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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number: 000-25375



VIGNETTE CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-2769415                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1301 South MoPac
Expressway

Austin, Texas 78746

(Address of principal executive offices)



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(512) 741-4300

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the
Act: None



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



Common Stock, $0.01 par value

(Title of each class)



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



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



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



As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $390,454,262.



As of February 29, 2004, 261,373,633 shares of the registrants
common stock were outstanding.



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DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held May 21, 2004 are incorporated by
reference in Part III of this Annual Report on Form 10-K.



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VIGNETTE CORPORATION



ANNUAL REPORT ON FORM 10K

For the year ended December 31, 2003



TABLE OF CONTENTS



|          |  |                                                                                                |  |     
|--------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                |  | Page
|Part I.   |  |                                                                                                |  |     
|          |  |                                                                                               
|Item 1.   |  | Business                                                                                       |  | 3   
|          |  |                                                                                               
|Item 2.   |  | Properties                                                                                     |  | 25  
|          |  |                                                                                               
|Item 3.   |  | Legal Proceedings                                                                              |  | 25  
|          |  |                                                                                               
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                            |  | 26  
|          |  |                                                                                               
|Part II.  |  |                                                                                                |  |     
|          |  |                                                                                               
|Item 5.   |  | Market for Registrants Common Stock and Related Stockholder Matters                           |  | 26  
|          |  |                                                                                               
|Item 6.   |  | Selected Consolidated Financial Data                                                           |  | 27  
|          |  |                                                                                               
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 28  
|          |  |                                                                                               
|Item 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 43  
|          |  |                                                                                               
|Item 8.   |  | Consolidated Financial Statements and Supplementary Data                                       |  | 44  
|          |  |                                                                                               
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 44  
|          |  |                                                                                               
|Item 9A.  |  | Controls and Procedures                                                                        |  | 45  
|          |  |                                                                                               
|Part III. |  |                                                                                                |  |     
|          |  |                                                                                               
|Item 10.  |  | Directors and Executive Officers of the Registrant                                             |  | 45  
|          |  |                                                                                               
|Item 11.  |  | Executive Compensation                                                                         |  | 45  
|          |  |                                                                                               
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 46  
|          |  |                                                                                               
|Item 13.  |  | Certain Relationships and Related Transactions                                                 |  | 48  
|          |  |                                                                                               
|Item 14.  |  | Principal Accountant Fees and Services                                                         |  | 48  
|          |  |                                                                                               
|Part IV.  |  |                                                                                                |  |     
|          |  |                                                                                               
|Item 15.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 48  



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FORWARD-LOOKING STATEMENTS



The statements contained in this Annual Report on Form 10-K that are not purely historical statements are forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding our expectations, beliefs, hopes, intentions or strategies for the future. These forward-looking statements involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this filing on Form 10-K to conform these statements to actual results.
Factors that might cause or contribute to such a difference include, but are not limited to, those discussed in the section entitled Risk Factors That May Affect Future Results and the risks discussed in our other historical Securities
and Exchange Commission filings.



We maintain a World Wide Web site at
www.vignette.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
free of charge through our Web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Web site and the information contained therein or connected thereto
are not intended to be incorporated into this Annual Report on Form 10-K.



Vignette is a trademark or registered trademark of Vignette Corporation in the United States and other countries. All other names are the trademarks or registered trademarks of their respective companies.



PART I.



|ITEM 1. | BUSINESS
|------- | --------



The information in this section is intended to provide a current description of our business and, therefore, has been updated to reflect our recent
acquisition of Tower Technology Pty Limited (Tower or Tower Technology), which occurred on March 1, 2004. Tower Technology is a leading provider of enterprise document and records management solutions.



Our History



Vignette was founded in 1995 and for the first several years of our existence, we focused exclusively on the market for managing and
delivering content via the Web. As companies began to adopt the Web as a channel for business communication, the technical requirements and complexities of managing and delivering information via the Web grew. Companies began to focus on
understanding the usefulness of specific pieces of information, or content, to customers in the context of Web-based applications. In addition, they began to integrate their other existing sources of content into these Web-based applications to
create information-rich Web sites.



