##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, DC
    20549
  Form 10-K
 (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-26679
  Art Technology Group,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State or other jurisdiction
    of
    incorporation or organization)

04-3141918(I.R.S. Employer
    Identification No.)One Main Street
    Cambridge, Massachusetts(Address of principal
    executive offices)

02142(Zip Code)   (617) 386-1000
 (Registrants telephone
    number, including area code)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.01 par value with Associated Preferred
    Stock Purchase Rights

The Nasdaq Stock Market, LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 Large accelerated
    filer o

Accelerated
    filer þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      Documents
    Incorporated by Reference




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##### 





ART
    TECHNOLOGY GROUP, INC.
  INDEX TO
    FORM 10-K
   
 PagePART IItem 1.


Business


1Item 1A.


Risk Factors


9Item 1B.


Unresolved Staff Comments


16Item 2.


Properties


16Item 3.


Legal Proceedings


16Item 4.


Submission of Matters to a Vote of Security
    Holders


17PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


17Item 6.


Selected Consolidated Financial Data


19Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


21Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


38Item 8.


Consolidated Financial Statements and
    Supplementary Data


39Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


68Item 9A.


Controls and Procedures


68Item 9B.


Other Information


70PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


70Item 11.


Executive Compensation


70Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


70Item 13.


Certain Relationships and Related Transactions
    and Director Independence


70Item 14.


Principal Accountant Fees and Services


70PART IVItem 15.


Exhibits and Financial Statement Schedules


71SIGNATURESSignatures


72Ex-10.1 Amended and Restated 1996 Stock Option PlanEx-10.10 Offer letter with Nina P. McIntyre dated January 27, 2009Ex-21.1 SubsidiariesEx-23.1 Consent of Ernst & Young LLPEx-31.1 Section 302 Certification of the Principal Executive OfficerEx-31.2 Section 302 Certification of the Principal Financial and Accounting OfficerEx-32.1 Section 906 Certification of the Principal Executive OfficerEx-32.2 Section 906 Certification of the Principal Financial and Accounting Officer     i




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##### Table of Contents



PART I  Some of the information contained in this Report consists of
    forward-looking statements within the meaning of the
    Private Securities Litigation Reform Act of 1995. Use of words
    such as believes, expects,
    anticipates, intends, plans,
    estimates, should, likely or
    similar expressions indicate a forward-looking statement. These
    statements are subject to risks and uncertainties and are based
    on the beliefs and assumptions of our management based on
    information currently available to our management. Important
    factors that could cause actual results to differ materially
    from the forward-looking statements include, but are not limited
    to, those set forth below under the heading Risk
    Factors. We assume no obligation to update any
    forward-looking statements.
  Item 1.
    Business  Our
    Business
  e-commerce e-commerce e-commerce e-commerce
  Corporate
    Information
  www.atg.com
  Overview
    e-Commerce e-commerce e-commerce
  e-commerce
 1




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
    Until 1995, we functioned primarily as a professional services
    organization in the Internet commerce market.
    In 1996, we began offering Internet commerce and software
    solutions, initially focusing on infrastructure products.
    In 2004, we began to concentrate on developing application
    products, having concluded that the market for infrastructure
    products had become increasingly standards driven and that we
    could best differentiate ourselves by offering our clients
    advanced applications functionality.
    In November 2004, we acquired Primus Knowledge Solutions, Inc.
    (Primus), a provider of software solutions for
    customer service designed to help companies deliver a superior
    customer experience via contact centers,
    e-mail and
    web self-service. The Primus solution extended our offerings
    beyond commerce and marketing and into customer service.
    In 2004, we also began to offer our clients hosted SaaS services
    as an alternative delivery model for our application solutions,
    having concluded that hosted services could provide significant
    advantages for our clients, and provide us with a substantial
    opportunity for growth.
    In 2005, we completed the integration of Primus applications
    into the ATG platform.
    In October 2006, we acquired eStara, Inc. (eStara),
    a provider of
    e-commerce
    optimization service solutions for enhancing online sales and
    support initiatives. The eStara solutions provided us with a new
    channel to help our clients convert web browsing activities into
    sales, as well as business opportunities independent of
    ATG-powered websites.
    In 2007, we initiated a strategy to offer our
    e-commerce
    platform solutions in combination with our site-independent SaaS
    services. One result of this strategy is that we recognize
    revenue from more of our transactions on a ratable basis.
    In February 2008, we acquired CleverSet, a provider of automated
    personalization engines, used to optimize
    e-commerce
    experiences by presenting visitors with relevant recommendations
    and information. CleverSets next-generation technology has
    been shown to significantly lift
    e-commerce
    revenue by increasing conversion rates and order size. We offer
    these services as ATG Recommendations within the optimization
    services product line.  e-commerce e-commerce
  e-commerce e-commerce
  Our
    Strategy
    
    Deliver an e-commerce platform with leadership functionality,
    suitable for the most demanding enterprises. Our clients
    tell us that, in some cases, our platform handles over 100,000
    orders per day in peak periods. Leading industry analysts rank
    the ATG Commerce Suite as a leader among commerce platforms for
    business-to-consumer sites on criteria including company
    strategy, product strategy, solution architecture,
    e-commerce
    features, customer management and service, financial resources,
    and market presence. It is our objective to continue to provide
    leadership in
    e-commerce
    functionality and operational excellence. 2




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
    Through our
    e-commerce
    optimization services offerings, deliver solutions independent
    of the underlying commerce platform to increase on-line
    revenue.  Our
    e-commerce
    optimization services can be delivered to clients running web
    sites on any
    e-commerce
    platform, or custom-built websites, across all industries. This
    increases the size of our market opportunity and customer
    penetration.
    Through our hosting services, make our industry-leading
    e-commerce
    functionality available to mid-tier companies and others who opt
    to outsource their
    e-commerce
    operations.By leveraging our experience with
    OnDemand offerings, our Professional Services organization
    assists our clients with their ATG implementations, thus helping
    our clients quickly and economically manage their
    e-commerce
    and service projects.
    Differentiate by providing a more personalized, more
    relevant, more consistent shopping experience.  We
    give merchandisers and marketers the power and analytics to
    define offers and cross-sells, to follow up on abandoned
    shopping carts, to perform multivariate split tests and to
    create multi-channel, multi-stage web and
    e-mail
    campaigns that match a companys selling strategy with
    information about a visitors browsing behavior, purchase
    and interaction history, preferences and profile. This increases
    basket size and the number of website visitors who go on to
    purchase items from that website, resulting in increased
    revenue. We use this same information to extend the consistent
    customer experience to the customer service agent in the call
    center, which can result in a more satisfied, loyal and
    profitable customer.
    Leverage existing sales channels.  We sell our
    products primarily through our direct sales organization. In
    addition, a significant portion of our product revenue is
    co-sold or influenced by a variety of business partners,
    including systems integrators, solution providers and other
    technology partners. We currently have a broad range of business
    alliances throughout the world, which include global systems
    integrators such as Accenture, Capgemini, CGI, Deloitte
    Consulting, Infosys, Sapient and Tata Consulting Services as
    well as regional integrators and interactive agencies such as
    Razorfish, BlastRadius, LBi Group, McFadyen Consulting,
    Professional Access, Resource Interactive, and Aaxis Group. In
    most geographies and situations, our goal is to maintain close
    relationships directly with our clients while also motivating
    systems integrators and other channel partners to implement our
    applications in their projects and solution sets.
    Leverage and expand our service
    capabilities.  We have extensive experience in web
    application development and integration services, as well as
    knowledge management design and call-center systems deployment.
    Through our Professional and Education Services organizations,
    we provide services to train our systems integrators, value
    added resellers, and complementary software vendors in the use
    of our products; and we offer consulting services to assist with
    customer implementations. We seek to motivate our business
    partners to provide joint implementation services to our end
    user customers. We intend to continue to seek additional
    opportunities to increase revenues from product sales by
    expanding our base of business partners trained in the
    implementation and application of our products.
    International expansion.  We have seen an
    increase in sales and pipeline growth in Europe and Asia
    Pacific. We seek to invest resources into further developing our
    reach internationally. In support of this initiative we have
    entered into partnership agreements abroad that will support our
    continued growth. As the international market opportunity
    continues to develop we will adjust our strategy.  ATG
    Licensed Software Products
  e-commerce e-commerce
  The ATG Commerce Suite e-commerce
 3




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The ATG Adaptive Scenario Engine e-commerce e-commerce
  ATG Commerce Search e-commerce
  ATG Merchandising
  ATG Content Administration
  ATG Outreach e-marketing
  ATG Self-Service
  ATG Commerce Service Center e-commerce
  ATG Knowledge
  ATG Campaign Optimizer
  ATG Customer Intelligence
     4




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Recurring
    Revenue
  e-Commerce
  e-Commerce
    Optimization Services Offerings
  e-Commerce e-commerce e-commerce e-commerce
  Click to Call e-mail
  Click to Chat
  Call Tracking
  ATG Recommendations e-commerce e-commerce
  ATG
    Commerce OnDemand
  e-commerce
    
    leveraging our experience to accelerate growth of the
    clients online business and allowing clients to focus on
    their core competencies;
    shifting the clients technology risks to us;
    shortening the time to market (vs. in-house development,
    deployment and maintenance); and
    avoiding upfront and ongoing expenditures required to purchase
    and maintain software and hardware.  Customer
    Support and Maintenance Services
   5




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##### Table of Contents



Professional
    and Education Services Revenue
    Professional Services.
  
