 68,603   |   |  |   | 73,138 | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|Basic net income (loss) per share                                                                                                    |  | $    | (0.42   | )    |  | $    | (2.27    | ) |  | $ | 0.22   | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|Diluted net income (loss) per share                                                                                                  |  | $    | (0.42   | )    |  | $    | (2.27    | ) |  | $ | 0.20   | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 
|Antidilutive common stock equivalents                                                                                                |  |      | 11,571  |      |  |      | 13,038   |   |  |   | 3,902  | 
|                                                                                                                                     |  |      |         |      |  |      |          |   |  |   |        | 



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

ATG accounts for investments in marketable
securities under FAS 115, Accounting for Certain Investments
in Debt and Equity Securities(FAS 115). Under FAS 115,
investments for which ATG has the positive intent and the
ability to hold to maturity, consisting of cash equivalents and
marketable securities, are reported at amortized cost, which
approximates fair market value. Cash equivalents are highly
liquid investments with maturities at the date of acquisition of
less than 90 days. Marketable securities are investment
grade debt securities with maturities at the date of acquisition
of greater than ninety days. At December 31, 2002 and 2001,
all of ATGs marketable securities were held in commercial
paper and corporate bonds and were classified as
held-to-maturity, and have maturities that are less than one
year. The average maturity of ATGs marketable securities
is approximately 3.6 months and 4.3 months at
December 31, 2002 and 2001, respectively. At
December 31, 2002, 2001 and 2000, the difference between
the amortized cost and market value of ATGs marketable
securities was approximately $(21,000) $163,000 and $181,000,
respectively. Realized gains and losses in 2002, 2001 and 2000
were not material. Restricted cash represents the portion of
ATGs outstanding letters of credit that are cash
collateralized as of December 31,

45



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2001 (see Note 3). At December 31, 2002
and 2001, ATGs cash, cash equivalents and marketable
securities consisted of the following:

|                            |                           |                                 |   |        |        |  |   |        |        | 
|--------------------------- | ------------------------- | ------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                            |                           |                                
|                            |                           | December 31,                   
|                            |                           |                                
|                            |                           | 2002                            |   | 2001  
|                            |                           |                                 |   |       
|                            |                           |                                
|                            |                           | (In thousands)                 
|Cash and cash equivalents  |                           |                                 |   |        |        |  |   |       
|                            | Cash                      |                                 | $ | 39,130 |        |  | $ | 10,518 |       
|                            | Money market accounts     |                                 |   | 6,699  |        |  |   | 38,975 |       
|                            |                           |                                 |   |        |        |  |   |       
|                            |                           | Total cash and cash equivalents |   | $      | 45,829 |  |   | $      | 49,493 | 
|                            |                           |                                 |   |        |        |  |   |       
|Marketable securities      |                           |                                 |   |        |        |  |   |       
|                            | Corporate debt securities |                                 | $ | 22,729 |        |  | $ | 14,057 |       
|                            |                           |                                 |   |        |        |  |   |       
|                            |                           | Total marketable securities     |   | $      | 22,729 |  |   | $      | 14,057 | 
|                            |                           |                                 |   |        |        |  |   |       
|Restricted cash            |                           |                                 |   |        |        |  |   |       
|                            | Restricted cash           |                                 | $ |       |        |  | $ | 16,757 |       
|                            |                           |                                 |   |        |        |  |   |       
|                            |                           | Total restricted cash           |   | $      |       |  |   | $      | 16,757 | 
|                            |                           |                                 |   |        |        |  |   |       



|    |                       
|--- | ----------------------
|(f) | Property and Equipment

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

Property and equipment at December 31, 2002
and 2001, consisted of the following:

|                                                     |  |                                        |         |                |       |      |        |  |       |   |        | 
|---------------------------------------------------- |  | -------------------------------------- | ------- | -------------- | ----- | ---- | ------ |  | ----- | - | ------ | 
|                                                     |  |                                        |         |               
|                                                     |  |                                        |         | December 31,  
|                                                     |  | Estimated                              |         |               
|Asset Classification                                 |  | Useful Life                            |         | 2002           |       | 2001
|                                                     |  |                                        |         |                |       |     
|                                                     |  |                                        |         |               
|                                                     |  |                                        |         | (In thousands)
|Computer equipment                                   |  |                                        | 3 years |                |       | $    | 12,231 |  |       | $ | 13,210 | 
|Leasehold improvements                               |  | Lesser of useful life or life of lease |         |                | 5,124 |      |        |  | 6,021 |  
|Furniture and fixtures                               |  |                                        | 7 years |                |       |      | 3,656  |  |       |   | 4,658  | 
|Computer software                                    |  |                                        | 3 years |                |       |      | 3,893  |  |       |   | 4,693  | 
|                                                     |  |                                        |         |                |       |      |        |  |       |   |        | 
|                                                     |  |                                        |         |                |       |      | 24,904 |  |       |   | 28,582 | 
|Less  Accumulated depreciation and
    amortization |  |                                        |         |                |       |      | 17,906 |  |       |   | 12,411 | 
|                                                     |  |                                        |         |                |       |      |        |  |       |   |        | 
|                                                     |  |                                        |         |                |       | $    | 6,998  |  |       | $ | 16,171 | 
|                                                     |  |                                        |         |                |       |      |        |  |       |   |        | 

Depreciation expense included in the accompanying
statements of operations was approximately $7,147,000,
$8,775,000 and $3,768,000 for the years ended December 31,
2002, 2001 and 2000, respectively.



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

ATG evaluates the establishment of technological
feasibility of its products in accordance with FAS 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed(FAS 86). ATG sells products
in a market that is subject to rapid technological change, new
product development and changing customer needs. Accordingly,
ATG has concluded that technological feasibility is not
established until the development stage of the product is nearly
complete. ATG defines technological feasibility as the
completion of a working model. The time period during which
costs could be capitalized, from the point of

46



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(h) Income
Taxes

ATG accounts for income taxes in accordance with
the provisions of FAS 109, Accounting for Income Taxes(FAS 109). This statement requires ATG to recognize a
current tax asset or liability for current taxes payable or
refundable and to record deferred tax assets or liabilities for
the estimated future tax effects of temporary differences and
carryforwards to the extent that they are realizable. A
valuation allowance is established against net deferred tax
assets, if based on the weighted available evidence, it is more
likely than not that all or a portion of the deferred tax assets
will not be realized (see Note 4).

(i) Stock-Based
Compensation

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

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

|                                                                                                                    |                    |                                              |         |         |   |      |          |          |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------- | ------------------ | -------------------------------------------- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | -
|                                                                                                                    |                    |                                             
|                                                                                                                    |                    | Years Ended December 31,                    
|                                                                                                                    |                    |                                             
|                                                                                                                    |                    | 2002                                         |         | 2001    |   | 2000
|                                                                                                                    |                    |                                              |         |         |   |     
|                                                                                                                    |                    |                                             
|                                                                                                                    |                    | (In thousands, except per-share information)
|Net income (loss) as reported                                                                                       |                    | $                                            | (29,490 | )       |   | $    | (156,005 | )        |   | $ | 14,487  |        
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |                    |                                              | 942     |         |   |      | 1,280    |          |   |   | 1,273   |        
|Deduct: Total stock based employee compensation
    expense determined under fair value based method for all awards |                    |                                              | (39,913 | )       |   |      | (49,978  | )        |   |   | (29,546 | )      
|                                                                                                                    |                    |                                              |         |         |   |      |          |          |   |   |         |        
|                                                                                                                    | Pro forma net loss |                                              | $       | (68,461 | ) |      | $        | (204,703 | ) |   | $       | (13,786 | )
|                                                                                                                    |                    |                                              |         |         |   |      |          |          |   |   |         |        
|Basic net income (loss) per share                                                                                  |                    |                                              |         |         |   |      |          |          |   |   |         |        
|                                                                                                                    | As reported        |                                              | $       | (0.42   | ) |      | $        | (2.27    | ) |   | $       | 0.22    |  
|                                                                                                                    | Pro forma          |                                              | $       | (0.98   | ) |      | $        | (2.98    | ) |   | $       | (0.21   | )
|Diluted net income (loss) per share                                                                                |                    |                                              |         |         |   |      |          |          |   |   |         |        
|                                                                                                                    | As reported        |                                              | $       | (0.42   | ) |      | $        | (2.27    | ) |   | $       | 0.20    |  
|                                                                                                                    | Pro forma          |                                              | $       | (0.98   | ) |      | $        | (2.98    | ) |   | $       | (0.21   | )

(j) Comprehensive
Income (Loss)

FAS 130, Reporting Comprehensive
Income, requires a full set of general-purpose financial
statements to include the reporting of comprehensive income
(loss). The Companys comprehensive income (loss) in 2000
does not differ from its net income (loss). It is composed of
two components in 2002 and 2001, net loss and foreign currency
translation loss. The Company has disclosed such amounts in the
Consolidated Statement of Stockholders Equity and
Comprehensive Income (Loss).

47



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(k) Fair
Value of Financial Instruments

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

(l) Concentrations
of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of marketable securities and accounts receivable. To reduce its
concentration of credit risk with respect to accounts
receivable, 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.

As of December 31, 2002, no customer
accounted for greater than 10% of accounts receivable. As of
December 31, 2001, one customer accounted for 23% of
accounts receivable.

(m) Long-Lived
Assets

In August 2001, the FASB issued FAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets.
FAS 144 supersedes FAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of, but retains FAS 121s fundamental
provisions for (a) recognition and measurement of
impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by
sale. FAS 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results
of Operations  Reporting the Effects of a Disposal of
a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions(APB 30), for segments of a business to be disposed of
but retains the requirement to report discontinued operations
separately from continuing operations. The Company adopted
FAS 144, effective January 1, 2002, which did not have
a material impact on its financial position or results of
operations.