The Web evolved as an important tool for
helping companies run their businesses more efficiently, and we responded by aligning our business strategy and product development efforts with this trend. In February of 2000, we acquired DataSage, Inc., a leading provider of Web-based analytics
and personalization software and in July 2000, we acquired OnDisplay, Inc., a leading provider of software for integrating business information and applications within an enterprise. The combination of our Web content management technology with the
integration technology from the OnDisplay, Inc. acquisition and the analytics technology from the Datasage, Inc. acquisition enabled us to offer an industry-leading suite of technology, introduced in September 2001 as Vignette V6, for optimizing the
management and use of Web content across an organization to deliver powerful Web-based applications.



The downturn in IT spending, generally, and the precipitous decline in spending for enterprise software, specifically, had a severe impact on our business from 2001 to 2003. Customers and prospects reduced their focus
on broad Web-based initiatives and, as a result, our revenue declined dramatically. In the latter part of 2003, we began to see some stabilization in our served markets and we believe that the interest in delivering critical business information via
the Web is increasing. Companies are once again focused on



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the opportunity to drive business efficiency though the use of the Web as a channel for business communication. In addition, companies are expanding their
focus from managing Web content to contemplate the capture, management, sharing and delivery of all types of enterprise content including documents, records, audio, video, email and other forms of information. Giga Research forecasts that this
Enterprise Content Management (ECM) market will grow at a 22% compounded annual rate to more than $3.3 billion in 2006.



In the past 15 months, we have significantly broadened our product offerings through internal development and acquisitions to better address the opportunity to capture,
manage, share and deliver enterprise information. In December of 2002, we introduced Vignette V7, the latest iteration of our flagship Web content management product. Also in December of 2002, we acquired Epicentric, Inc., a leading provider of
business portals for delivering information via the Web. In December 2003, we acquired Intraspect Software, Inc., a leading provider of collaboration software for allowing information-sharing and in March 2004, we acquired Tower Technology Pty
Limited, a leading provider of enterprise document and records management solutions. We have strengthened our product portfolio and now offer what we believe is the leading suite of ECM solutions. We deliver these solutions with the added benefit of
platform independence and full support of the J2EEstandards.



Overview



We believe we are uniquely positioned to provide Web applications that help companies drive revenue growth, cost reductions, increased
employee productivity and improved customer satisfaction. Our portal, integration, content, analysis, process and collaboration technologies give organizations the capability to provide a simple, personalized experience anytime, anywhere; integrate
systems and information from inside and outside the organization; manage the lifecycle of enterprise information; and collaborate by supporting ad-hoc and business process-based information sharing. Together, our products and expertise help
companies to harness the power of their information and the Web to deliver measurable improvements in business efficiency.



Our portal helps organizations build, manage and deliver integrated composite applications and deliver personalized experiences to any touch-point. Our integration
capability allows organizations to integrate content and processes from any source or enterprise application as well as deploy applications using configurable modules. Content capabilities can capture and manage enterprise content from creation to
retirement and manage how information is stored and delivered in the context of how it will be consumed. Collaboration capabilities provide a complete online environment for distributed networks while maintaining a group memory of intellectual
property and work products. Our process capabilities automatically process information and content through business workflows. In addition, organizations can evaluate and review the use of content, information and the portal with our analysis
capabilities.



To meet the information technology needs of organizations of all
sizes, our capabilities were developed using open standards. Our capabilities accelerate the time for organizations to recognize value by reaching new markets, growing revenue from anticipating or responding quickly to market demands, and delivering
applications faster using comprehensive application services. Our capabilities are adaptable, allowing organizations to configure the business solutions to meet the unique requirements of each organization as well as use the products individually
with partner solutions or as an integrated suite. Our commitment to open standards allows organizations to realize more value from their current infrastructure and application investments, as well as reduce costs and increase agility using
technology standards while leveraging cross-platform support. Our capabilities are scalable, allowing organizations to begin with simple projects and grow to enterprise-wide deployments and to meet the needs of the most demanding audiences. These
software advantages, combined with our capabilities and expertise, help organizations realize measurable efficiency results.