    OnDemand Offerings.  By leveraging our
    experience with the pre-built OnDemand offerings, our
    Professional Services organization assists our clients with
    their implementations, thus helping our clients quickly and
    economically launch their
    e-commerce
    and service projects.
    Full-lifecycle Solutions.  We work with our
    clients from the earliest stages of their projects. The
    full-lifecycle approach encompasses everything from working with
    our clients end users and technical staff to define
    project requirements to solution design, implementation,
    usability testing, staging and deployment.
    Custom Solutions.  We can also manage specific
    areas of our clients projects, such as designing a
    solution to meet a clients requirements, implementing
    scenarios or integrating our solutions with a third-party
    application.
    Structured Enablement.  In this model, we give
    our clients the guidance they need while maximizing the skills
    of the clients own personnel. Depending on a clients
    project goals and the expertise of its team, appropriate ATG
    personnel (such as architects or engineers) work onsite as
    advisors to aid the clients personnel in areas such as
    reviewing completed work or advising on a particular project
    area.  Education Services.
  Markets
    Research
    and Development
    e-commerce
 6




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##### Table of Contents



Sales and
    Marketing
    e-Commerce
      Strategic
    Alliances
    Competition
    
    in-house development efforts by potential clients or partners;
    e-commerce
    application vendors, such as Escalate Retail and IBM;
    e-commerce
    business process outsourcers, such as Digital River and GSI
    Commerce;
    providers of hosted managed service offerings, such as
    Accenture, EDS and IBM;
    providers of hosted on-demand subscription services, such as
    Demandware, Digital River, MarketLive and Venda;
    vendors of marketing and customer-service applications,
    including natural language, self-service and traditional
    customer relationship management application vendors; and
    commerce optimization vendors, such as Avail Intelligence,
    Baynote and LivePerson.  e-commerce
 7




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e-commerce
  Proprietary
    Rights and Licensing
      Employees
    Internet
    Address and SEC Reports
  Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330. http://www.sec.gov
  www.atg.com Form 10-K.
 8




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Item 1A.
    Risk
    Factors  Form 10-K
  The
    current global recession and related credit crisis are likely to
    adversely affect our business and results of
    operations.
    We
    expect our revenues and operating results to continue to
    fluctuate for the foreseeable future. If our quarterly or annual
    results are lower than the expectations of securities analysts,
    then the price of our common stock is likely to
    fall.
    
    fluctuating economic conditions, particularly as they affect our
    customers willingness to implement new
    e-commerce
    solutions and their ability to pay for our products and services;
    the timing of recognition of revenue from our products and
    services, which is affected by the mix of product license
    revenue and services provided;
    the timing of customer orders, especially larger transactions,
    and product implementations;
    our ability to cultivate and maintain strategic alliances;
    delays in introducing new products and services;
    price discounting and concessions that we may offer in response
    to competitive conditions;
    changes in the mix of revenues derived from higher and
    lower-margin products and services;
    timing of hiring and utilization of personnel;
    cost overruns related to fixed-price services projects;
    the mix of domestic and international sales;
    variation in our actual costs from our cost estimates related to
    long term hosting contracts;
    increased expenses, whether related to sales and marketing,
    product development or administration; and 9




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
    costs related to possible acquisitions of technologies or
    businesses.    We may
    not be able to sustain or increase our revenue or profitability
    on a quarterly or annual basis.
    Our
    lengthy sales cycle makes it difficult to predict our quarterly
    results and causes variability in our operating
    results.
    If the
    market for
    e-commerce
    does not continue to grow, then demand for our products and
    services may decrease.
  e-commerce.
  If we
    fail to adapt to rapid changes in the market for online business
    applications, then our products and services could become
    obsolete.
     10




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e-commerce E-commerce
  We
    face intense competition in the market for online commerce
    applications and services, and we expect competition to
    intensify in the future. If we fail to remain competitive, then
    our revenues may decline, which could adversely affect our
    future operating results and our ability to grow our
    business.
    
    Potential clients or partners may choose to develop
    e-commerce
    applications in-house, rather than paying for our products or
    services.
    Some of our current and potential competitors have greater
    financial, marketing and technical resources than we do,
    allowing them to leverage a larger installed customer base and
    distribution network, adopt more aggressive pricing policies and
    offer more attractive sales terms, adapt more quickly to new
    technologies and changes in customer requirements, and devote
    greater resources to the promotion and sale of their products
    and services than we can.
    Our suite of service products competes against various
    vendors software tools designed to address a specific
    element or elements of the complete set of eService processes,
    including
    e-mail
    management, support, knowledge management, and web-based
    customer self-service and assisted service.
    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, and consolidation in our industry is likely to
    intensify. Accordingly, new competitors or alliances among
    competitors may emerge and rapidly acquire significant market
    share.
    Some of our current and potential competitors, especially our
    larger competitors like IBM that offer broad suites of computer
    and software applications, may offer free or low-cost
    e-commerce
    applications and functionality bundled with their own computer
    and software products. Potential customers may not see the need
    to buy our products and services separately when they can use
    the bundled applications and functionality in our
    competitors product suites for little or no additional
    cost.  If the
    market for our OnDemand service offerings does not develop or
    develops more slowly than we expect, then our business could be
    negatively affected.
    If our
    clients experience interruptions, delays or failures in our
    hosted services, then we could incur significant costs and lose
    revenue opportunities.
  e-commerce
 11




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We
    depend heavily on key employees in a competitive labor
    market.
    We
    could incur substantial costs defending against a claim of
    infringement or protecting our intellectual property from
    infringement.
      
    cease selling or using products or services that incorporate the
    challenged intellectual property;
    obtain a license, which may not be available on reasonable
    terms, to sell or use the relevant technology; or
    redesign those products or services to avoid infringement.     12




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If we
    fail to maintain our existing customer base, then our ability to
    generate revenues will be harmed.
  e-commerce e-commerce e-commerce e-commerce e-commerce
  If we
    fail to address the challenges associated with our international
    operations, then revenues from our products and services may
    decline, and the costs of providing our products or services may
    increase.
    
    changes in exchange rates may increase volatility of foreign
    based revenue;
    changes in regulatory requirements, tariffs and other barriers;
    longer payment cycles and problems in collecting accounts
    receivable in Western Europe and Asia;
    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 for countries in which
    English is not the primary language;
    reduced protection for intellectual property rights in some of
    the countries in which we operate or plan to operate;
    difficulties related to entering into legal contracts under
    local laws and in foreign languages;
    fluctuations in the exchange rates between foreign and United
    States currency;
    potentially adverse tax consequences; and
    political and economic instability.  We may
    need financing in the future, and any additional financing may
    result in restrictions on our operations or substantial dilution
    to our stockholders.
   13




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##### Table of Contents



If
    systems integrators or value added resellers reduce their
    support and implementation of our products, then our revenues
    may fail to meet expectations and our operating results would
    suffer.
    If our
    software products contain serious errors or defects, then we may
    lose revenues and market acceptance and may incur costs to
    defend or settle product liability claims.
    e-commerce,
  Government
    or industry regulations could directly restrict our business or
    indirectly affect our business by limiting the growth of
    e-commerce.
  e-commerce e-commerce e-commerce
  The
    Internet has generated privacy concerns that could result in
    legislation or market perceptions that could result in reduced
    sales of our products and harm our business.
   14