The Company reviews the carrying value of its
long-lived assets whenever events and circumstances indicate
that the assets might be impaired and the carrying value may not
be recoverable. Recoverability of these assets is measured by
comparison of the carrying value of the assets to the
undiscounted cash flows estimated to be generated by those
assets over their remaining economic life. If such assets are
considered impaired, the impairment loss is measured by
comparing the fair value of the assets to their carrying values.
Fair value is determined by either a quoted market price or a
value determined by a discounted cash flow technique, whichever
is more appropriate under the circumstances involved.

(n) Hedging
Activities

A portion of our revenues, earnings and cash
flows are exposed to changes in foreign exchange rates. On
September 18, 2002, our Board of Directors formally
approved our foreign currency-hedging program to mitigate the
risk of foreign currency fluctuations on earnings and cash
flows. Under this program, we may at times seek to manage our
foreign exchange risk through the use of foreign currency
forward-exchange contracts. ATG may use these contracts to
offset the potential earnings and cash flow effects from
short-term foreign currency assets and liabilities that arise
from operations. FAS 133, Accounting for Derivative
Instruments and Hedging Activities(FAS 133) requires
that all derivative contracts and hedging activities be recorded
at fair value in the financial statements. Such contracts are
marked to market in each reporting period with the resulting
change in fair value recognized immediately in Other Income in
the Statement of

48



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Operations as unrealized gains and losses up
through their maturity, at which time the gains or losses become
realized. These gains and losses offset the changes in fair
value of the asset or liability being hedged. Realized gains and
losses were not material in 2002. As of December 31, 2002
there were no foreign currency-hedging contracts outstanding.
Furthermore, the Company does not have any option or other
derivative contracts outstanding at December 31, 2002.

(o) Foreign
Currency Translation

The financial statements of the Companys
foreign subsidiaries are translated in accordance with
FAS 52, Foreign Currency Translation(FAS 52).
In 2000, the functional currency of the Companys foreign
subsidiaries was the U.S. dollar. Accordingly, all assets
and liabilities of the foreign subsidiaries were translated
using the exchange rate at the balance sheet date, except for
property and equipment, other assets and stockholders
equity, which were translated at historical rates. Revenues and
expenses were translated at average rates during the period. In
2001, the Company determined the functional currency of its
foreign subsidiaries was the local currency. As a result, the
Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year-end. Prior
to translation, the Company remeasures foreign currency
denominated assets and liabilities into the functional currency
of the respective Company entity, resulting in unrealized gains
or losses recorded in Interest and Other Income, Net in the
accompanying Statement of Operations. Revenues and expenses are
translated using average exchange rates in effect during the
year. Gains and losses from foreign currency translation are
credited or charged to accumulated other comprehensive loss
included in Stockholders Equity in the accompanying
Consolidated Balance Sheets. During the years ended
December 31, 2002, 2001, and 2000, the Company recorded
$950,000, $58,000, and $0, respectively, from transactional
gains and losses and remeasurement gains and losses which are
included in Interest and Other Income, Net in the accompanying
Statements of Operations.

(p) Recent
Accounting Pronouncements

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

During fiscal 2001, the Company determined that
the remaining unamortized goodwill of $4.0 million
associated with two professional services acquisitions was
impaired, and accordingly was included as a component of the
restructuring charge recorded in the fourth quarter of fiscal
2001 (see Note 11). The effect

49



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of no longer amortizing goodwill in accordance
with FAS 142 for the twelve months ended December 31,
2001 and 2000 is as follows:

|                                               |                            |                         |          |                         |   |   |        |      | 
|---------------------------------------------- | -------------------------- | ----------------------- | -------- | ----------------------- | - | - | ------ | ---- | 
|                                               |                            | For the Twelve Months   |          | For the Twelve Months  
|                                               |                            | Ended December 31, 2001 |          | Ended December 31, 2000
|                                               |                            |                         |          |                        
|Reported net income (loss)                     |                            | $                       | (156,005 | )                       |   | $ | 14,487 |     
|Add back: Goodwill amortization (net of taxes) |                            |                         | 2,217    |                         |   |   | 777    |     
|                                               |                            |                         |          |                         |   |   |        |     
|Adjusted net income (loss)                     |                            | $                       | (153,788 | )                       |   | $ | 15,264 |     
|                                               |                            |                         |          |                         |   |   |        |     
|Basic earnings per share:                      |                            |                         |          |                         |   |   |        |     
|                                               | Reported net income (loss) |                         | $        | (2.27                   | ) |   | $      | 0.22 | 
|                                               | Goodwill amortization      |                         |          | 0.03                    |   |   |        | 0.01 | 
|                                               |                            |                         |          |                         |   |   |        |     
|                                               | Adjusted net income (loss) |                         | $        | (2.24                   | ) |   | $      | 0.23 | 
|                                               |                            |                         |          |                         |   |   |        |     
|Diluted earnings per share:                    |                            |                         |          |                         |   |   |        |     
|                                               | Reported net income (loss) |                         | $        | (2.27                   | ) |   | $      | 0.20 | 
|                                               | Goodwill amortization      |                         |          | 0.03                    |   |   |        | 0.01 | 
|                                               |                            |                         |          |                         |   |   |        |     
|                                               | Adjusted net income (loss) |                         | $        | (2.24                   | ) |   | $      | 0.21 | 
|                                               |                            |                         |          |                         |   |   |        |     

In November 2001, the Emerging Issues Task Force
(EITF) issued EITF 01-14, Income Statement
Characterization of Reimbursement Received for
Out-of-Pocket Expenses Incurred, relating to the
accounting for reimbursements received for out-of-pocket
expenses. In accordance with EITF 01-14, reimbursements
received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The
Company has historically accounted for such reimbursements as a
reduction of the cost of revenues. The Company adopted
EITF 01-14 effective January 1, 2002. Comparative
consolidated financial statements for prior periods have been
reclassified to comply with the guidance in EITF 01-14. The
impact of the reclassification was to increase revenues by 2%
for the year ended December 31, 2002, 1% for the year ended
December 31, 2001 and 1% for the year ended
December 31, 2000.

In July 2002, the FASB issued FAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities(FAS 146), which addresses financial
accounting and reporting for costs associated with exit or
disposal activities. FAS 146 supercedes EITF 94-3
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), and establishes when a
liability for a cost associated with an exit or disposal
activity must be recognized, which is at the time the liability
is incurred. Severance pay, in many cases, would be recognized
over time rather than up front. If the benefit arrangement
requires employees to render future service beyond a
minimum retention period a liability should be
recognized as employees render service over the future service
period even if the benefit formula used to calculate an
employees termination benefit is based on length of
service. FAS 146 is effective for exit or disposal
activities initiated after December 31, 2002, and is not
expected to have a material impact on the Companys
consolidated financial statements.

On December 31, 2002, the FASB issued
FAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure(FAS 148). FAS 148 amends FAS 123, to provide
alternative methods of transition to FAS 123s fair
value method of accounting for stock-based employee compensation
in the event companies adopt FAS 123 and account for stock
options under the fair value method. FAS 148 also amends
the disclosure provisions of FAS 123 and APB Opinion
No. 28, Interim Financial Reporting(APB 28),
to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim
financial statements. While FAS 148 does not amend
FAS 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions
of FAS 148 are applicable to all

50



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

companies with stock-based employee compensation,
regardless of whether they account for that compensation using
the fair value method of FAS 123 or the intrinsic value
method of APB 25. As of December 31, 2002, ATG has
adopted the disclosure requirements of FAS 148 and have
shown the pro-forma disclosures in the summary of significant
accounting policies (see Footnote 1(i)).

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

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

(q) Financial
Statement Reclasses

During 2002, ATG has made certain changes and
adjustments to the Consolidated Financial Statements and related
Notes. In accordance with EITF 01-14, the Company has
reclassified reimbursements received for out-of-pocket expenses
as revenue and cost of revenues for the years 2002, 2001 and
2000. Restricted cash has been separately disclosed in the 2001
Balance Sheet, Cash Flow Statement and Note 1(e) under the
caption Cash, Cash Equivalents and Marketable Securities related
to the outstanding letters of credit in favor of various
landlords to secure obligations under the Companys
facility leases. In Note 9 the Company has separately
disclosed income taxes within accrued expenses. In addition, the
Company has adopted FAS 142 and provided the required
transitional disclosures in Note 1(p).

(2) Disclosures About Segments of an
Enterprise

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

51



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $30,078,000, $47,584,000 and
$37,569,000 in 2002, 2001 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,
2002, 2001 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 2002,
2001 and 2000:

|                                              |  |                          |     |      |  |      |     |   |  |  |     |  
|--------------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                              |  |                         
|                                              |  | Years Ended December 31,
|                                              |  |                         
|                                              |  | 2002                     |     | 2001 |  | 2000
|                                              |  |                          |     |      |  |     
|United States                                 |  |                          | 70  | %    |  |      | 66  | % |  |  | 77  | %
|Europe, Middle East and Africa (excluding UK) |  |                          | 6   |      |  |      | 18  |   |  |  | 13  |  
|United Kingdom (UK)                           |  |                          | 18  |      |  |      | 10  |   |  |  | 6   |  
|Asia Pacific                                  |  |                          | 3   |      |  |      | 2   |   |  |  | 2   |  
|Other                                         |  |                          | 3   |      |  |      | 4   |   |  |  | 2   |  
|                                              |  |                          |     |      |  |      |     |   |  |  |     |  
|                                              |  |                          | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                              |  |                          |     |      |  |      |     |   |  |  |     |  

(3) Long-Term Obligations

(a) Credit
Facility

Effective June 13, 2002, ATG entered into a
$15 million revolving line of credit with Silicon Valley
Bank (the Bank) which provides for borrowings of up to the
lesser of $15 million or 80% of eligible accounts
receivable. The line of credit bore interest at the Banks
prime rate. The line of credit was secured by all of the
Companys tangible and intangible intellectual and personal
property and is subject to financial covenants including
liquidity coverage and profitability. As a result of this
agreement, ATG was no longer required to fully cash secure all
of its letters of credit (LCs). However, the Company was
required to maintain $18 million of unrestricted cash with
the Bank at all times during the term of the line of credit. As
a result of this requirement, this revolving line of credit did
not increase the amount of net cash available to the Company
during the term of the agreement.