Our products and capabilities are supported by our professional services organization, Vignette Professional Services (VPS). VPS offers pre-packaged and custom services, along with documented best practices, to help organizations define their online business objectives and deploy
their



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content management, portal, process, collaboration, integration and analysis applications. Our education, consulting and customer care teams give customers
the benefit of our experience gained from thousands of customer implementations. We partner with a number of leading system integrators such as Accenture, EDS, Bearing Point, and Deloitte Consulting to implement our software for their clients. In
many cases, we work in blended teams to jointly implement solutions. To ensure that we provide support to our customers on their chosen platform and infrastructure, we have long-standing relationships with key technology providers such as BEA
Systems, IBM and Sun Microsystems.



Products



Our portal, integration, content management, document and records management, collaboration,
process and analysis services enable organizations to rapidly build, manage and deploy applications. We support an enterprise services foundation, allowing organizations to manage current and future growth demands and strategies to reflect the
real-time enterprise for their customers, suppliers, partners and employees. Our solutions help our customers:



| |  | Quickly deploy an integrated solution from a single vendor to increase return on investment;
| | - | --------------------------------------------------------------------------------------------



| |  | Deliver the unique ability to use and manage information where it is currently stored, regardless of format and repository;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| |  | Unify the management of applications, information and processes across the enterprise through integration with current business applications; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Lower the cost of ownership by leveraging implemented infrastructures and accepted market standards.
| | - | ----------------------------------------------------------------------------------------------------



We help organizations to combine a comprehensive understanding of content assets across the business, and their value, with Web applications
that actively manage the information they have throughout their organization, and deliver the right information and processes to the right person at the right time, regardless of its source.



We have continued to provide an integrated enterprise services foundation to create and
manage information, business processes, portals and applications. Vignette Content Management and Vignette Application Portal form the core of our product family, and afford users the ability to manage information and interaction in an integrated
fashion. Our products also deliver a set of new market defining technologies that our customers can use to further expand the flexibility and functionality of their implementation of our products.



To address the particular size and requirements of our customers, we deliver our products in
various suites: group, business and enterprise. Additionally, we allow organizations the flexibility to purchase products individually. The Vignette Enterprise Services Foundation is a framework that describes our products covering six application
services: portal, integration, content, collaboration, process, and analysis. Organizations may purchase products individually from these six service categories or pre-bundled in suites to meet their specific needs. Following is a listing of our
products.



Vignette Portal Services - Powerful portal applications
provide both a highly functional portal framework and a business user-friendly development environment for assembling portlets.



| |  | Vignette Application Portal is an adaptable, scalable, open-portal solution that enables organizations to rapidly build and deliver highly customizable applications for their
real-time enterprise across diverse business communities such as employees, partners and customers. We also offer a variety of additional specialized products to enhance our application portal.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Application Builder enables quick creation, assembly and customization of applications, empowering organizations to respond rapidly to changing business needs.
Wizard-based interfaces accelerate the development and deployment of a wide range of critical applications that automatically integrate into the customers collaborative portal environment.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vignette Integration Services - Rich integration capabilities provide unique
capabilities to connect a broad range of unstructured, semi-structured and structured data (including transactional) sources.



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| |  | Vignette Business Integration Studio is a graphical application integration environment for collecting and integrating content and applications from a wide selection of
sources with minimal coding. Vignette Business Integration Studio allows users to readily and dynamically map content from disparate schemas, remote repositories and applications to an aggregated destination. We offer over fifty pre-built
application and technology adapters that can be used by Vignette Business Integration Studio to integrate with enterprise, desktop, database and proprietary content sources existing throughout an enterprise.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Technology Adapters are plug-ins to Vignette Business Integration Studio that provide prepackaged integration capabilities to common technology applications that
already exist in an enterprise.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vignette Content Services
- Robust content management services including library services, content type modeling, workflow, taxonomy, and search. Document and records management solutions are also available to expand the ability to capture, manage, utilize, retain and
dispose of an organizations enterprise content. In addition, imaging and transactional Web capture functionality can effectively promote transitioning paper-based processes to digital processes, streamlining high-volume transaction
processes and facilitating the centralized capture, storage and archival of an organizations business content. This solution also effectively delivers risk and compliance management processes upon the breadth of an organizations business
content, documents, transactions, images, e-mails, rich media and Web transactions.