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Anti-takeover
    provisions in our charter documents and Delaware law could
    prevent or delay a change in control of our
    company.
    
    authorizing the issuance of blank check preferred
    stock;
    providing for a classified board of directors with staggered,
    three-year terms;
    providing that directors may only be removed for cause by a
    two-thirds vote of stockholders;
    limiting the persons who may call special meetings of
    stockholders and prohibiting stockholder action by written
    consent;
    establishing advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings; and
    authorizing anti-takeover provisions.    Continued
    compliance with regulatory and accounting requirements will be
    challenging and will require significant
    resources.
   15




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Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    e-commerce e-commerce
 16




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Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities    High


LowFiscal 2007First quarter

$
2.67


$
2.04Second quarter


2.88



2.19Third quarter


3.33



2.69Fourth quarter


4.75



3.10Fiscal 2008First quarter

$
4.45


$
2.80Second quarter


4.06



2.98Third quarter


4.48



3.10Fourth quarter


3.44



1.23      17




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##### Table of Contents



COMPARISON
    OF 5-YEAR CUMULATIVE TOTAL RETURN
    AMONG ART TECHNOLOGY GROUP, INC.,
    NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
  
  ASSUMES
    $100 INVESTED ON DECEMBER 31, 2003
    ASSUMES DIVIDEND REINVESTED
    FISCAL YEAR ENDING DECEMBER 31, 2008
  Value of Investment($)December 31,2003


2004


2005


2006


2007


2008Art Technology Group Inc.

$
100.00


$
98.04


$
128.10


$
152.29


$
282.35


$
126.14Hemscott Industry Group 852 Index

$
100.00


$
126.04


$
109.07


$
103.53


$
110.68


$
71.06NASDAQ Market Index

$
100.00


$
108.41


$
110.79


$
122.16


$
134.29


$
79.25  18




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##### Table of Contents



Stock
    Repurchase Program
    Rule 10b5-1
    (c)


(d)Total number of


Approximate dollar(a)


(b)


shares purchased


value of shares that mayTotal number of


Average price


as part of publicly


yet be purchased underPeriod

shares purchased


paid per share


announced plan


the plans or programs(In thousands)October 2008














November 2008


4,196,359


$
1.77



4,196,359


$
8,190December 2008














4,196,359


$
1.77



4,196,359


$
8,190   Item 6.
    Selected
    Consolidated Financial Data  Form 10-K. Form 10-K Form 10-K
   19




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##### Table of Contents



Consolidated
    Statement of Operations Data:
  Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Revenue:Product licenses

$
47,429


$
30,529


$
32,784


$
29,821


$
23,345Recurring services


91,039



76,672



51,113



44,258



29,359Professional and education services


26,173



29,859



19,335



16,567



16,515Total revenue


164,641



137,060



103,232



90,646



69,219Cost of Revenue:Product licenses


2,186



2,197



1,751



1,816



2,206Recurring services


34,077



24,119



11,239



6,575



3,884Professional and education services


25,619



29,223



19,560



16,680



15,995Total cost of revenue


61,882



55,539



32,550



25,071



22,085Gross Profit


102,759



81,521



70,682



65,575



47,134Operating Expenses:Research and development


29,329



24,963



21,517



18,481



16,209Sales and marketing


49,569



44,397



30,909



29,396



29,602General and administrative


19,432



18,211



12,952



11,231



7,742Restructuring charge (benefit)






(59
)


(62
)


885



3,570Total operating expenses


98,330



87,512



65,316



59,993



57,123Income (loss) from operations


4,429



(5,991
)


5,366



5,582



(9,989
)Interest and other income, net


960



2,237



1,712



219



395Income (loss) before provision (benefit) for income taxes


5,389



(3,754
)


7,078



5,801



(9,594
)Provision (benefit) for income taxes


1,590



433



(2,617
)


32



(50
)Net income (loss)

$
3,799


$
(4,187
)

$
9,695


$
5,769


$
(9,544
)Basic net income (loss) per share

$
0.03


$
(0.03
)

$
0.08


$
0.05


$
(0.12
)Diluted net income (loss) per share

$
0.03


$
(0.03
)

$
0.08


$
0.05


$
(0.12
)Basic weighted average common shares outstanding


128,534



127,528



115,280



109,446



79,252Diluted weighted average common shares outstanding


133,916



127,528



120,096



111,345



79,252   Consolidated
    Balance Sheet Data:
  December 31,2008


2007


2006


2005


2004(In thousands)Cash, cash equivalents and short-term marketable securities
    (including restricted marketable securities of $1,669 at
    December 31, 2008)

$
60,983


$
50,879


$
31,223


$
33,569


$
26,507Long-term marketable securities (including restricted marketable
    securities of $419 at December 31, 2008)


419



1,062











4,001Total assets


188,767



177,719



149,981



92,765



97,803Total deferred revenue


54,067



46,354



24,209



21,113



25,355Long-term obligations, less current maturities














63



112Total stockholders equity

$
110,946


$
107,097


$
105,074


$
50,160


$
42,185  20




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
  Form 10-K. Form 10-K
  e-commerce e-commerce e-commerce e-commerce
  Shift to
    increasing ratably recognized revenue
  e-commerce e-commerce
  e-commerce e-commerce e-commerce e-commerce e-commerce
  Key
    measures that we use to evaluate our performance:
   21




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##### Table of Contents




    We use product license bookings, a non-GAAP financial measure,
    as an important measure of growth in demand for our ATG
    e-commerce
    platform and the success of our sales and marketing efforts. We
    define product license bookings as product license revenue as
    reported under GAAP plus the contract value of licenses executed
    and whose recognition was deferred in the current period less
    revenue that was recognized from license contracts executed and
    deferred in prior periods. When considering the contract value
    of licenses executed during the period we use our judgment in
    assessing collectability and likelihood of granting future
    concessions. Factors that we consider include the financial
    condition of the customer and contractual provisions included in
    the contract.  e-commerce
  
    We use cash flow from operations as an indicator of the success
    of the business. Because a portion of our revenue is deferred in
    the near term, our net income may be significantly different
    from the cash that we generate from operations.
    We use recurring services revenue, as reported under GAAP, to
    evaluate the success of our strategy to deliver site-independent
    online services and the growth of our recurring revenue sources.
    Recurring services revenue includes
    e-commerce
    optimization services, application hosting services and support
    and maintenance related to ATG
    e-commerce
    platform sales.
    We use revenue and gross margins on our various lines of
    business to measure our success at meeting cash and non-cash
    cost and expense targets in relation to revenue earned.
    We use days sales outstanding (DSO), calculated by
    dividing accounts receivable at period end by revenue and
    multiplying the result by the number of days in the period. We
    also use a modified DSO that adjusts our revenue by the change
    in deferred revenue during the period to provide us with a more
    accurate picture of the strength of our accounts receivables and
    related collection efforts. The percentage of accounts
    receivable that are less than 60 days old is an important
    factor that our management uses to understand the strength of
    our accounts receivable portfolio. This measure is important
    because a disproportionate percentage of our product license
    bookings often occurs late in the quarter, which has the effect
    of increasing our DSO and modified DSO.  Trends in
    On-Line Sales and our Business
    Impact of weakening economy.
 22




---



##### Table of Contents



quarter-by-quarter
  Trend in on-line sales. e-commerce e-commerce bricks-and-mortar
  E-commerce
    replatforming. e-commerce e-commerce e-commerce e-commerce e-commerce e-commerce
  Emergence of the on demand model of Software as a
    Service.
  Rapidly evolving and increasingly complex customer
    requirements. e-commerce e-commerce e-commerce
  International expansion.
  Competitive trend.
 23




---



##### Table of Contents



Virtualization.
  Development of ATGs partner
    ecosystem.
  Critical
    Accounting Policies and Estimates
          Revenue
    Recognition
  e-commerce Form 10-K
  Persuasive evidence of an arrangement
  Delivery has occurred or services rendered e-commerce
  Fee is fixed or determinable
 24