Effective December 24, 2002, ATG modified
its existing working capital facility with the Bank. ATGs
eligible line of credit was increased to $20 million from
$15 million. The new line is no longer tied to 80% of
eligible accounts receivable. While there were no outstanding
borrowings under the facility at December 31, 2002, ATG has
issued letters of credit (LCs) totaling
$13.9 million, which are supported by this facility. The
line of credit bears interest at the Banks prime rate
(4.25% at December 31, 2002). As of December 31, 2002,
approximately $6.1 million was available for future
borrowings. The line of credit is secured by all of ATGs
tangible and intangible intellectual and personal property and
is subject to financial covenants including liquidity coverage
and profitability. The liquidity covenant mandates ATG maintain
$40 million in cash at the end of each month throughout the
duration of the facility. The profitability covenant allows for
net losses not to exceed; $4.5 million for the fourth quarter of
2002, $4.0 million for the first quarter of 2003,
$2.0 million for the second quarter of 2003,
$1.0 million for the third and fourth quarters of 2003. The
Bank has granted additional provisions, to be used if necessary,
for a maximum $25 million in restructuring charges for the
duration of the facility. Of the $25 million, a maximum of
$7.5 million may be taken as a cash expense during the term
of the facility; a second provision is made for a maximum of
$12.0 million in cash to be paid toward real estate
buy-outs. ATG is required to maintain $27 million in
unrestricted cash with the Bank at all times, and in the event
the balance should decrease, ATG will be required to pay fees
and expenses to compensate

52



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Bank for lost income. As of December 31,
2002, the Company was in compliance with all related financial
covenants. While there were no outstanding borrowings under the
facility at December 31, 2002, ATG has issued letters of
credit (LCs) totaling $13.9 million, which are
supported by this facility. In the event that ATG does not
comply with any of the covenants within the line of credit or
defaults on any of its provisions, the Banks significant
remedies include, 1) declaring all obligations immediately
due and payable; 2) ceasing to advance money or extend
credit for our benefit; 3) applying to the obligations any
balances and deposits held by us or any amount held by the Bank
owing to or for the credit or the account of ATG; and,
(4) putting a hold on any deposit account held as
collateral. If the agreement expires, or is not extended, the
Bank will require outstanding LCs at that time to be cash
secured on terms acceptable to the Bank. The revolving line of
credit expires on December 23, 2003.

As of December 31, 2002, ATG had commitments
totaling approximately $13.9 million in the form of
outstanding LCs in favor of our various landlords to
secure obligations under ATGs facility leases pursuant to
leases expiring in 2003 through 2009. As of December 31,
2002, all of the LCs were secured under the line of credit.

Throughout 2001, ATG had a working capital
line-of-credit agreement with a bank, which provided for
borrowings of up to the lesser of $12,500,000, or 80%, of
eligible accounts receivable (as defined). The line of credit
bore interest at the Banks prime rate (4.75% at
December 31, 2001) and expired in December 2001. As of
December 31, 2001, ATG had commitments totaling
approximately $16.7 million in the form of outstanding
standby letters of credit (LCs) in favor of ATGs
various landlords to secure obligations under ATGs
facility leases. All LCs were fully cash secured as of
December 31, 2001, and these secured amounts were
classified as restricted cash at December 31, 2001.

(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 could sell up to
$10.0 million of its accounts receivable to the bank
subject to acceptance by the bank on a non-recourse basis. Upon
purchase, the bank assumed the risk of collection for the
acquired accounts receivable except in the event that ATG
violated the terms of the receivables purchase agreement or the
customer asserted a discount, allowance, warranty claim or right
of return. The accounts receivable were 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%. In September 2000, ATG
sold $9.6 million of accounts receivable to the bank under
the Receivables Agreement. ATG recorded the transaction as a
sale of accounts receivable in accordance with FAS 125,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilitiesand FAS 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and accordingly reduced
accounts receivable by the amount of the accounts receivable
sold. As of February 2001, all of the sold receivables were
collected in full and remitted to the bank. This agreement
expired in September 2001.

(c) BroadVision
Settlement

In connection with a settlement of the patent
infringement claim by BroadVision Inc. (BroadVision), ATG
acquired a perpetual, paid-up license for BroadVisions
patented technology. ATG paid $2,000,000 in each of the years
ended December 31, 2002 and 2001, and $11,000,000 in 2000.
At December 31, 2001, these payments were included in the
accompanying consolidated balance sheet as follows: $2,000,000
in current maturities of long-term obligations, with no
long-term obligations. ATG expensed $2,332,000, $2,333,000 and
$2,333,000 of the settlement as cost of service revenues in the
years ended December 31, 2002, 2001, and 2000, respectively.

53



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Income Taxes

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

|         |       |                          |         |         |   |      |          |          |   |   |        |        | 
|-------- | ----- | ------------------------ | ------- | ------- | - | ---- | -------- | -------- | - | - | ------ | ------ | 
|         |       |                         
|         |       | Years Ended December 31,
|         |       |                         
|         |       | 2002                     |         | 2001    |   | 2000
|         |       |                          |         |         |   |     
|Domestic |       | $                        | (22,197 | )       |   | $    | (128,885 | )        |   | $ | 16,651 |       
|Foreign  |       |                          | (7,293  | )       |   |      | (3,269   | )        |   |   | 1,214  |       
|         |       |                          |         |         |   |      |          |          |   |   |        |       
|         | Total |                          | $       | (29,490 | ) |      | $        | (132,154 | ) |   | $      | 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,
|        |          |                         
|        |          | 2002                     |   | 2001 |  | 2000
|        |          |                          |   |      |  |     
|Federal |          |                          |   |      |  |      |        |        |   |   |       |       
|        | Current  |                          | $ |     |  |      | $      |       |   |   | $     | 8,780  |  
|        | Deferred |                          |   |     |  |      |        | 19,140 |   |   |       | (7,385 | )
|State   |          |                          |   |      |  |      |        |        |   |   |       |       
|        | Current  |                          |   |     |  |      |        | 53     |   |   |       | 1,789  |  
|        | Deferred |                          |   |     |  |      |        | 3,200  |   |   |       | (1,533 | )
|Foreign |          |                          |   |      |  |      |        |        |   |   |       |       
|        | Current  |                          |   |     |  |      |        | 2,457  |   |   |       | 1,727  |  
|        | Deferred |                          |   |     |  |      |        | (999   | ) |   |       |       |  
|        |          |                          |   |      |  |      |        |        |   |   |       |       
|        |          | $                        |  |      |  | $    | 23,851 |        |   | $ | 3,378 |       
|        |          |                          |   |      |  |      |        |        |   |   |       |       

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

|                                     |  |                          |       |      |  |      |       |    |  |  |       |  
|------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | -
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2002                     |       | 2001 |  | 2000
|                                     |  |                          |       |      |  |     
|Federal tax at statutory rate        |  |                          | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0  | %
|State taxes, net of federal benefit  |  |                          | (2.4  | )    |  |      | (3.1  | )  |  |  | 6.5   |  
|Meals and entertainment              |  |                          | 0.3   |      |  |      | 1.0   |    |  |  | 6.1   |  
|Deferred compensation                |  |                          | 0.8   |      |  |      |      |    |  |  | 4.9   |  
|Non-deductible restructuring costs   |  |                          |      |      |  |      | 2.0   |    |  |  |      |  
|Other                                |  |                          | 0.6   |      |  |      |      |    |  |  | 1.8   |  
|                                     |  |                          |       |      |  |      |       |    |  |  |       |  
|Provision before valuation allowance |  |                          | (35.7 | )    |  |      | (35.1 | )  |  |  | 54.3  |  
|                                     |  |                          |       |      |  |      |       |    |  |  |       |  
|Valuation allowance                  |  |                          | 35.7  |      |  |      | 53.1  |    |  |  | (35.4 | )
|                                     |  |                          |       |      |  |      |       |    |  |  |       |  
|                                     |  |                          |      | %    |  |      | 18.0  | %  |  |  | 18.9  | %
|                                     |  |                          |       |      |  |      |       |    |  |  |       |  

54



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                 |  |              |         |      |  |   |         |  
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2002         |         | 2001
|                                 |  |              |         |     
|Cumulative temporary differences |  | $            | 23,131  |      |  | $ | 21,811  |  
|US Income tax credits            |  |              | 1,037   |      |  |   | 1,037   |  
|Net operating losses             |  |              | 71,694  |      |  |   | 47,357  |  
|Acquisition related              |  |              |        |      |  |   |        |  
|Valuation-allowance              |  |              | (95,862 | )    |  |   | (70,205 | )
|                                 |  |              |         |      |  |   |         |  
|                                 |  | $            |        |      |  | $ |        |  
|                                 |  |              |         |      |  |   |         |  

As of December 31, 2002, ATG had net
operating loss carryforwards of approximately
$180.0 million for federal income tax purposes and
approximately $8.9 million for non-US income tax purposes.
Approximately $90.4 million of the federal and state income
tax net operating loss carryforwards relate to the exercise of
incentive and nonqualified stock options which are treated as
compensation deductions for federal and state income tax
purposes. Approximately $56.0 million of this amount was
tax benefited through additional paid-in-capital in 2000. ATG
also has available federal tax credit carryforwards of
approximately $1.0 million. If not utilized, these
carryforwards will expire at various dates beginning 2011
through 2022. If substantial changes in ATGs ownership
should occur, as defined by Section 382 of the Internal
Revenue Code (the Code), there could be annual limitations on
the amount of carryforwards that can be realized in future
periods. ATG has completed several refinancings since its
inception and has incurred ownership changes, as defined under
the Code, which could have an impact on the Companys
ability to utilize these tax credit and operating loss
carryforwards.

As of December 31, 2002, the Company has
recorded a full valuation-allowance against its deferred tax
assets due to the uncertainty surrounding the realizability of
these assets. The valuation allowance increased
$25.7 million to $95.9 million in 2002 from
$70.2 million in 2001.