| |  | Vignette Content Management manages content, sites, content types and objects and the deployment and delivery of content. It also functions as a task inbox and workflow
manager and includes a roles-based management console and essential library services. The Vignette Command Center, the core of Vignette Content Management, is an intuitive and configurable roles-based management console that enables business and
technical users to manage virtually all of their content management objectives through one interface. Once integrated with business processes, users can share knowledge and collaborate on virtually any tasks, using e-mail, desktop applications and
Web-based workspaces. We also offer a variety of additional specialized products to enhance Vignette Content Management.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Taxonomy and Advanced Search organizes and classifies enterprise content using a rich, multi-dimensional taxonomy. It supports XML taxonomy schemas for importing
existing custom-created taxonomies and allows the use of taxonomies provided by third parties or the creation of new taxonomies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Content Management SDK provides a complete set of APIs, documentation and best practices library that enables developers to extend Vignette Content Management. With
the Vignette Content Management SDK, developers can extend application capabilities such as Vignette Content Managements core library services, knowledge management, classification, virtual repository capabilities, workflow and more to meet
the unique needs of the enterprise.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Command Center SDK provides a complete set of APIs, documentation and a best practices library that enables developers to extend the Vignette Command Center.
With Vignette Command Center SDK, developers can modify the look and feel of the Vignette Command Center interface, customize menu options and capabilities or configure the Vignette Command Center to manage third party or custom enterprise
applications.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Integrated Document Managementis an integrated document management, archive and retrieval solution addressing document capture, production imaging supporting forms OCR/ICR, high performance image viewing,
printing, and storage management; business process automation and workflow supporting case management, BPM and Web services; output report management for capturing, mining, linking, distribution, and statement presentment; and COLD storage and
records management supporting electronic and physical records, retention management, e-mail archiving and regulatory compliance.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Records and Document Serveris an enterprise document and records management solution facilitating risk and compliance management supporting metadata search, QBE, indexed full text search, checkin/out and ACL
security.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | WebCaptureis a secure Web transaction capture and playback risk management solution recording transactions on a customers site and visited Web sites.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



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Vignette Collaboration Services  Through our acquisition of Intraspect in December 2003, we acquired rich
collaboration capabilities that enhanced our capability of sharing knowledge for teams using workspaces. Our collaboration services also provide interaction management.



| |  | Vignette Project Delivery provides online workspaces where extended project teams can work together to better serve and collaborate with key project teams. This solution
offers out-ofthe-box templates for collaboration and can capture project assets, expertise and best practices. Using Vignette Project Delivery can help organizations increase their speed and repeatability of their projects and can help improve
the productivity of internal teams.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Strategic Account Management is an enterprise solution for business users to create account workspaces and allows account teams to better serve key accounts by
effectively capturing, sharing, and searching account-related information and knowledge. This allows organizations to reduce the account team communication cycles and captures valuable account communication, allowing organizations to improve
customer satisfaction, productivity of internal teamwork while reducing the costs of account management.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Business Workspaces is an enterprise solution for business-users to create workspaces, where teams can share, capture and search information. Vignette Business
Workspaces provides secure online workspaces where extended business teams can work together more effectively. This helps organizations to reduce the risk of knowledge being lost and improves business relationships.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Dialog delivers highly personalized content to the intended recipients at the designated time through online and offline touch points. A simple, graphical
environment allows business users to create planned, multi-step conversations that can be triggered by virtually any type of event, including Web site registration, completion of a purchase, event attendance or a customer service call.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Messengerallows business users to easily create, manage, launch and analyze e-mail marketing campaigns. The wizard-based user interface provides all of the tools
necessary for non-technical users to properly execute targeted e-mail campaigns to the appropriate audience with the appropriate content.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vignette Process Services - Powerful standards-based process workflow engine and graphical process modeler for building and deploying business processes across the
enterprise application infrastructure.