---



##### Table of Contents



Collection is probable
  e-commerce
  No. 00-21, EITF 00-21,
     25




---



##### Table of Contents



e-commerce set-up e-commerce
  Allowances
    for Accounts Receivable
    Research
    and Development Costs
  Accounting for Research and Development
    Costs, Accounting for the
    Costs of Computer Software to be Sold, Leased, or Otherwise
    Marketed,
  e-commerce 98-1, Accounting for Computer Software Developed or Obtained for
    Internal Use (SOP 98-1).
  e-commerce SOP 98-1 e-commerce
  Impairment
    or Disposal of Long Lived Assets, including Intangible
    Assets
   26




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##### Table of Contents



Goodwill
  Goodwill and Other Intangible Assets
  Accounting
    for Income Taxes
  Accounting for Income Taxes
  Accounting for
    Uncertainty in Income Taxes
  Stock-Based
    Compensation Expense
   27




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##### Table of Contents



Results
    of Operations
    Year Ended December 31,2008


2007


2006Revenue:Product licenses


29
%


22
%


32
%Recurring services


55
%


56
%


50
%Professional and education services


16
%


22
%


18
%Total revenue


100
%


100
%


100
%Cost of Revenue:Product licenses


1
%


2
%


2
%Recurring services


21
%


18
%


11
%Professional and education services


16
%


21
%


19
%Total cost of revenue


38
%


41
%


32
%Gross Profit


62
%


59
%


68
%Operating Expenses:Research and development


18
%


18
%


21
%Sales and marketing


30
%


33
%


30
%General and administrative


12
%


13
%


12
%Total operating expenses


60
%


64
%


63
%Income (loss) from operations


2
%


(5
)%


5
%Interest and other income, net


1
%


2
%


2
%Income (loss) before provision (benefit) for income taxes


3
%


(3
)%


7
%Provision (benefit) for income taxes


1
%


0
%


(2
)%Net income (loss)


2
%


(3
)%


9
%     Year Ended December 31,2008


2007


2006Cost of product license revenue


5
%


7
%


5
%Gross margin on product license revenue


95
%


93
%


95
%Cost of recurring services revenue


37
%


31
%


22
%Gross margin on recurring services revenue


63
%


69
%


78
%Cost of professional and education services revenue


98
%


98
%


101
%Gross margin on professional and education services revenue


2
%


2
%


(1
)%   Product
    license bookings
  e-commerce
 28




---



##### Table of Contents



Years Ended December 31,2008


2007


2006(In thousands)Product license bookings

$
52,782


$
43,412


$
32,812Product license bookings deferred


(25,546
)


(14,166
)


(505
)Product license deferred revenue recognized


20,193



1,283



477Product license revenue

$
47,429


$
30,529


$
32,784   e-commerce
  e-commerce
      Years
    ended December 31, 2008, 2007 and 2006
  Revenues
  Years Ended December 31,2008

2007

2006(In thousands)Total revenue

$
164,641


$
137,060


$
103,232   e-commerce
  e-commerce
   29




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##### Table of Contents



Product
    License Revenue
  Years Ended December 31,2008

2007

2006Product license revenue

$
47,429


$
30,529


$
32,784As a percent of total revenue


29
%


22
%


32
%     e-commerce
  e-commerce
  Recurring
    services revenue
  Years Ended December 31,2008


2007


2006Support and maintenance

$
45,716


$
41,923


$
39,303e-Commerce
    optimization services and managed application hosting services


45,323



34,749



11,810Total recurring services revenue

$
91,039


$
76,672


$
51,113As a percent of total revenue


55
%


56
%


50
%     
    Support and maintenance revenue increased 9% to
    $45.7 million in 2008 from $41.9 million in 2007. The
    increase is due to growth in our installed base of ATG
    e-commerce
    software.
    e-Commerce
    optimization services and managed application hosting services
    revenue increased 30% to $45.3 million in 2008 from
    $34.7 million in 2007. The increased revenue in 2008 is
    driven by growth in the number of customers utilizing our
    e-commerce
    optimization services and increased utilization by our existing
    customer base. Revenue generated by the ATG Recommendations
    acquired in the CleverSet transaction in February 2008 is
    included in this
    e-commerce
    optimization services revenue. 30




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##### Table of Contents




    Support and maintenance revenue increased 7% to
    $41.9 million in 2007 from $39.3 million in 2006. The
    increase is due to growth in our installed base of ATG
    e-commerce
    software. partially offset by approximately $1.1 million of
    revenue that was deferred due to arrangements that were sold in
    conjunction with application hosting services or
    e-commerce
    optimization services.
    e-Commerce
    optimization services and managed application hosting services
    revenue increased to $34.7 million in 2007 from
    $11.8 million in 2006. Revenues in 2007 included the full
    years results of eStara, which we acquired in October
    2006, and represented 45% of total recurring service revenue for
    2007 compared with 23% in 2006.    Professional
    and education services revenue
  Years Ended December 31,2008

2007

2006Professional and education services revenue

$
26,173


$
29,859


$
19,335As a percent of total revenue


16
%


22
%


18
%     e-commerce
      Cost of
    Product License Revenues
  Years Ended December 31,2008


2007


2006Cost of product license revenue

$
2,186


$
2,197


$
1,751As a percent of license revenue


5
%


7
%


5
%Gross margin on product license revenue

$
45,243


$
28,332


$
31,033As a percent of license revenue


95
%


93
%


95
%    31




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##### Table of Contents



Cost of
    Recurring Services Revenue
  Years Ended December 31,2008


2007


2006Cost of recurring services revenue

$
34,077


$
24,119


$
11,239As a percent of recurring services revenue


37
%


31
%


22
%Gross margin on recurring services revenue

$
56,962


$
52,553


$
39,874As a percent of recurring services revenue


63
%


69
%


78
%         e-commerce
        Cost of
    Professional and Education Services Revenues
  Years Ended December 31,2008


2007


2006Cost of professional and education services revenue

$
25,619


$
29,223


$
19,560As a percent of professional and education services revenue


98
%


98
%


101
%Gross margin on professional and education services revenue

$
554


$
636


$
(225
)As a percent of professional and education services revenue


2
%


2
%


(1
)%  32




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##### Table of Contents



Research
    and Development Expenses
 Years Ended December 31,2008

2007

2006Research and development expenses

$
29,329


$
24,963


$
21,517As a percent of total revenue


18
%


18
%


21
%         e-commerce SOP 98-1 e-commerce
  Sales and
    Marketing Expenses
 Years Ended December 31,2008

2007

2006Sales and marketing expenses

$
49,569


$
44,397


$
30,909As a percent of total revenue


30
%


33
%


30
%      33




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##### Table of Contents



General
    and Administrative Expenses
  Years Ended December 31,2008

2007

2006General and administrative expenses

$
19,432


$
18,211


$
12,952As a percent of total revenue


12
%


13
%


12
%               Stock-Based
    Compensation Expense
  Share-Based Payment
    Interest
    and Other Income, Net
   34




---



##### Table of Contents



Provision
    (Benefit) for Income Taxes
        Acquisitions
  CleverSet
    Acquisition
  e-commerce e-commerce
 35




---



##### Table of Contents



eStara
    Acquisition
  five-day
    Form 10-K.
  Liquidity
    and Capital Resources
      
    Net income for the 2008 of $3.8 million included non-cash
    expenses for depreciation and amortization of $8.9 million,
    stock-based compensation expense of $7.9 million and
    non-cash tax expense of $2.0 million.
    Deferred revenue increased $7.7 million during the year. We
    invoice customers as licenses and services are delivered and
    collect these invoices under customary business practices.
    Accordingly, the invoices that generated the deferred revenue
    balance at December 31, 2008 were subject to our collection
    process and, to the extent collected, are in our cash flow from
    operations.
    Cash flows from accounts receivable increased $5.6 million
    in 2008, due to improved collection of outstanding accounts
    receivable, which resulted in a decline in days sales
    outstanding to 70 days at December 31, 2008 compared
    to 93 days at December 31, 2007.
    Cash flows due to accrued expenses and accounts payable
    increased $0.2 million in 2008 due to higher operating
    expenses in 2008 partially offset by our focus to pay our
    vendors timely. We will be required to pay cash in future
    periods for these expenses that were recorded in 2008.
    Cash flows from prepaid expenses and other assets decreased
    $0.7 million in 2008 due to payments for rent paid in
    advance in the United Kingdom, support and maintenance contract
    on internally utilized software, and health insurance premiums.   36




---



##### Table of Contents



Accounts
    Receivable and Days Sales Outstanding
    Quarter Ended December 31,2008