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

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

(5) Stockholders Equity



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



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

In April 1996, the 1996 Stock Option Plan (the
1996 Plan) was approved by ATGs Board of Directors and
stockholders. The purpose of the 1996 Plan is to reward
employees, officers and directors, and consultants and advisors
to ATG who are expected to contribute to the growth and success
of ATG. The 1996 Plan

55



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

provides for the award of options to purchase
shares of ATGs common stock. Stock options granted under
the 1996 Plan may be either incentive stock options or
nonqualified stock options. The 1996 Plan is administered by the
Board of Directors, which has the authority to designate
participants, determine the number and type of options to be
granted, the time at which options are exercisable, the method
of payment and any other terms or conditions of the options.
Options generally vest quarterly over a two to four-year period
and expire 10 years from the date of grant. While the Board
determines the prices at which options may be exercised under
the 1996 Plan, the exercise price of an incentive stock option
shall be at least 100% (110% for incentive stock options granted
to a 10% stockholder) of the fair market value of ATGs
common stock on the date of grant. On May 14, 2001, the
1996 Plan was amended to increase the total shares of common
stock that have been reserved for options to be granted to
25,600,000. As of December 31, 2002, there are 8,147,226
shares available for future grant under the 1996 Plan.

Additionally, in May 1999, ATG granted 150,000
options outside ATGs stock option plans to an executive of
ATG. As of December 31, 2002, these options have not been
exercised.



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

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

Under the terms of the Director Plan, each
currently active non-employee 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 became directors after the
initial public offering and were not employees of ATG received
an option to purchase 25,000 shares of the Companys 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 10,000 shares of common stock on
the date of each annual meeting of stockholders 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 are fully vested upon grant. As of
December 31, 2002, there are 50,000 shares available for
future grant under the Director Plan.

56



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                               |           |                                 |        |          |   |          |            |            |  |   |       |       | 
|------------------------------ | --------- | ------------------------------- | ------ | -------- | - | -------- | ---------- | ---------- |  | - | ----- | ----- | 
|                               |           |                                 |        |          |   | Weighted
|                               |           |                                 |        |          |   | Average 
|                               |           | Number                          |        | Exercise |   | Exercise
|                               |           | of Shares                       |        | Price    |   | Price   
|                               |           |                                 |        |          |   |         
|                               |           |                                
|                               |           | (In thousands, except per-share
|                               |           | information)                   
|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 |      
|                               | Granted   |                                 |        | 8,532    |   |          |            | .07- 40.25 |  |   |       | 8.81  | 
|                               | Exercised |                                 |        | (937     | ) |          |            | .06- 75.56 |  |   |       | 12.36 | 
|                               | Canceled  |                                 |        | (5,099   | ) |          |            | .06-120.00 |  |   |       | 35.47 | 
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      
|Outstanding, December 31, 2001 |           |                                 | 13,038 |          |   |          | .06-120.00 |            |  |   | 21.25 |      
|                               | Granted   |                                 |        | 4,288    |   |          |            | .90-  4.31 |  |   |       | 2.39  | 
|                               | Exercised |                                 |        | (343     | ) |          |            | .06-  2.13 |  |   |       | .33   | 
|                               | Canceled  |                                 |        | (5,412   | ) |          |            | .06-120.00 |  |   |       | 36.16 | 
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      
|Outstanding, December 31, 2002 |           |                                 | 11,571 |          |   | $        | .06-120.00 |            |  | $ | 7.91  |      
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      
|Exercisable, December 31, 2002 |           |                                 | 5,523  |          |   | $        | .06-120.00 |            |  | $ | 9.78  |      
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      
|Exercisable, December 31, 2001 |           |                                 | 4,370  |          |   | $        | .06-120.00 |            |  | $ | 23.76 |      
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      
|Exercisable, December 31, 2000 |           |                                 | 2,297  |          |   | $        | .06-120.00 |            |  | $ | 13.81 |      
|                               |           |                                 |        |          |   |          |            |            |  |   |       |      

57



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
relating to currently outstanding and exercisable options as of
December 31, 2002:

|                         |                |                                              |  |                  |        |          |  |        |     |          |  |   |       |  |  |  |       |  |  |   |       | 
|------------------------ | -------------- | -------------------------------------------- |  | ---------------- | ------ | -------- |  | ------ | --- | -------- |  | - | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |                |                                              |  |                 
|                         |                | Outstanding                                  |  | Exercisable     
|                         |                |                                              |  |                 
|                         |                |                                              |  | Weighted Average |        |          |  |       
|                         |                |                                              |  | Remaining        |        | Weighted |  |        |     | Weighted
|                         |                |                                              |  | Contractual Life |        | Average  |  | Number |     | Average 
|                         |                | Number of                                    |  | Outstanding      |        | Exercise |  | of     |     | Exercise
|Range of Exercise Prices |                | Shares                                       |  | (Years)          |        | Price    |  | Shares |     | Price   
|                         |                |                                              |  |                  |        |          |  |        |     |         
|                         |                |                                             
|                         |                | (In thousands, except per-share information)
|                         | $  .06-$   .08 |                                              |  |                  | 20     |          |  |        | 4.3 |          |  | $ | .07   |  |  |  | 18    |  |  | $ | .07   | 
|                         | .25            |                                              |  |                  | 590    |          |  |        | 5.1 |          |  |   | .25   |  |  |  | 590   |  |  |   | .25   | 
|                         | .70-   1.02    |                                              |  |                  | 1,894  |          |  |        | 9.2 |          |  |   | .94   |  |  |  | 262   |  |  |   | .94   | 
|                         | 1.05-   1.55   |                                              |  |                  | 1,339  |          |  |        | 8.4 |          |  |   | 1.36  |  |  |  | 322   |  |  |   | 1.33  | 
|                         | 1.67-   2.46   |                                              |  |                  | 1,873  |          |  |        | 8.4 |          |  |   | 2.09  |  |  |  | 1,092 |  |  |   | 2.12  | 
|                         | 2.54-   3.67   |                                              |  |                  | 369    |          |  |        | 8.9 |          |  |   | 3.28  |  |  |  | 77    |  |  |   | 3.34  | 
|                         | 3.83-   5.59   |                                              |  |                  | 3,660  |          |  |        | 7.6 |          |  |   | 4.42  |  |  |  | 1,851 |  |  |   | 4.68  | 
|                         | 5.75-   8.59   |                                              |  |                  | 108    |          |  |        | 7.5 |          |  |   | 7.41  |  |  |  | 95    |  |  |   | 7.60  | 
|                         | 8.95-  13.41   |                                              |  |                  | 670    |          |  |        | 7.8 |          |  |   | 10.08 |  |  |  | 565   |  |  |   | 9.91  | 
|                         | 14.00-  20.00  |                                              |  |                  | 93     |          |  |        | 7.7 |          |  |   | 18.55 |  |  |  | 50    |  |  |   | 18.64 | 
|                         | 22.94-  34.25  |                                              |  |                  | 105    |          |  |        | 8.1 |          |  |   | 28.79 |  |  |  | 50    |  |  |   | 29.06 | 
|                         | 34.50-  51.69  |                                              |  |                  | 308    |          |  |        | 7.5 |          |  |   | 43.38 |  |  |  | 186   |  |  |   | 44.51 | 
|                         | 52.50-  78.00  |                                              |  |                  | 336    |          |  |        | 5.0 |          |  |   | 61.02 |  |  |  | 252   |  |  |   | 59.23 | 
|                         | 80.56- 120.00  |                                              |  |                  | 206    |          |  |        | 7.6 |          |  |   | 87.91 |  |  |  | 113   |  |  |   | 88.27 | 
|                         |                |                                              |  |                  |        |          |  |        |     |          |  |   |       |  |  |  |       |  |  |   |       | 
|                         |                |                                              |  |                  | 11,571 |          |  |        | 7.9 |          |  | $ | 7.91  |  |  |  | 5,523 |  |  | $ | 9.78  | 
|                         |                |                                              |  |                  |        |          |  |        |     |          |  |   |       |  |  |  |       |  |  |   |       | 

Through 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 over the
vesting period of the underlying stock options. ATG recorded
compensation expense of, $942,000, $1,280,000 and $1,273,000 for
the years ended December 31, 2002, 2001 and 2000,
respectively, related to these options.



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

The 1999 Employee Stock Purchase Plan (the Stock
Purchase Plan) was adopted by ATGs Board of Directors and
approved by stockholders in May 1999. The Stock Purchase Plan
authorizes the issuance of up to a total of 1,000,000 shares of
ATGs common stock to participating employees. In May 2002
the Companys shareholders approved an increase in the
number of shares available in the Plan from 1,000,000 to
3,000,000 shares. 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
the Companys stock are not eligible to participate. During
each designated quarterly offering period, each eligible
employee may deduct between 1% to 10% of base pay to purchase
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.

During the years ended 2002, 2001 and 2000,
1,616,442, 131,708 and 179,099 shares, respectively, were issued
under the 1999 Employee Stock Purchase Plan. As of
December 31, 2002, there were 1,077,402 shares remaining
unissued in the plan.

58



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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

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

|                                                                       |  |                          |           |      |  |      |           |   |  |  |            |  
|---------------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  |  | ---------- | -
|                                                                       |  |                         
|                                                                       |  | Years Ended December 31,
|                                                                       |  |                         
|                                                                       |  | 2002                     |           | 2001 |  | 2000
|                                                                       |  |                          |           |      |  |     
|Risk-free interest rate                                                |  |                          | 3.43      | %    |  |      | 4.43      | % |  |  | 5.92       | %
|Expected dividend yield                                                |  |                          |          |      |  |      |          |   |  |  |           |  
|Expected live (years)                                                  |  |                          | 4         |      |  |      | 4         |   |  |  | 4          |  
|Expected volatility                                                    |  |                          | 125       | %    |  |      | 135       | % |  |  | 115        | %
|Weighted average remaining contractual life of
    options outstanding |  |                          | 7.9 years |      |  |      | 8.4 years |   |  |  | 8.80 years |  

The weighted average grant date fair values per
share generated by application of the Black-Scholes model
utilizing the assumptions noted above for the years ended
December 31, 2002, 2001 and 2000 were $1.97, $7.40 and
$52.64, respectively, resulting in total compensation expense of
$8,549,000, $62,197,000 and $256,901,000 for stock awards
granted in 2002, 2001 and 2000, respectively. Total compensation
expense is recognized over the underlying option period adjusted
for forfeitures.