| |  | Vignette Process Workflow Modeler provides an intuitive graphical environment for non-technical users to model workflows and other business processes through Microsoft Visio,
a well-known business user application. The Vignette Process Workflow Modeler is capable of handling complex tasks such as conditional branching, sub-workflows, looping and parallel routing, while also supporting advanced capabilities such as
flexible payloads, dynamic resource assignment and the invocation of external systems and business processes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vignette Analysis Services - In-depth metrics and reporting based on Web logs, content delivery logs and process performance logs that drive return on investment
through the analysis of content usage, Web site or application performance, and process performance.



| |  | Vignette Web Log Reporting provides robust site and operations reporting metrics that are integrated with the Vignette Command Center. Vignette Web Log Reporting provides
integrated and prepackaged reports for measuring such metrics as site analysis, page analysis, referral statistics, click-stream and downloads.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Vignette Analysis and Reporting measures the return on investment for Web initiatives by monitoring and analyzing content interactions. With Vignette Analysis and Reporting,
business users can track interactions such as most and least used content items, customer activity by each node in the taxonomy, unregistered content items that receive the most hits by an audience, the amount of activity on each
presentation channel and top search terms. We also offer a variety of additional specialized products to enhance our analysis services products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Open Architecture



We have built an open and comprehensive platform and provide support for major industry standard platforms, including both Java 2 Platform-Enterprise Edition
(J2EE) and Microsoft .NET. Our
applications support various combinations of operating systems, directory servers, Web servers, application servers and databases. We refer to this combination of operating systems, directory servers, Web servers, application servers and databases
as our supported platform matrix. A representative, but not exhaustive, list of supported platforms includes Sun Solaris, IBM AIX and Microsoft Windows 2000 operating systems, IBM and SunOne Directory Servers, Microsoft and IBM Web servers, IBM
WebSphere and BEA WebLogic application servers and Oracle, IBM DB2 and Microsoft SQLServer databases. Representative presentation layer support includes Vignette Application Portals own portal framework as well as JavaServer Pages (JSP),
ActiveServer Pages (ASP) and XML with stylesheets. Our open architecture permits easy integration and use of third-party development environments, layout and design tools, authoring tools and systems management environments.



Services



We provide services to help define online business objectives and to develop and deliver content, portal, process, collaboration,
integration and analysis applications. Our consulting, education and customer care services are based on best practices, methodologies and tools developed from experience. Our services are designed to reduce time to deployment, mitigate risk and
achieve greater return on our customers software investment.



Vignette
Professional Services(VPS) offers
consulting and education services to help customers identify their strategic application objectives, design content, portal, process, collaboration, integration and analysis applications and deliver solutions using our products. Our services center
on the Vignette Solution Methodology. This established framework allows customers and partners to leverage best practices to plan, build and maintain content, portal, process, collaboration, integration and analysis solutions. VPS provides services that are tailored to the individual
customer through either Velocity Services, a set of packaged service offerings, or customized services. VPS also partners with consulting partners to provide best of class services needed to create Web applications designed to meet customers business
objectives. We generally sell our services under time-and-materials agreements.



Our Customer Care, Maintenance and Support Services organizations are committed to our customers on-going business success. Customer Care services include a combination of account management and global technical support
offerings that are tailored to meet customers specific needs. Vignette Global Support provides optional 24x7 access to skilled technical engineers and flexible, easy-to-use telephone and Web resources that can provide our customers with
timely, effective assistance.



Strategy



Our objective is to maintain and extend our leadership position as a global provider of
applications and products that enable organizations to harness the power of information and the Web to deliver measurable improvements in business efficiency. To achieve this objective, we will focus on expanding our customer base of global 2000
organizations both at the enterprise and departmental levels, extending our technology and product leadership through internal investment in research and development, expanding our global sales capabilities and extending our partnership alliances
with leading technology and services companies.