2007(Dollar amounts in thousands)Days sales outstanding


70



93Revenue

$
45,397


$
39,326Accounts receivable, net

$
35,109


$
40,443Modified days sales outstanding


67



82Percent of accounts receivable less than 60 days


92
%


88
%     Contractual
    Obligations
    Less than








More thanContractual Obligations

Total


1 year


1-3 years


3-5 years


5 yearsOperating leases

$
15,460


$
3,894


$
6,059


$
1,946


$
3,561Long-term tax obligations


1,775















1,775$
17,235


$
3,894


$
6,059


$
1,946


$
5,336   Recent
    Accounting Pronouncements
  Business Combinations,
 37




---



##### Table of Contents



Accounting for Costs Associated with Exit or
    Disposal Activities
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51 Business Combinations.
  The
    Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity
    With Generally Accepted Accounting Principles
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk     38




---



##### Table of Contents



Item 8.
    Consolidated
    Financial Statements and Supplementary Data  Report of
    Independent Registered Public Accounting Firm
  The Board of
    Directors and Stockholders
         Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109.
    Ernst &
    Young LLP
    39




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    BALANCE SHEETS
 (In
    thousands, except share data)
  December 31,2008


2007ASSETSCurrent Assets:Cash and cash equivalents

$
47,413


$
34,419Marketable securities (including restricted securities of $1,669
    at December 31, 2008)


13,570



16,460Accounts receivable, net of reserves of $1,234 ($958 in 2007)


35,109



40,443Deferred costs, current


924



790Deferred tax assets


560



Prepaid expenses and other current assets


3,814



2,741Total current assets


101,390



94,853Property and equipment, net


10,098



7,208Deferred costs, less current portion


1,984



2,337Marketable securities (including restricted securities of $419
    at December 2008)


419



1,062Other assets


1,423



1,475Intangible assets, net


7,770



11,109Goodwill


65,683



59,675$
188,767


$
177,719LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
2,958


$
3,619Accrued expenses


18,875



19,082Deferred revenue, current portion


38,782



35,577Accrued restructuring, current portion


146



855Total current liabilities


60,761



59,133Accrued restructuring, less current portion






225Deferred revenue, less current portion


15,285



10,777Other liabilities


1,775



487Commitments and contingencies (Notes 7 and 10)Stockholders equity:Preferred stock, $0.01 par value; authorized 
    10,000,000 shares; issued and outstanding  no
    shares






Common stock, $0.01 par value; authorized 
    200,000,000 shares; issued 
    131,572,773 shares and 129,293,221 shares at
    December 31, 2008 and 2007, respectively


1,316



1,293Additional paid-in capital


315,730



305,151Accumulated deficit


(191,946
)


(195,745
)Treasury stock, at cost (5,605,501 shares and
    986,960 shares at December 31, 2008 and 2007,
    respectively)


(11,810
)


(2,902
)Accumulated other comprehensive loss


(2,344
)


(700
)Total stockholders equity


110,946



107,097$
188,767


$
177,719    40




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
 (In
    thousands, except per share data)
  Year Ended December 31,2008


2007


2006Revenue:Product licenses

$
47,429


$
30,529


$
32,784Recurring services


91,039



76,672



51,113Professional and education services


26,173



29,859



19,335Total revenue


164,641



137,060



103,232Cost of Revenue:Product licenses


2,186



2,197



1,751Recurring services


34,077



24,119



11,239Professional and education services


25,619



29,223



19,560Total cost of revenue


61,882



55,539



32,550Gross Profit


102,759



81,521



70,682Operating Expenses:Research and development


29,329



24,963



21,517Sales and marketing


49,569



44,397



30,909General and administrative


19,432



18,211



12,952Restructuring benefit






(59
)


(62
)Total operating expenses


98,330



87,512



65,316Income (loss) from operations


4,429



(5,991
)


5,366Interest and other income, net


960



2,237



1,712Income (loss) before provision (benefit) for income taxes


5,389



(3,754
)


7,078Provision (benefit) for income taxes


1,590



433



(2,617
)Net income (loss)

$
3,799


$
(4,187
)

$
9,695Basic net income (loss) per share

$
0.03


$
(0.03
)

$
0.08Diluted net income (loss) per share

$
0.03


$
(0.03
)

$
0.08Basic weighted average common shares outstanding


128,534



127,528



115,280Diluted weighted average common shares outstanding


133,916



127,528



120,096    41




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 AND COMPREHENSIVE INCOME (LOSS)
 (In thousands, except share data)
  AccumulatedCommon Stock


Additional








Other


Total


ComprehensiveNumber of


Par


Paid-in


Accumulated


Treasury


Comprehensive


Stockholders


IncomeShares


Value


Capital


Deficit


Stock


Loss


Equity


(Loss)Balance, December 31, 2005


110,637,606


$
1,106


$
251,454


$
(201,253
)





$
(1,147
)

$
50,160



Exercise of stock options


1,474,897



15



1,535















1,550



Issuance of common stock in connection with employee stock
    purchase plan


327,643



3



658















661



Issuance of common stock and valuation of options related to
    eStara acquisition


14,523,386



145



38,894















39,039



Vesting of restricted stock related to the eStara acquisition


45,284







120















120



Vesting of restricted stock issued under the non-employee
    director plan


46,557



1



55















56



Stock based compensation expense related to employee stock awards










3,575















3,575



Comprehensive income:Net income














9,695











9,695


$
9,695Foreign currency translation adjustment






















218



218



218Comprehensive income





























$
9,913Balance, December 31, 2006


127,055,373



1,270



296,291



(191,558
)






(929
)


105,074



Exercise of stock options


1,622,028



16



2,031















2,047



Issuance of common stock in connection with employee stock
    purchase plan


410,720



4



897















901



Vesting of restricted stock related to the eStara acquisition


198,646



2



528















530



Vesting of restricted stock issued under the non-employee
    director plan


6,454



1



231















232



Repurchase of common stock


(986,960
)













$
(2,902
)






(2,902
)


Stock based compensation expense related to employee stock awards










5,173















5,173



Comprehensive loss:Net loss














(4,187
)










(4,187
)

$
(4,187
)Foreign currency translation adjustment






















229



229



229Comprehensive loss





























$
(3,958
)Balance, December 31, 2007


128,306,261



1,293



305,151



(195,745
)


(2,902
)


(700
)


107,097Exercise of stock options


1,393,479



14



2,238















2,252



Issuance of common stock in connection with employee stock
    purchase plan


398,071



4



974















978



Vesting of restricted stock related to the eStara acquisition


14,182







31















31



Vesting of restricted stock issued under the non-employee
    director plan


146,454



1



526















527



Repurchase of common stock


(4,618,541
)














(8,908
)






(8,908
)


Stock based compensation expense related to employee stock awards










4,304















4,304



Vesting of restricted stock issued to employees


327,366



4



3,035















3,039



Tax withholding on restricted stock










(529
)














(529
)


Comprehensive income:Net income














3,799











3,799


$
3,799Foreign currency translation adjustment






















(1,540
)


(1,540
)


(1,540
)Unrealized loss on available-for-sale securities






















(104
)


(104
)


(104
)Comprehensive income





























$
(2,155
)Balance, December 31, 2008


125,967,272


$
1,316


$
315,730


$
(191,946
)

$
(11,810
)

$
(2,344
)

$
110,946    42




---



##### Table of Contents



ART
    TECHNOLOGY GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (In thousands)
  Years Ended December 31,2008


2007


2006Cash Flows from Operating Activities:Net income (loss)

$
3,799


$
(4,187
)


9,695Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:Depreciation and amortization


8,895



7,862



5,141Stock-based compensation expense


7,896



5,843



3,751Non-cash tax expense


2,009







Deferred income taxes


(560
)






Net changes in operating assets and liabilities:Accounts receivable, net


5,586



(5,584
)


(9,424
)Prepaid expense and other assets


(745
)


(657
)


(621
)Deferred costs


219



(3,127
)


Accounts payable


(1,208
)


1,012



(629
)Accrued expenses and other liabilities


1,413



4,118



(169
)Deferred revenue


7,713



22,145



2,417Accrued restructuring


(934
)


(1,164
)


(2,536
)Net cash provided by operating activities


34,083



26,261



7,625Cash Flows from Investing Activities:Purchases of marketable securities


(19,771
)


(21,779
)