As required under FAS 123, the reported net
(loss) income and basic and diluted earnings per share have
been presented to reflect the impact had the Company been
required to include the amortization of the Black-Scholes option
value as expense. For purposes of this disclosure, the estimated
fair value of the options is amortized to expense over the
options vesting periods. See Note 1(i) for the
disclosure of pro forma net loss and loss per share.



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

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

When exercisable, each Right will entitle
shareholders to buy one one-thousandth of a share of a newly
created Series A Junior Participating Preferred Stock at an
exercise price of $15 per Right. Subject to certain exceptions,
the Rights will be exercisable after a person or group (except
for certain excluded persons) acquires beneficial ownership of
15% or more of ATGs outstanding common stock or undertakes
a tender or

59



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

exchange offer which, if consummated, would
result in that person or group beneficially owning 15% or more
of ATGs outstanding common stock. The Rights will be
redeemable by the Board at any time before a person or group
acquires 15% or more of ATGs outstanding common stock and
under certain other circumstances at a redemption price of $.001
per Right.



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

On August 1, 2002, the Company offered all
full-time and part-time employees, other than the officers as
defined in Rule 16a-1(f) of the Securities and Exchange Act
of 1934, and directors, the opportunity to participate in a
stock option exchange program. The voluntary program gave
employees the opportunity to exchange options with exercise
prices of $15.00 or more per share that were granted under the
Amended and Restated 1996 Stock Option Plan. However, if an
employee elected to cancel any awards, all options granted after
January 26, 2002 were also required to be canceled. The new
options will be exercisable for one share of ATGs common
stock for every three shares of the Companys common stock
issuable upon exercise of a surrendered option to be granted at
least six months and one day after the old options are cancelled.

The cancellation date for the options elected in
the exchange program was August 29, 2002 at which date the
Company accepted all such cancellations. The exercise price for
the new options will be the closing price of the Companys
common stock on The Nasdaq National Market on March 3,
2003, the anticipated re-grant date. Twenty-five percent of each
new option will vest immediately on the date the new options are
granted. The remaining seventy-five percent will vest in three
equal installments on the dates six months, twelve months and
eighteen months after the grant date. Approximately 3,000,495
options were eligible for exchange under this program.

On August 29, 2002, 1,997,819 options were
cancelled under the stock option exchange program. The
replacement options will be granted at least six months and one
day from August 29, 2002 (see Note 14 for additional
information).

(6) Acquisitions

On June 1, 2000, ATG completed the
acquisition of Petronio Technology Group, a Boston-based
provider of educational training and consulting services. ATG
acquired Petronio Technology Group for $1,200,000, consisting of
an initial payment of $600,000 at the closing and two annual
contingent payments of $300,000 each. The acquisition was
accounted for under the purchase method of accounting, and the
results of operations for Petronio Technology Group were
included in ATGs results from the acquisition date. ATG
recorded $600,000 in goodwill that was being amortized over two
years 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. For the year ended December 31, 2001, ATG
recorded amortization expense of $241,000 and compensation
expense of $300,000. Due to the Companys restructuring of
its business operations in 2001, the Company determined the
goodwill related to the asset was permanently impaired. As a
result, the Company wrote off $171,000 of the remaining
unamortized goodwill in the fourth quarter of 2001. This amount
is included in the Companys restructuring charge (see
Note 11).

On July 17, 2000, ATG completed the
acquisition of The Toronto Technology Group, Inc., a privately
held 30-person consulting and educational services company based
in Toronto, Canada, for approximately $12.0 million in
cash, options and shares of common stock. The acquisition was
accounted for under the purchase method of accounting. Upon the
closing of the transaction, ATG paid $5.2 million in cash,
issued 19,634 employee stock options and also issued 56,237
exchangeable shares of ATGs subsidiary Art Technology
Group (Canada), Inc. The exchangeable shares will become
exchangeable for 56,237 shares of ATGs common stock,
subject to a three-year vesting schedule. As of December 31
2001, 18,745 shares were exchanged for ATG Inc. common
shares. The Company accrued approximately $2.1 million in
compensation

60



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expense ratably from July 18, 2000 to
July 17, 2001, related to these shares that were exchanged.
Additionally, the company settled 11,762 exchangeable shares
with a certain employee. Upon settlement, ATG recorded
$1.3 million as a component of restructuring expense (see
Note 11). This expense included both the cash paid to
settle the award and unamortized deferred compensation at the
time of settlement. Additionally, 25,712 shares were
forfeited when the remainder of the employees left the company.
Also, as part of the 2001 restructuring charge, ATG incurred
charges relating to headcount reductions, excess office space,
and the write-off of the remaining goodwill of $3.8 million
all relating to the Toronto Technology Group Inc. acquisitions.
This charge was included as part of the restructuring (see
Note 11).

(7) Commitments and
Contingencies



| |           
| | ----------
| | (a) Leases

ATG has offices, primarily for sales and support
personnel, in ten domestic locations as well as ten foreign
countries. At December 31, 2002, ATG has issued
$13.9 million of LCs under its line of credit in
favor of various landlords to secure obligations under our other
facility leases, which expire from 2003 through 2009.

The approximate future minimum payments of
ATGs facility leases and certain operating equipment
leases as of December 31, 2002, are as follows:

|                          |                                     |                  |        |        | 
|------------------------- | ----------------------------------- | ---------------- | ------ | ------ | 
|Years Ending December 31, |                                     | Operating Leases
|                          |                                     |                 
|                          |                                     | (In thousands)  
|2003                      |                                     | $                | 18,788 |       
|2004                      |                                     |                  | 15,477 |       
|2005                      |                                     |                  | 16,096 |       
|2006                      |                                     |                  | 14,086 |       
|2007                      |                                     |                  | 9,398  |       
|Thereafter                |                                     |                  | 18,782 |       
|                          |                                     |                  |        |       
|                          | Total future minimum lease payments |                  | $      | 92,627 | 
|                          |                                     |                  |        |       

Of the $92.6 million in future minimum lease
payments, $70.7 million was included in the Companys
2001 and 2002 restructuring charges. The $70.7 million was
reduced to a $46.9 million restructuring charge after
taking into consideration estimated sublease income and
estimated vacancy periods until the various properties are
sub-leased (see Note 11).

Rent expense included in the accompanying
statements of operations was approximately $9,434,000,
$15,076,000 and $6,029,000 for the years ended December 31,
2002, 2001 and 2000, respectively.

(8) Employee Benefit Plan

Effective January 1, 1997, ATG adopted the
Art Technology Group 401(k) Plan (the 401(k) Plan). All
employees, as defined, are eligible to participate in the 401(k)
Plan. The 401(k) Plan allows eligible employees to make
salary-deferred contributions of up to 15% of their annual
compensation, as defined, subject to certain Internal Revenue
Service limitations. ATG may contribute to the 401(k) Plan at
its discretion. For the years ended December 31, 2002, 2001
and 2000, ATG made a discretionary contribution to the 401(k)
Plan of approximately $1,216,000, $1,008,000 and $888,000,
respectively.

61



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) Accrued Expenses

Accrued expenses at December 31, 2002 and
2001 consist of the following:

|                          |  |                |        |      |  |   |        | 
|------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                          |  |               
|                          |  | December 31,  
|                          |  |               
|                          |  | 2002           |        | 2001
|                          |  |                |        |     
|                          |  |               
|                          |  | (In thousands)
|Payroll and related costs |  | $              | 6,943  |      |  | $ | 8,506  | 
|Accrued accounts payable  |  |                | 1,295  |      |  |   | 1,105  | 
|Accrued taxes             |  |                | 3,904  |      |  |   | 4,367  | 
|Other                     |  |                | 6,077  |      |  |   | 10,740 | 
|                          |  |                |        |      |  |   |        | 
|                          |  | $              | 18,219 |      |  | $ | 24,718 | 
|                          |  |                |        |      |  |   |        | 



|     |                                  
|---- | ---------------------------------
|(10) | Valuation And Qualifying Accounts

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

|                             |  |              |       |            |  |             |       |           |  |   |        |   |  |   |       | 
|---------------------------- |  | ------------ | ----- | ---------- |  | ----------- | ----- | --------- |  | - | ------ | - |  | - | ----- | 
|                             |  |              |       | Additions/ |  |             |       | Balance  
|                             |  | Beginning of |       | Charges to |  | Deductions/ |       | at End   
|                             |  | Period       |       | Expense    |  | Write-offs  |       | of Period
|                             |  |              |       |            |  |             |       |          
|Year Ended December 31, 2000 |  | $            | 460   |            |  | $           | 2,976 |           |  | $ | (781   | ) |  | $ | 2,655 | 
|                             |  |              |       |            |  |             |       |           |  |   |        |   |  |   |       | 
|Year Ended December 31, 2001 |  | $            | 2,655 |            |  | $           | 4,900 |           |  | $ | (4,016 | ) |  | $ | 3,539 | 
|                             |  |              |       |            |  |             |       |           |  |   |        |   |  |   |       | 
|Year Ended December 31, 2002 |  | $            | 3,539 |            |  | $           | 694   |           |  | $ | (2,292 | ) |  | $ | 1,941 | 
|                             |  |              |       |            |  |             |       |           |  |   |        |   |  |   |       | 



|     |              
|---- | -------------
|(11) | Restructuring



| |                  
| | -----------------
| | December 31, 2001

As a result of a global slowdown in information
technology spending, ATG undertook plans to restructure its
operations during 2001. Actions taken by ATG included:
consolidation of excess facilities, a worldwide workforce
reduction, the write-off of certain unrealizable assets and
settling certain obligations that have no future benefit. In the
second quarter ATG recorded a restructuring charge of
$44.2 million, and in the fourth quarter of 2001, ATG
recorded a restructuring charge of $32.7 million. Total
restructuring charges for the year totaled $76.9 million.