Strategic Alliances



We establish strategic alliances to assist us in the marketing, selling,
distribution, and development of customer Web applications for our mutual customers and prospects, as well as to increase product interoperability within the industry. This approach is intended to increase the number of qualified personnel available
to perform application design and development services for our customers, and to provide additional marketing expertise, technical expertise, and increased channels of distribution in certain vertical industry segments. In addition, our renewed
focus on vertical and horizontal solution offerings of Web



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services applications increases the importance of our relationships with technology partners, strategic consulting partners and other channels of
distribution to the market.



We have established partnerships to offer
solutions based on our technology offerings and have extended our sales and implementation services reach with leading systems integrators such as Accenture, Bearing Point, Deloitte Consulting, EDS and IBM Global Services. We have also established
strategic alliances with technology leaders such as BEA Systems, Hewlett-Packard, IBM, and Sun Microsystems.



We intend to invest in our existing partner relationships as well as to form new partnerships with other market-leading systems integrators, technology vendors and distribution channels.



Business Combinations



We have completed seven acquisitions since our inception. One acquisition occurred in March 2004 shortly before the release of this report;
one occurred in December 2003; one occurred during 2002; three occurred during 2000; and one occurred during 1999. All acquisitions were accounted for as purchase business combinations and, therefore, the net assets acquired or net liabilities
assumed were recorded at their estimated fair value at the respective dates of acquisition and the results of operations have been included with ours for the periods subsequent to the respective acquisition dates. Following is a listing of our three
most recent acquisitions:



Tower Technology Pty Limited.Effective March
1, 2004, we acquired Tower Technology Pty Limited, a leading provider of enterprise document and records management solutions. We paid approximately $125.0 million for Tower Technology, consisting of approximately $45.0 million in cash and 29.8
million shares of common stock for all of the issued and outstanding shares of Tower Technology.



Intraspect Software, Inc. Effective December 11, 2003, we acquired all of the outstanding stock of Intraspect Software, Inc., a leading provider of collaboration software, in exchange for $10.0 million in cash
and approximately 4.2 million shares of stock. The total purchase price, including transaction costs of $0.5 million, was approximately $20.4 million.



Epicentric, Inc. Effective December 3, 2002, we acquired all of the outstanding stock of Epicentric, Inc., a leading provider of business portal solutions, in
exchange for $26.0 million in cash. The total purchase price, including transaction costs of $3.1 million, was $29.1 million.



In connection with each of our acquisitions, we incurred one-time acquisition costs and integration-related charges. Such charges relate to product integration,
cross-training of employees, and other merger-related items. For four acquisitions, a portion of the purchase price was allocated to in-process research and development and was expensed upon the consummation of the respective transaction. These
related acquisition, integration and in-process research and development charges totaled approximately $4.3 million, $1.8 million, and $1.9 million during 2003, 2002, and 2001, respectively. The purchase price allocation process has not yet been
completed for the Tower Technology acquisition just completed.



Customers



As of December 31, 2003, we had served over 1,600 end-user customers. Our
customer list includes successful organizations in the entertainment, financial services, government, healthcare, high technology, higher education, life sciences, manufacturing, new media and publishing, retail, telecom and travel industries.



Competition



The market for our products is intensely competitive, subject to rapid technological change
and significantly affected by new product introductions and other market activities of industry participants. We expect competition to persist and intensify in the future. We have three primary sources of competition: in-house development efforts by
potential customers or partners; other vendors of software that directly address Web-based application solutions; and developers of point solution software that address only certain



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technology components of the solution set that we provide (e.g., content management, document and records management, portal management, process,
collaboration, integration or analytics).



Many of our competitors have longer
operating histories and significantly greater financial, technical, marketing and other resources than we do and thus may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Also, many current
and potential competitors have wider name recognition and more extensive customer bases that could be leveraged, thereby gaining market share to our detriment. Such 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. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance
their products. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.