(18,904
)Maturities of marketable securities


25,288



17,569



15,101Purchases of property and equipment


(7,010
)


(4,840
)


(4,459
)Payments for acquisitions, net of cash acquired


(9,766
)


(829
)


(7,153
)Collateralization of letters of credit


(2,088
)






(Increase) decrease in other assets






(22
)


(155
)Net cash used in investing activities


(13,347
)


(9,901
)


(15,570
)Cash Flows from Financing Activities:Proceeds from the exercise of stock options


2,252



2,047



1,537Proceeds from employee stock purchase plan


978



901



661Repurchase of common stock


(8,908
)


(2,902
)


Payment of employee restricted stock tax withholdings


(529
)






Payments on capital leases






(56
)


(63
)Principal payments on notes payable










(198
)Net cash (used in) provided by financing activities


(6,207
)


(10
)


1,937Effect of foreign exchange rate changes on cash and cash
    equivalents


(1,535
)


158



(141
)Net increase (decrease) in cash and cash equivalents


12,994



16,508



(6,149
)Cash and cash equivalents, beginning of period


34,419



17,911



24,060Cash and cash equivalents, end of period

$
47,413


$
34,419


$
17,911Supplemental Disclosure of Cash Flow information:Cash paid for interest expense

$



$



$
11Cash paid for income taxes

$
520


$



$
Supplemental Disclosure of Noncash Investing and Financing
    Activities:Issuance of stock and options related to acquisitions

$



$



$
39,039  43




---



##### Table of Contents



(1)
    Organization,
    Business and Summary of Significant Accounting
    Policies  e-commerce e-commerce
  (a)
    Principles
    of Consolidation    (b)
    Use of
    Estimates    (c)
    Revenue
    Recognition  e-commerce e-Commerce 97-2, Software Revenue Recognition
    (SOP 97-2) Revenue Recognition
    (SAB 104), No. 00-21, Revenue Arrangements with Multiple Deliverables
    (EITF 00-21),
    1. Sales
    of Perpetual Software Licenses
  SOP 97-2 , SOP 98-9, Modifications of
    SOP 97-2,
    Software Revenue Recognition, With Respect to Certain
    Transactions. SOP 97-2 SOP 98-9,
 44




---



##### Table of Contents



SOP 97-2.
    SOP 98-9. e-commerce e-commerce
  2. Sales
    of Application Hosting Services and Professional
    Services
  No. 00-3, Application of AICPA Statement of Position
    97-2 to
    Arrangements that Include the Right to Use Software Stored on
    Another Entitys Hardware
    (EITF 00-3), EITF 00-21.
  EITF 00-3, SOP 97-2, EITF 00-21 EITF 00-21, set-up
  3. Sales
    of
    e-Commerce
    Optimization Services
  e-commerce e-commerce
 45




---



##### Table of Contents



e-commerce e-commerce e-commerce
  e-commerce
  and/or e-commerce
  (d)
    Deferred
    Costs  set-up set-up
  (e)
    Accounts
    Receivable and Allowances for Accounts Receivable    Revenue Recognition When Right of Return Exists,
 46




---



##### Table of Contents



Beginning of





Deductions/


Balance at EndPeriod


Additions


Write-Offs


of Period(In thousands)Year Ended December 31, 2006

$
778


$
323


$
(654
)

$
447Year Ended December 31, 2007

$
447


$
1,670


$
(1,159
)

$
958Year Ended December 31, 2008

$
958


$
677


$
(401
)

$
1,234   (f)
    Cost
    of Product License Revenues    (g)
    Cost
    of Recurring Services Revenues    (h)
    Cost
    of Professional and Education Services Revenues    (i)
    Net
    Income (Loss) Per Share  Share-Based Payment
 47




---



##### Table of Contents



2008


2007


2006(In thousands, except per share amounts)Net income (loss)

$
3,799


$
(4,187
)

$
9,695Weighted average common shares outstanding used in computing
    basic net income (loss) per share


128,534



127,528



115,280Dilutive employee common stock equivalents


5,382







4,816Total weighted average common stock and common stock equivalent
    shares outstanding used in computing diluted net income (loss)
    per share


133,916



127,528



120,096Basic net income (loss) per share

$
0.03


$
(0.03
)

$
0.08Diluted net income (loss) per share

$
0.03


$
(0.03
)

$
0.08Anti-dilutive common stock equivalents


7,995



16,506



5,237   (j)
    Cash,
    Cash Equivalents and Marketable Securities  Accounting for Certain Investments in
    Debt and Equity Securities (SFAS 115).
      No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments
   48




---



##### Table of Contents



December 31,2008


2007(In thousands)Cash and cash equivalents:Cash

$
42,894


$
21,678Money market accounts


4,519



4,453Commercial paper






7,288Certificates of deposit






1,000Total cash and cash equivalents

$
47,413


$
34,419Marketable securities:Maturities within 1 year:U.S. Treasury securities

$
1,000


$
Certificates of deposit


2,744



902Commercial paper


1,597



9,794Corporate debt securities


8,229



5,764Maturities within 1 to 3 years:Certificates of deposit


419



Total marketable securities

$
13,989


$
17,522   (k)
    Fair
    Value Measurement  Fair Value Measurements
           49




---



##### Table of Contents



Fair Value Measurements at December 31, 2008Quoted Prices inActive Markets for


Significant Other


SignificantIdentical Assets


Observable Inputs


Unobservable InputsAssets

Total


(Level 1)


(Level 2)


(Level 3)Cash equivalents

$
4,519


$
4,519







Short-term available-for- sale securities


10,826



1,000


$
9,826



Total assets at fair value

$
15,345


$
5,519


$
9,826



   (l)
    Restricted
    Cash    (m)
    Property
    and Equipment    December 31,Asset Classification

Estimated Useful Life

2008


2007(In thousands)Computer equipment

3 years

$
11,711


$
8,729Leasehold improvements

Lesser of useful life or life of lease


2,618



2,443Furniture and fixtures

5 years


686



536Computer software

3 years


3,895



2,12818,910



13,836Less  accumulated depreciation and amortization




(8,812
)


(6,628
)$
10,098


$
7,208       Accounting for the
    Impairment or Disposal of Long-Lived Assets
 50




---



##### Table of Contents



(n)
    Research
    and Development Expenses for Software Products  Accounting for Research
    and Development Costs, Accounting for the Costs of Computer Software to be Sold,
    Leased, or Otherwise Marketed,
  e-commerce 98-1, Accounting for Computer Software Developed or Obtained for
    Internal Use (SOP 98-1).
  e-commerce
  (o)
    Income
    Taxes  Accounting for Income Taxes.
  (p)
    Stock-Based
    Compensation   51




---



##### Table of Contents



(q) Comprehensive
    Income (Loss)
  Reporting Comprehensive Income
    As of December 31,2008


2007(In thousands)Foreign currency translation adjustment

$
(2,240
)

$
(700
)Unrealized loss on available-for-sale securities


(104
)


$
(2,344
)

$
(700
)   (r)
    Concentrations
    of Credit Risk        (s)
    Goodwill    Goodwill and Other
    Intangible Assets
 52




---



##### Table of Contents



As of, and ForThe Year EndedDecember 31,2008


2007(In thousands)Balance at beginning of year

$
59,675


$
59,328Acquisition of CleverSet


8,138



eStara earn-out payment






621Collection of accounts receivable previously reserved


(121
)


(274
)Release of valuation allowance on deferred tax assets related to
    NOLs from the Primus acquisition (Note 4)


(2,009
)


$
65,683


$
59,675     (t)
    Intangible
    Assets        December 31, 2008


December 31, 2007Gross Carrying


Accumulated


Net Book


Gross Carrying


Accumulated


Net BookAmount


Amortization


Value


Amount


Amortization


Value(In thousands)Customer relationships

$
11,660


$
(8,600
)

$
3,060


$
11,500


$
(6,196
)

$
5,304Purchased technology


9,710



(5,770
)


3,940



8,900



(4,145
)


4,755Trademarks


1,400



(630
)


770



1,400



(350
)


1,050Total intangible assets

$
22,770


$
(15,000
)

$
7,770


$
21,800


$
(10,691
)

$
11,109  53




---



##### Table of Contents



Total(In thousands)2009

$
3,7042010


3,0322011


1,034Total

$
7,770   (u)
    Foreign
    Currency Translation  Foreign Currency Translation
  (v)
    Recent
    Accounting Pronouncements  Business Combinations Accounting for Costs Associated with Exit or
    Disposal Activities,
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51 Business Combinations.
 54