62



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The significant components of the 2001
restructuring charge (in thousands):

Restructuring Charges

|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |             |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  
|---------------------------------------------- |  | -------- | ------ | ------------ |  | ------------ | ------ | ------------- |  | ------------- | ------ | -------------- |  | -------------- | ------ | ----------- |  | ------------- | ------ |  |  | - | ---- | - |  | - | --- |  |  | - | ----- |  |  | - | ------ | -
|                                               |  |          |        |              |  |              |        | Payments or   |  |               |        |                |  |                |        |             |  |              
|                                               |  |          |        |              |  |              |        | Write-Offs in |  | Accrued       |        | Adjustments in |  | Adjustments in |        |             |  | Accrued 2001 
|                                               |  |          |        |              |  |              |        | Twelve        |  | Restructuring |        | Estimate made  |  | Estimate made  |        |             |  | Restructuring
|                                               |  | Quarter  |        | Quarter      |  |              |        | Months        |  | Charges       |        | in Quarter     |  | in Quarter     |        |             |  | Charges      
|                                               |  | Ended    |        | Ended        |  | Year Ended   |        | Ended         |  | as of         |        | Ended          |  | Ended          |        |             |  | as of        
|                                               |  | June 30, |        | December 31, |  | December 31, |        | December 31,  |  | December 31,  |        | June 20,       |  | December 31,   |        | Payments or |  | December 31, 
|                                               |  | 2001     |        | 2001         |  | 2001         |        | 2001          |  | 2001          |        | 2002           |  | 2002           |        | Write-Offs  |  | 2002         
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |             |  |              
|Facilities-related costs and impairments       |  | $        | 38,100 |              |  | $            | 22,818 |               |  | $             | 60,918 |                |  | $              | 16,208 |             |  | $             | 44,710 |  |  | $ | 447  |   |  | $ | 907 |  |  | $ | 9,016 |  |  | $ | 37,048 |  
|Employee severance, benefits and related costs |  |          | 4,757  |              |  |              | 3,181  |               |  |               | 7,938  |                |  |                | 6,748  |             |  |               | 1,190  |  |  |   |     |   |  |   |    |  |  |   | 920   |  |  |   | 270    |  
|Asset impairments                              |  |          | 212    |              |  |              | 5,358  |               |  |               | 5,570  |                |  |                | 5,570  |             |  |               |       |  |  |   |     |   |  |   |    |  |  |   |      |  |  |   |        |  
|Exchangeable share settlement                  |  |          |       |              |  |              | 1,263  |               |  |               | 1,263  |                |  |                | 1,263  |             |  |               |       |  |  |   |     |   |  |   |    |  |  |   |      |  |  |   |       |  
|Marketing costs                                |  |          | 851    |              |  |              |       |               |  |               | 851    |                |  |                | 851    |             |  |               |       |  |  |   | (536 | ) |  |   |    |  |  |   |      |  |  |   | (536   | )
|Legal and accounting costs                     |  |          | 315    |              |  |              | 90     |               |  |               | 405    |                |  |                | 232    |             |  |               | 173    |  |  |   |     |   |  |   |    |  |  |   | 173   |  |  |   |       |  
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |             |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  
|Total                                          |  | $        | 44,235 |              |  | $            | 32,710 |               |  | $             | 76,945 |                |  | $              | 30,872 |             |  | $             | 46,073 |  |  | $ | (89  | ) |  | $ | 907 |  |  | $ |      |  |  | $ | 36,782 |  
|                                               |  |          |        |              |  |              |        |               |  |               |        |                |  |                |        |             |  |               |        |  |  |   |      |   |  |   |     |  |  |   |       |  |  |   |        |  

The facilities-related cost component consisted
of idle lease space and termination payments for offices
worldwide, which were no longer required due to the reduction in
personnel. In determining the facilities-related costs, ATG has
estimated the vacancy period and sublease income. A component of
the fourth quarter facility-related cost was a change in
estimate of the second quarter facility-related restructuring
charge. The net change in estimate was an additional charge of
$1.5 million in the fourth quarter. Of the
$1.5 million charge, a credit of $8.2 million was
realized due to the buy out of a lease included in the second
quarter charge of $9.3 million, which is being paid ratably
over 4.5 years. This credit was offset by an increase of
approximately $9.7 million due to updated assumptions, as a
result of a market analysis indicating lower sublease rates and
longer vacancy periods for two leases provided for in the second
quarter. Included in the facility-related costs was the
write-off of the abandoned leasehold improvements and fixed
assets of $7.7 million and $2.2 million, respectively.
These fixed assets were directly related to the restructured
excess office facilities.

The employee severance cost component of the
restructuring charge was related to reductions in personnel. As
part of the restructuring ATG terminated the employment of 530
employees, or 46% of ATGs workforce. Approximately 47% of
these employees were from sales and marketing, 22% from
services, 19% from general and administrative and 12% from
research and development. In addition, ATG settled 11,762
exchangeable shares with a certain employee. Upon settlement,
ATG recorded $1.3 million as a charge to restructuring.

The asset impairment-related costs included the
write-off of the remaining unamortized goodwill of approximately
$4.0 million, which was related to the two professional
service acquisitions completed in 2000. In addition, the Company
determined that approximately $1.4 million of purchased
software was deemed impaired due to ATGs revised product
development strategy.

During the second quarter of 2002, ATG recorded a
net charge increasing the 2001 restructured lease obligation
accruals by $447,000. The Company increased one lease obligation
estimate by $1.3 million as a result of adjusting the
estimated sublease income and vacancy assumptions due to the
continued weakening of the real estate market in that location.
Offsetting this increase, ATG recognized a benefit of $853,000
from two other restructured lease obligation accruals due to
favorable sublease transactions consummated during the second
quarter. This net charge has been offset by the Company
receiving a refund of $536,000 relating to

63



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the marketing component of the restructuring
charge recorded in fiscal 2001, resulting in a net credit to
income of $89,000 for the quarter ended June 30, 2002.
Also, during the fourth quarter of 2002, ATG recorded a charge
of $907,000 to increase charges recorded in 2001 for lease
obligations of idle locations.



| |                  
| | -----------------
| | December 31, 2002

As a result of the continued weakness in global
information technology spending, ATG undertook plans to
restructure its operations during 2002. Actions taken by ATG
included: consolidation and closure of excess facilities, a
worldwide workforce reduction and, the write-off of certain idle
assets. In the second quarter ATG recorded a restructuring
credit of $89,000, due to a change in the 2001 estimated
restructuring charge, and in the fourth quarter of 2002, ATG
recorded an aggregate restructuring charge of
$19.1 million. Restructuring charges for 2002 totaled
$19.0 million.

The significant components of the 2002
restructuring charge (in thousands):

Restructuring Charges

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

During the fourth quarter of 2002, the Company
recorded a restructuring charge of $19.1 million, which
consisted of actions initiated in the fourth quarter of 2002 and
an adjustment of $907,000 to increase the charges recorded in
2001 for lease obligations of idle locations. The
facilities-related charge associated with the 2002 fourth
quarter action was $13,476,000 comprising $12,021,000 for
operating leases related to office space that is either idle or
will be vacated during the first quarter of 2003 and $1,455,000
of leasehold improvement and furniture and fixtures written down
to their estimated fair value. The Company also recorded a
charge of $3,553,000 for severance and benefit costs related to
cost reduction actions taken across the worldwide employee base,
and as a result of this action and the actions taken in 2001,
the Company wrote-off $1,158,000 of computer equipment and
software, which were no longer being used due to the reduction
in personnel and office locations.

The lease charge is for office space the Company
is vacating and intends to sub-lease. The amount of the
operating lease charge is based on assumptions from current real
estate market data for sub-lease income rates and vacancy rates
at each respective location. The severance and benefit costs
were for 125 employees, or 23% of the Companys workforce,
consisting of 53 employees from sales and marketing, 45 from
services, 19 from general and administrative and 8 from research
and development. The Company accrued employee benefits pursuant
to ongoing benefits plans and statutory minimum requirements in
foreign locations. The Company began the termination process on
January 6, 2003. As a result of a reduction of employees on
a worldwide basis in the 2002 and 2001 restructuring actions, as
well as the closure of certain office locations, the Company
wrote-off computer equipment and software and furniture and
fixtures that it has abandoned and will not be used in the
future. These assets have been written down to their fair value
based on the expected cash flows they will generate over their
remaining economic life. Due to the short remaining economic
life and current market conditions for such assets, the fair
value of these assets has been estimated as zero. In addition,
the Company wrote-off leasehold improvements related to the
facilities it is attempting to sub-lease because the estimated
cash flows to be generated from those locations are not
sufficient to recover the carrying value of the

64



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assets. The Company expects to substantially
complete the above actions by the end of the first quarter of
2003.