---



##### Table of Contents



The
    Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity
    With Generally Accepted Accounting Principles
  (2)
    Disclosures
    About Segments of an Enterprise  Disclosures About Segments of an
    Enterprise and Related Information
      Year Ended December 31,2008


2007


2006United States


71
%


68
%


75
%Europe, Middle East, Africa (excluding UK)


15
%


16
%


9
%United Kingdom (UK)


12
%


14
%


14
%Other


2
%


2
%


2
%100
%


100
%


100
%   (4)
    Income
    Taxes  Income
    Taxes
    Years Ended December 31,2008


2007


2006(In thousands)Domestic

$
3,097


$
(7,280
)

$
3,176Foreign


2,292



3,526



3,902$
5,389


$
(3,754
)

$
7,078  55




---



##### Table of Contents



Years Ended December 31,2008


2007


2006(In thousands)FederalCurrent

$
(102
)

$
9


$
Deferred


2,009







StateCurrent


59







12Deferred










ForeignCurrent


184



424



(2,629
)Deferred


(560
)






$
1,590


$
433


$
(2,617
)     Years Ended December 31,2008


2007


2006Federal tax at statutory rate


35.0
%


(35.0
)%


35.0
%State taxes, net of federal benefit


4.7



(4.7
)


0.1Stock-based compensation


23.4



2.8



18.7Meals and entertainment


3.5



3.4



2.1Reversal of previously accrued taxes










(36.8
)Tax credits


(33.5
)


(13.6
)


(34.6
)Other


(2.6
)


1.3



6.8Provision before valuation allowance


30.5



(45.8
)


(8.7
)Increase (use) of fully reserved net operating losses


(1.0
)


57.3



(28.0
)29.5
%


11.5
%


(36.7
)%  56




---



##### Table of Contents



December 31,2008


2007(In thousands)Deferred tax assets:Restructuring

$
51


$
381Depreciation and amortization


980



708Deferred revenue


2,188



Reserves and accruals


686



991Stock-based compensation


2,674



2,912Capitalized expenses


13,112



16,781Federal income tax credits


9,969



8,164Net operating losses


70,691



87,717Total gross deferred tax assets


100,351



117,654Valuation allowance


(96,706
)


(113,245
)Total deferred tax assets


3,645



4,409Deferred tax liabilities:Intangible assets


(3,085
)


(4,409
)Net deferred tax assets

$
560


$
       Accounting for
    Uncertainty in Income Taxes-an Interpretation of FASB Statement
    No. 109
 57




---



##### Table of Contents



December 31,2008


2007Balance at January 1

$
4,294


$
4,599Increases for tax positions taken during a prior period






313Decreases for tax positions taken during the current period


(39
)


(618
)Decreases relating to settlements


(582
)


Decreases resulting from the expiration of the statute of
    limitations






Balance at December 31

$
3,673


$
4,294       (5)
    Stock-Based
    Compensation and Stockholders Equity  Equity
    Compensation Plans
    1996
    Stock Option Plan
   58




---



##### Table of Contents



1999
    Outside Director Stock Option Plan
      Primus
    Stock Option Plans
        1999
    Employee Stock Purchase Plan
   59




---



##### Table of Contents



Grant-Date
    Fair Value
    Years Ended December 31,Stock Options

2008


2007


2006Options granted (in thousands)


1,639



1,478



4,540Weighted-average exercise price

$
3.63


$
2.86


$
2.64Weighted average grant date fair value

$
2.46


$
2.25


$
2.28Assumptions:Expected volatility


73.9
%


95.3
%


113.2
%Expected term (in years)


6.25



6.25



6.25Risk-free interest rate


3.19
%


4.33
%


4.68
%Expected dividend yield


0
%


0
%


0
%           Stock-Based
    Compensation Expense
   60




---



##### Table of Contents



Stock-Based
    Compensation Activity
    Weighted AverageWeighted Average


RemainingNumber


Exercise Price


Contractual Term


Aggregateof Options


Per Share


in Years


Intrinsic Value(In thousands, except weighted average exercise price andweighted average remaining contractual term in years)Outstanding, December 31, 2007


14,147


$
2.62Granted


1,639



3.63Exercised


(1,393
)


1.62Cancelled


(969
)


3.18Outstanding, December 31, 2008


13,424


$
2.80






$
5,457Exercisable, December 31, 2008


10,036


$
2.72






$
5,296Options vested or expected to vest at December 31, 2008(1)


13,170


$
2.79






$
4,150     (1)
    
    In addition to the vested options, the Company expects a portion
    of the unvested options to vest at some point in the future.
    Options expected to vest are calculated by applying an estimated
    forfeiture rate to the unvested options.      WeightedRestricted


Average GrantShares


Date Fair Valueand RSUs


Per Share(In thousands, exceptper share amounts)Non-Vested shares outstanding at December 31, 2007


2,359


$
2.57Awards granted


2,601


$
3.54Restrictions lapsed


(655
)

$
2.47Awards forfeited


(542
)

$
3.21Non-Vested shares outstanding at December 31, 2008


3,763


$
3.17      61




---



##### Table of Contents



Shareholders
    Rights Plan
      (6)
    Acquisitions  Acquisition
    of CleverSet
  e-commerce e-commerce
   62




---



##### Table of Contents



Cash

$
270Accounts receivable


131Prepaid expenses and other assets


330Property, plant and equipment


56Goodwill


8,138Intangible assets:Customer relationships (estimated useful life of 3 years)


160Developed product technology (estimated useful life of
    3 years)


810Total intangible assets


970Accounts payable


(191
)Accrued expenses


(289
)Total purchase price

$
9,415     Year Ended December 31,2008


2007(In thousands)Pro forma revenue

$
164,739


$
138,733Pro forma net income (loss)


3,262



(7,416
)Pro forma net income (loss) per Share  basic and
    diluted

$
0.02


$
(0.06
)   Acquisition
    of eStara, Inc.
  e-commerce five-day
   63




---



##### Table of Contents



Cash

$
2,699Accounts receivable


3,671Other current assets


188Property, plant and equipment


167Goodwill


32,071Intangible assets:Customer relationships (estimated useful life of 4 years)


7,300Developed product technology (estimated useful life of
    5 years)


5,300Trademarks (estimated life of 5 years)


1,400Total intangible assets


14,000Other long-term assets


37Accounts payable


(517
)Deferred revenue


(679
)Accrued and other expenses


(1,821
)Total purchase price

$
49,816   (7)
    Commitments
    and Contingencies  Leases
      2009

$
3,8942010


3,2242011


2,8352012


9712013


975Thereafter


3,561Total future minimum lease payments

$
15,460    64




---



##### Table of Contents



Indemnifications
          (8)
    Employee
    Benefit Plan    (9)
    Accrued
    Expenses    2008


2007(In thousands)Compensation and benefits

$
8,358


$
9,348Income taxes


209



1,887Outside contractor and professional fees


3,391



3,475VAT and sales and use taxes


3,298



1,579Other


3,619



2,793$
18,875


$
19,082  65




---



##### Table of Contents



(10)
    Litigation    e-commerce e-commerce
   66




---



##### Table of Contents



(11)
    Quarterly
    Results of Operations (Unaudited)    Quarter EndedMarch 31,


June 30,


September 30,


December 31,2008


2008


2008


2008(In thousands, except per share amounts)Total revenues

$
36,530


$
41,920


$
40,794


$
45,397Gross profit


21,623



25,665



25,251



30,220Net income (loss)


(842
)


348



786



3,507Basic and diluted net income (loss) per share

$
(0.01
)

$
0.00


$
0.01


$
0.03Diluted net income (loss) per share

$
(0.01
)

$
0.00


$
0.01


$
0.03   Quarter EndedMarch 31,


June 30,


September 30,


December 31,2007


2007


2007


2007(In thousands, except per share amounts)Total revenues

$
29,232


$
32,616


$
35,886


$
39,326Gross profit


17,951



19,517



21,577



22,476Net income (loss)


(1,461
)


(2,748
)


(760
)


782Basic and diluted net income (loss) per share

$
(0.01
)

$
(0.02
)

$
(0.01
)

$
0.01  67




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  1.
    Managements
    Report on Disclosure Controls and Procedures  Rules 13a-15(e) 15d-15(e)
  2.
    Internal
    Control over Financial Reporting  (a)
    Managements
    Annual Report on Internal Control Over Financial
    Reporting           68




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                 Ernst &
    Young LLP
    69




---



##### Table of Contents



3.
    Changes
    in internal control over financial reporting.    Item 9B.
    Other
    information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    http://www.atg.com/About
  Form 8-K Form 8-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   70




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  (a) (1) Financial
    Statements
    
    Report of Independent Registered Public Accounting Firm
    Consolidated Balance Sheets as of December 31, 2008 and 2007
    Consolidated Statements of Operations for the years ended
    December 31, 2008, 2007 and 2006
    Consolidated Statements of Stockholders Equity and
    Comprehensive Income (Loss) for the years ended
    December 31, 2008, 2007 and 2006
    Consolidated Statements of Cash Flows for the years ended
    December 31, 2008, 2007 and 2006
    Notes to Consolidated Financial Statements  (a) (2) Financial
    Statement Schedule
    (a) (3) Exhibits
   71




---



##### Table of Contents



SIGNATURES       By:
    /s/  ROBERT
    D. BURKE   Chief Executive Officer and President
    Name

Title/s/  ROBERT
    D. BURKERobert
    D. Burke

Chief Executive Officer and President(Principal Executive Officer)/s/  JULIE
    M.B. BRADLEYJulie
    M.B. Bradley

Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)/s/  MICHAEL
    A. BROCHUMichael
    A. Brochu

Director/s/  DAVID
    B. ELSBREEDavid
    B. Elsbree

Director/s/  JOHN
    R. HELDJohn
    R. Held

Director/s/  ILENE
    H. LANGIlene
    H. Lang

Director/s/  MARY
    E. MAKELAMary
    E. Makela

Director/s/  DANIEL
    C. REGISDaniel
    C. Regis

Chairman of the Board/s/  PHYLLIS
    S. SWERSKYPhyllis
    S. Swersky

Director  72




---



##### Table of Contents



EXHIBIT INDEX
  Filed withThis

Incorporated by ReferenceExhibit



Form





ExhibitNo.

Description

10-K

Form

Filing Date

No.2
.1

Agreement and Plan of Merger dated as of January 19, 2008
    among Art Technology Group, Inc., Einstein Acquisition Corp.,
    eShopperTools.com, Inc., and the stockholder representative and
    principal stockholders of eShopperTools.com, Inc., named therein



8-K

January 25, 2008


10.12
.2

Agreement and Plan of Merger dated as of September 18, 2006
    among Art Technology Group, Inc., eStara, Inc., Arlington
    Acquisition Corp., Storrow Acquisition Corp., and the
    stockholder representative and principal stockholders of eStara
    named therein



8-K

September 22, 2006


10.12
.3

Amendment No. 1 to Agreement and Plan of Merger dated as of
    October 2, 2006 among Art Technology Group, Inc.,
    eStara, Inc. and the stockholder representative named therein



8-K

October 6, 2006


2.23
.1

Amended and Restated Certificate of Incorporation



S-8

June 12, 2003


4.13
.2

Amended and Restated By-Laws of Art Technology Group, Inc.
    (as further amended and adopted April 17, 2008)



8-K

April 23, 2008


3.14
.1

Rights Agreement dated September 26, 2001 with EquiServe
    Trust Company, N.A. (SEC
    file no. 000-26679)



8-K

October 2, 2001


4.110
.1*

Amended and Restated 1996 Stock Option Plan (including forms of
    agreements)

X10
.2*

Amended and Restated 1999 Outside Director Stock Option Plan
    (including forms of agreements)



10-Q

August 7, 2007


10.210
.3*

1999 Employee Stock Purchase Plan



DEF14A
    (proxy
    statement)

April 10, 2006


Annex A10
.4

Primus 1999 Non-Officer Stock Option Plan



10-K

March 16, 2005


10.410
.5

Primus 1999 Stock Incentive Compensation Plan, as amended



8-K

April 25, 2007


99.310
.6*

General
    Change-in-Control
    Policy for Employees



10-Q

November 9, 2004


10.2110
.7*

Amended and Restated Employment Agreement dated April 14,
    2008 with Robert Burke



10-Q

May 12, 2008


10.310
.8*

Offer letter with Julie M.B. Bradley dated July 6, 2005



10-Q

November 8, 2005


10.910
.9

Offer letter with Andrew Reynolds dated July 23, 2007



10-K

March 17, 2008


10.1010
.10*

Offer letter with Nina P. McIntyre dated January 27, 2009

X10
.11*

Form of Change in Control Agreement by and among Art Technology
    Group, Inc. and Executive Management Team Members, dated
    April 14, 2008



10-Q

May 12, 2008


10.410
.12*

2008 Executive Management Compensation Plan, as amended, dated
    March 3, 2008



8-K

March 6, 2008


99.1 73




---



##### Table of Contents



Filed withThis

Incorporated by ReferenceExhibit



Form





ExhibitNo.

Description

10-K

Form

Filing Date

No.10
.13*

Amended and Restated Non-Employee Director Compensation Plan, as
    amended on September 16, 2008



10-Q

November 7, 2008


10.110
.14

Lease agreement dated May 6, 2006 with RREEF America REIT
    II Corp. PPP



10-Q

May 10, 2006


10.3310
.15

Amended and Restated Loan and Security Agreement dated
    June 13, 2002 with Silicon Valley Bank



10-Q

August 14, 2002


10.110
.16

First Loan Modification Agreement dated September 30, 2002
    with Silicon Valley Bank



10-Q

November 14, 2002


10.110
.17

Amendment Agreement dated October 4, 2002 with Silicon
    Valley Bank



10-Q

November 14, 2002


10.210
.18

Second Loan Modification Agreement dated December 20, 2002
    with Silicon Valley Bank



10-K

March 28, 2003


10.2110
.19

Fourth Loan Modification Agreement dated November 26, 2003
    with Silicon Valley Bank



10-K

March 15, 2004


10.2510
.20

Fifth Loan Modification Agreement dated June 2004 with Silicon
    Valley Bank



10-Q

August 9, 2004


10.2610
.21

Letter Agreement re: Loan Arrangement with Silicon Valley Bank
    dated June 16, 2004



10-Q

August 9, 2004


10.2510
.22

Sixth Loan Modification Agreement dated November 24, 2004
    with Silicon Valley Bank



10-K

March 16, 2005


10.2810
.23

Seventh Loan Modification Agreement dated December 21, 2004
    with Silicon Valley Bank



10-K

March 16, 2005


10.2910
.24

Eighth Loan Modification Agreement dated December 30, 2005
    with Silicon Valley Bank



10-K

March 16, 2006


10.3110
.25

Ninth Loan Modification Agreement dated February 10, 2006
    with Silicon Valley Bank



10-Q

May 10, 2006


10.3210
.26

Tenth Loan Modification Agreement dated October 4, 2006
    with Silicon Valley Bank



8-K

October 5, 2006


10.110
.27

Eleventh Loan Modification Agreement dated May 7, 2007 with
    Silicon Valley Bank



10-Q

August 7, 2007


10.510
.28

Twelfth Loan Modification Agreement dated September 5, 2007
    with Silicon Valley Bank



10-Q

November 5, 2007


10.110
.28

Securities Account Control Agreement dated December 20,
    2002 with Silicon Valley Bank



10-K

March 28, 2003


10.2010
.28

Agreement and Release between Clifford Conneighton and Art
    Technology Group, Inc., dated July 16, 2008



10-Q

August 8, 2008


10.221
.1

Subsidiaries

X23
.1

Consent of Ernst & Young LLP

X31
.1

Certification of Principal Executive Officer Pursuant to
    Exchange Act
    Rules 13a-14
    and 15d-14,
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002

X 74




---



##### Table of Contents



Filed withThis

Incorporated by ReferenceExhibit



Form





ExhibitNo.

Description

10-K

Form

Filing Date

No.31
.2

Certification of Principal Financial and Accounting Officer
    Pursuant to Exchange Act
    Rules 13a-14
    and 15d-14, as Adopted Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002

X32
.1

Certification of Principal Executive Officer Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002

X32
.2

Certification of the Principal Financial and Accounting Officer
    Pursuant to 18 U.S.C. Section 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X     *
    
    Management contract or compensatory plan. 75