As of December 31, 2002, the Company had an
accrued restructuring liability of $52.4 million, of which
$36.8 million relates to 2001 restructuring charges and
$15.6 million relates to 2002 restructuring charges. The
long-term portion of the accrued restructuring liability was
$32.5 million. A summary of the short and long-term accrued
restructuring is as follows (in thousands):

Accrued Restructuring

|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ------------- |  | ------------- | ------ | ------------- |  | -------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|                                               |  |              |        | Payments or   |  |               |        | Restructuring |  | Payments or    |        |              
|                                               |  |              |        | Write-offs in |  | Accrued       |        | Charges for   |  | Write-Offs for |        | Accrued      
|                                               |  | Twelve       |        | the Twelve    |  | Restructuring |        | the Twelve    |  | the Twelve     |        | Restructuring
|                                               |  | Months Ended |        | Months Ended  |  | Charges as of |        | Months Ended  |  | Months Ended   |        | Charges as of
|                                               |  | December 31, |        | December 31,  |  | December 31,  |        | December 31,  |  | December 31,   |        | December 31, 
|                                               |  | 2001         |        | 2001          |  | 2001          |        | 2002          |  | 2002           |        | 2002         
|                                               |  |              |        |               |  |               |        |               |  |                |        |              
|Facilities-related costs and impairments       |  | $            | 60,918 |               |  | $             | 16,208 |               |  | $              | 44,710 |               |  | $ | 15,988 |   |  | $ | 11,629 |  |  | $ | 49,069 |  
|Employee severance, benefits and related costs |  |              | 7,938  |               |  |               | 6,748  |               |  |                | 1,190  |               |  |   | 3,553  |   |  |   | 920    |  |  |   | 3,823  |  
|Asset impairments                              |  |              | 5,570  |               |  |               | 5,570  |               |  |                |       |               |  |   |       |   |  |   |       |  |  |   |       |  
|Exchangeable share settlement                  |  |              | 1,263  |               |  |               | 1,263  |               |  |                |       |               |  |   |       |   |  |   |       |  |  |   |        |  
|Marketing costs                                |  |              | 851    |               |  |               | 851    |               |  |                |       |               |  |   | (536   | ) |  |   |       |  |  |   | (536   | )
|Legal and accounting costs                     |  |              | 405    |               |  |               | 232    |               |  |                | 173    |               |  |   |       |   |  |   | 173    |  |  |   |       |  
|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  
|Total                                          |  | $            | 76,945 |               |  | $             | 30,872 |               |  | $              | 46,073 |               |  | $ | 19,005 |   |  | $ | 12,722 |  |  | $ | 52,356 |  
|                                               |  |              |        |               |  |               |        |               |  |                |        |               |  |   |        |   |  |   |        |  |  |   |        |  



|     |           
|---- | ----------
|(12) | Litigation

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

The Company and certain officers have been named
defendants in seven purported class action suits currently
pending in the United States District Court for the District of
Massachusetts. Each of these cases alleges that the Company and
certain officers have violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5,
which generally may subject issuers of securities and persons
controlling those issuers to civil liabilities for fraudulent
actions or defects in the public disclosure required by

65



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

securities laws. Four of the cases were filed on
various dates in October 2001 in the U.S. District
Court for the District of Massachusetts. Three of the cases were
initially filed in the Central District of California (the
California actions) on various dates in August and
September 2001. The California actions were consolidated and
transferred to the District of Massachusetts on or about
November 27, 2001. On December 13, 2001, the Court
issued an Order of Consolidation in which it consolidated all
actions filed against us and appointed certain individuals as
Lead Plaintiffs in the consolidated action. It also appointed
two law firms as Co-Lead Counsel, and a third law firm as
Liaison Counsel. Counsel for the plaintiffs has filed a
Consolidated Amended Complaint applicable to all of the
consolidated actions. On April 19, 2002, the Company filed
a motion to dismiss the case. The plaintiffs have filed their
opposition to the motion, and the Company has submitted a
response. While management believes the claims against the
Company are without merit, and intends to defend the action
vigorously, the litigation is in the preliminary stage.

A breach of contract claim was filed in Germany
by DIFA Deutsche Immobilien Fonds AG against Art Technology
Group GMBH, a subsidiary of the Company, on July 18, 2002.
The suit alleges that ATG GmbH failed to pay rent on office
space leased by the plaintiff and failed to deliver a bank
guarantee, thereby breaching its lease obligations to plaintiff.
The German court returned a ruling on January 22, 2003
adverse to ATG and found in favor of the plaintiff in the
approximate amount of 1.4 million euros (approximately
$1,486,000 as of March 21, 2003) plus 8% interest and the
delivery of a security deposit in the form of a bank guarantee
in the amount of approximately 675,000 euros (approximately
$717,000 as of March 21, 2003). The judgment amount
represents unpaid rent from February to June 2002, which was
accrued as part of the restructuring charge recorded in 2001 and
remains accrued at December 31, 2002. At the
plaintiffs option, it may seek to institute suit in the
future for additional rents that have accrued since the date
established in the ruling. The prevailing party in a German
lawsuit is also entitled to collect court costs and
attorneys fees from the non-prevailing party according to
a fee and cost schedule established by law. The fees and costs
in this case total approximately 65,000 euros (approximately
$69,000 as of March 21, 2003), (exclusive of fees and costs
associated with a potential appeal). ATG filed an appeal to the
suit on February 6, 2003. ATGs appeal of the suit is
based, in part, on interpretations of law made by the first
judge relating to alleged modifications to the original
agreement with plaintiff.

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



|     |                                                
|---- | -----------------------------------------------
|(13) | Quarterly Results of Operations
    (Unaudited)

The following table presents a condensed summary
of quarterly results of operations for the years ended
December 31, 2002 and 2001:

|                            |         |                              |        |            |   |         |        |            |   |   |        |       |   |   |         |       |  
|--------------------------- | ------- | ---------------------------- | ------ | ---------- | - | ------- | ------ | ---------- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                            |         |                             
|                            |         | Year Ended December 31, 2002
|                            |         |                             
|                            |         | First                        |        | Second     |   | Third   |        | Fourth    
|                            |         | Quarter                      |        | Quarter(1) |   | Quarter |        | Quarter(1)
|                            |         |                              |        |            |   |         |        |           
|Total revenues              |         | $                            | 27,323 |            |   | $       | 25,152 |            |   | $ | 24,502 |       |   | $ | 24,516  |      
|Gross profit                |         |                              | 17,305 |            |   |         | 15,209 |            |   |   | 15,265 |       |   |   | 15,995  |      
|Net income (loss)           |         |                              | (2,849 | )          |   |         | (2,750 | )          |   |   | (3,057 | )     |   |   | (20,834 | )    
|Net income (loss) per share |         |                              |        |            |   |         |        |            |   |   |        |       |   |   |         |      
|                            | Basic   |                              |        | (0.04      | ) |         |        | (0.04      | ) |   |        | (0.04 | ) |   |         | (0.30 | )
|                            | Diluted |                              |        | (0.04      | ) |         |        | (0.04      | ) |   |        | (0.04 | ) |   |         | (0.30 | )

66



---



##### Table of Contents



ART TECHNOLOGY GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                   |         |                              |         |            |   |         |         |               |   |   |        |       |   |   |         |       |  
|------------------ | ------- | ---------------------------- | ------- | ---------- | - | ------- | ------- | ------------- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                   |         |                             
|                   |         | Year Ended December 31, 2001
|                   |         |                             
|                   |         | First                        |         | Second     |   | Third   |         | Fourth       
|                   |         | Quarter                      |         | Quarter(1) |   | Quarter |         | Quarter(1)(2)
|                   |         |                              |         |            |   |         |         |              
|Total revenues     |         | $                            | 43,257  |            |   | $       | 35,532  |               |   | $ | 30,453 |       |   | $ | 31,096  |      
|Gross profit       |         |                              | 26,291  |            |   |         | 21,956  |               |   |   | 18,832 |       |   |   | 21,282  |      
|Net loss           |         |                              | (12,912 | )          |   |         | (41,880 | )             |   |   | (9,030 | )     |   |   | (92,183 | )    
|Net loss per share |         |                              |         |            |   |         |         |               |   |   |        |       |   |   |         |      
|                   | Basic   |                              |         | (0.19      | ) |         |         | (0.61         | ) |   |        | (0.13 | ) |   |         | (1.34 | )
|                   | Diluted |                              |         | (0.19      | ) |         |         | (0.61         | ) |   |        | (0.13 | ) |   |         | (1.34 | )



---



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | Restructuring charges were taken during these
    quarters, see Note 11 for complete information.
|   
|(2) | An income tax charge was taken during this
    quarter, see Note 4 for complete information.     



|     |                  
|---- | -----------------
|(14) | Subsequent Events

On March 3, 2003, 479,447 options were
re-granted to employees of ATG in accordance with the Option
Exchange Program as discussed in Note 5, at a grant price
of $0.99 per share.

On March 24, 2003, the Companys Board
of Directors approved resolutions, subject to shareholder
approval, to increase the number of shares of common stock
available for future issuances under the 1999 Outside
Directors Stock Option Plan and the 1999 Employee Stock
Purchase Plan to 800,000 shares from 300,000 shares, and to
5,000,000 shares from 3,000,000 shares, respectively.

67



---



##### Table of Contents








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

On April 1, 2002, we filed a Current Report
on Form 8-K reporting a change in our independent
accountants from Arthur Andersen LLP to Ernst &
Young LLP.




PART III






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

The information required under this Item is
incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 30, 2003 under the headings
Election of Class III Directors,
Background Information About Directors Continuing in
Office and Information About Executive
Officers.






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

The information required under this Item is
incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 30, 2003 under the heading
Executive Compensation.






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

The information required under this Item is
incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 30, 2003 under the heading
Information About Stock Ownership and Performance
And Securities Authorized for Issuance under Equity
Compensation Plans.






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

The information, if any, required under this Item
is incorporated herein by reference to our definitive proxy
statement pursuant to Regulation 14A, to be filed with the
SEC not later than April 30, 2003 under the heading
Related Party Transactions.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90-day period prior to the filing of
this Annual Report on Form 10-K, an evaluation was carried
out under the supervision and with the participation of our
management, including our Chief Executive Officer, or CEO, and
Chief Financial Officer, or CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on that evaluation, our CEO and CFO have concluded that
our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in reports that
we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms and are operating in an
effective manner.

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of our most recent
evaluation.

68



---



##### Table of Contents






PART IV






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

(a) (1) Financial Statements

The following are included in Item 8:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report of Independent Auditors                                                                                                              
|
| |  | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                                            
|
| |  | Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000                                              
|
| |  | Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss) for the years ended
    December 31, 2002, 2001 and 2000
|
| |  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                                              
|
| |  | Notes to Consolidated Financial Statements                                                                                                  

(a) (2) Financial Statement
Schedule

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

(a) (3) Exhibits

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

|        |          |             |  |                                                                                                                                                                       
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1(1)   |             |  | Amended and Restated Certificate of Incorporation
    of the Registrant, as amended.                                                                                  
|        | 3.2(2)   |             |  | Amended and Restated By-Laws of the Registrant.                                                                                                                       
|        | 4.1(3)   |             |  | Rights Agreement between Registrant and Equiserve
    Trust Company, N.A., as rights Agent.                                                                           
|        | 10.1(4)  |             |  | 1996 Stock Option Plan of the Registrant, as
    amended.                                                                                                             
|        | 10.2(4)  |             |  | 1999 Outside Director Stock Option Plan of the
    Registrant.                                                                                                        
|        | 10.3(4)  |             |  | 1999 Employee Stock Purchase Plan of the
    Registrant.                                                                                                              
|        | 10.4(4)  |             |  | Lease between the Registrant and DVPT Limited
    Partnership, dated March 11, 1999.                                                                                  
|        | 10.5     |             |  | Lease between the Registrant and Pine Street
    Investors I, LLC, dated October 6, 1999.                                                                             
|        | 10.6     |             |  | First Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated December 30, 1999.                                                        
|        | 10.7     |             |  | Second Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated August 28, 2000.                                                         
|        | 10.8     |             |  | Third Amendment to Lease between the Registrant
    and Pine Street Investors I, LLC, dated December 22, 2000.                                                        
|        | 10.9     |             |  | Lease between the Registrant and DIFA Deutsche
    Immobilien Fonds AG dated, on or about January 18, 2001.                                                           
|        | 10.10(5) |             |  | Nonstatutory Option Agreement between Paul
    Shorthose and the Registrant dated October 23, 2001.                                                                   
|        | 10.11(5) |             |  | Promissory Note issued by Edward Terino to the
    Registrant dated November 21, 2001.                                                                                
|        | 10.12(5) |             |  | Letter of Credit Agreement between Silicon Valley
    Bank and the Registrant noting Amgen Cambridge Real Estate
    Holdings as beneficiary, dated December 21, 2001.
|        | 10.13(5) |             |  | Termination of Lease Agreement between Amgen
    Cambridge Real Estate Holdings, Inc., and the Registrant dated
    January 2, 2002.                                  

69



---



##### Table of Contents



|        |          |             |  |                                                                                                                                
|------- | -------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.14(6) |             |  | Amended and Restated Loan and Security Agreement
    between the Registrant and Silicon Valley Bank, dated
    June 13, 2002.  
|        | 10.15    |             |  | John Dragoon Amended Offer Letter and
    Change-in-Control Agreement, dated July 16, 2002.                                    
|        | 10.16(7) |             |  | First Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated September 30, 2002.                 
|        | 10.17(7) |             |  | Amendment Agreement between the Registrant and
    Silicon Valley Bank dated October 4, 2002.                                  
|        | 10.18    |             |  | Edward Terino Executive Change-in-Control
    Agreement, dated December 1, 2002.                                               
|        | 10.19    |             |  | Robert Burke letter agreement dated
    March 28, 2003.                                                                        
|        | 10.20    |             |  | Securities Account Control Agreement between
    Registrant and Silicon Valley Bank, dated December 20, 2002.                  
|        | 10.21    |             |  | Second Loan Modification Agreement between the
    Registrant and Silicon Valley Bank dated December 20, 2002.                 
|        | 10.22    |             |  | Paul Shorthose Letter Agreement, dated,
    December 31, 2002.                                                                 
|        | 21(5)    |             |  | Subsidiaries of the Registrant.                                                                                                
|        | 23.1     |             |  | Consent of Ernst & Young LLP.                                                                                                  
|        | 99.1     |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.



---



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



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated herein by reference to the Exhibits
    to the Registrants Quarterly Report on Form 10-Q for
    the period ended September 30, 2001.
|   
|(2) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-3
    (File No. 333-64698).              
|   
|(3) | Incorporated herein by reference to the Exhibits
    to the Registrants Current Report on Form 8-K filed
    on October 2, 2001.                  
|   
|(4) | Incorporated herein by reference to the Exhibits
    to the Registrants Registration Statement on Form S-1
    (File No. 333-78333).              
|   
|(5) | Incorporated herein by reference to the Exhibits
    to the Registrants Annual Report on Form 10-K for the
    year ended December 31, 2001.      
|   
|(6) | Incorporated herein by reference to the Exhibits
    to the Registrants Quarterly Report on Form 10-Q for
    the period ended June 30, 2002.     
|   
|(7) | Incorporated herein by reference to the Exhibits
    to the Registrants Quarterly Report on Form 10-Q for
    the period ended September 30, 2002.

(b) Reports on Form 8-K

None.

70



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, as of March 24,
2003.



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



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

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

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 24, 2003.

|                                         |  |                                                                                                            |  |  |  | 
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  |  |  | 
|                                         |  |                                                                                                            |  | 
|Name                                     |  | Title                                                                                                      |  | 
|                                         |  |                                                                                                            |  | 
|                                        
|/s/ ROBERT D. BURKERobert D. Burke       |  | Chief Executive Officer and President
    (Principal Executive Officer)                                    |  | 
|                                        
|/s/ EDWARD TERINOEdward Terino           |  | Senior Vice President and Chief Financial
    Officer
    (Principal Financial and
    Accounting Officer) |  | 
|                                        
|/s/ PAUL G. SHORTHOSEPaul G. Shorthose   |  | Chairman of the Board                                                                                      |  | 
|                                        
|/s/ JOHN R. HELDJohn R. Held             |  | Director                                                                                                   |  | 
|                                        
|/s/ SCOTT A. JONESScott A. Jones         |  | Director                                                                                                   |  | 
|                                        
|/s/ ILENE H. LANGIlene H. Lang           |  | Director                                                                                                   |  | 
|                                        
|/s/ MARY E. MAKELAMary E. Makela         |  | Director                                                                                                   |  | 
|                                        
|/s/ THOMAS N. MATLACKThomas N. Matlack   |  | Director                                                                                                   |  | 
|                                        
|/s/ PHYLLIS S. SWERSKYPhyllis S. Swersky |  | Director                                                                                                   |  | 

71



---



##### Table of Contents



CERTIFICATIONS

I, Robert D. Burke, certify that:

1.     I have reviewed
this report on Form 10-K of Art Technology Group, Inc.;

2.     based on my
knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to
the period covered by this report;

3.     based on my
knowledge, the financial statements, and other financial
information included in this report, fairly present in all
material respects the financial condition, results of operations
and cash flows of Art Technology Group, Inc. as of, and for, the
periods presented in this report;

4.     Edward Terino,
the Senior Vice President, Finance and Chief Financial Officer
of Art Technology Group, Inc., and I:



| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | are responsible for establishing and maintaining
    disclosure controls and procedures (as defined for purposes of
    Rules 13a-14 and 15d-14 under the Securities Exchange Act
    of 1934, as amended) for Art Technology Group, Inc.;                                                                      
|
| |  | have designed such disclosure controls and
    procedures to ensure that material information relating to Art
    Technology Group, Inc., included its consolidated subsidiaries,
    is made known to us by others within those entities,
    particularly during the period in which this report was prepared;
|
| |  | have evaluated the effectiveness of the
    disclosure controls and procedures of Art Technology Group, Inc.
    as of a date within 90 days prior to the filing date of
    this report; and                                                                                                                   
|
| |  | have presented in this report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on the required evaluation as of that date;                                                                                                                                       

5.     Mr. Terino
and I have disclosed to the auditors of Art Technology Group,
Inc. and to the audit committee of the board of directors of Art
Technology Group, Inc.:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all significant deficiencies in the design or
    operation of internal controls that could adversely affect the
    ability of Art Technology Group, Inc. to record, process,
    summarize and report financial data and have identified for such
    auditors any material weaknesses in internal controls; and
|
| |  | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    internal controls of Art Technology Group, Inc.; and                                                                                                                                   

6.     Mr. Terino
and I have indicated in this report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ Robert D.
    Burke                  
| |                                          
| | Robert D. Burke                          
| | President and Chief Executive
    Officer
| | (principal executive officer)            

Date: March 24, 2003

72



---



##### Table of Contents



I, Edward Terino, certify that:

1.     I have reviewed
this report on Form 10-K of Art Technology Group, Inc.;

2.     based on my
knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to
the period covered by this report;

3.     based on my
knowledge, the financial statements, and other financial
information included in this report, fairly present in all
material respects the financial condition, results of operations
and cash flows of Art Technology Group, Inc. as of, and for, the
periods presented in this report;

4.     Robert D. Burke,
the President and Chief Executive Officer of Art Technology
Group, Inc., and I:



| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | are responsible for establishing and maintaining
    disclosure controls and procedures (as defined for purposes of
    Rules 13a-14 and 15d-14 under the Securities Exchange Act
    of 1934, as amended) for Art Technology Group, Inc.;                                                                       
|
| |  | have designed such disclosure controls and
    procedures to ensure that material information relating to Art
    Technology Group, Inc., including its consolidated subsidiaries,
    is made known to us by others within those entities,
    particularly during the period in which this report was prepared;
|
| |  | have evaluated the effectiveness of the
    disclosure controls and procedures of Art Technology Group, Inc.
    as of a date within 90 days prior to the filing date of
    this report; and                                                                                                                    
|
| |  | have presented in this report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on the required evaluation as of that date;                                                                                                                                        

5.     Mr. Burke
and I have disclosed to the auditors of Art Technology Group,
Inc. and to the audit committee of the board of directors of Art
Technology Group, Inc.:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all significant deficiencies in the design or
    operation of internal controls that could adversely affect the
    ability of Art Technology Group, Inc. to record, process,
    summarize and report financial data and have identified for such
    auditors any material weaknesses in internal controls; and
|
| |  | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    internal controls of Art Technology Group, Inc.; and                                                                                                                                   

6.     Mr. Burke
and I have indicated in this report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                                                 
| | ------------------------------------------------
| | /s/ Edward
    Terino                           
| |                                                 
| | Edward Terino                                   
| | Senior Vice President, Finance and              
| | Chief Financial Officer                         
| | (principal financial and accounting
    officer)

Date: March 24, 2003

73