Such competition could materially and adversely affect our ability to obtain revenues from either license or service fees from new or existing customers on terms
favorable to us. Further, competitive pressures may require us to reduce the price of our software. In either case, our business, operating results and financial condition would be materially and adversely affected. There can be no assurance that we
will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on our business, financial condition and operating results. See Risk Factors that May Affect Future
ResultsRisks Related to Our BusinessWe Face Intense Competition from Other Software Companies, Which Could Make it Difficult to Compete Successfully.



Research and Development



We have made substantial investments in research and development through both internal development and technology acquisitions. Although we plan to continue to evaluate
externally developed technologies for integration into our product lines, we expect that most enhancements to existing and new products will be developed internally.



The majority of our research and development activity has been directed towards future extensions to our family of products. This
development consists primarily of adding new competitive product features and additional tools and products.



Research and development expenditures, excluding acquired in-process research and development charges, for 2003, 2002 and 2001 were approximately $39.9 million, $51.3 million and $64.9 million respectively. We expect
that we will continue to commit significant resources to research and development in the future. Most research and development costs have been expensed as incurred.



The market for our products and services is characterized by rapid technological change, frequent new product introductions and
enhancements, evolving industry standards, and rapidly changing customer requirements. The introduction of products incorporating new technologies and the emergence of new industry standards could render existing products obsolete and unmarketable.
While we believe we invest more aggressively in research and development than many of our competitors, our spending has been reduced as part of overall expense management. These reductions may impair our ability to maintain technology leadership.
Our future success will depend in part on our ability to anticipate changes, enhance our current products, develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our
customers. See Risk Factors that May Affect Future ResultsRisks Related to Our BusinessIf We are Unable to Meet the Rapid Changes in Software Technology, Our Existing Products Could Become Obsolete.



Sales and Marketing



We market our products primarily through our direct sales force; however, we intend to expand our indirect sales channel through additional
relationships with systems integrators, value-added resellers and original equipment manufacturers. We generate leads from a variety of sources, including businesses seeking partners to develop Web-based applications. Initial sales activities
typically include a demonstration



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##### Index to Financial Statements

of our product capabilities followed by one or more detailed technical reviews. As of December 31, 2003, the direct sales force consisted of 190 sales
executives and related support personnel.



We will continue to establish
partnerships with major industry vendors and strategically selected regional partners that will add value to our products and expand distribution opportunities.



We use a variety of marketing programs to build market awareness of our brand name, our products, and Vignette as well as to attract potential customers for our
products. A broad mix of programs are used to accomplish these goals, including market research, product and strategy updates with industry analysts, public relations activities, advertising, direct marketing and relationship marketing programs,
seminars, customer events, user group meetings, trade shows and speaking engagements. Our marketing organization also produces marketing materials in support of sales to prospective customers that include brochures, data sheets, white papers,
presentations and demonstrations.



Proprietary Rights and Licensing



Our success and ability to compete is dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the
proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We presently own six patents and have a number of patent applications pending in the United States. We have thirteen registered
trademarks in the United States, four pending trademark applications in the United States, 71 registered trademarks in foreign countries, and 4 pending trademark applications in foreign countries. 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 or shrink-wrap agreements, which impose certain restrictions on the licensees ability to utilize
the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us 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 the various legal protections of
our technology to establishing and maintaining a technology leadership position.



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



To date, we have not been
notified that our products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement with respect to our current or future products. We expect that developers of commercial
software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and as the functionality of products in different segments of the software industry increasingly overlaps.
Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert managements attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of product infringement against us and our failure or inability to license the infringed technology or develop or license
technology with comparable functionality could have a material adverse effect on our business, financial condition and operating results. See Risk Factors that May



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Affect Future ResultsRisks Related to Our BusinessOur Business is Based on Our Intellectual Property and We Could Incur Substantial Costs
Defending Our Intellectual Property From Infringement or a Claim of Infringement.



We include certain third-party software in our products. This third-party software may not continue to be available on commercially reasonable terms. We license data encryption and authentication technology from RSA Data Security, Inc.,
bridging solutions technology from Intrinsyc Software, Inc., browser-based Web editing software from Ektron, Inc., database access technology from Rogue Wave Software, Inc., chart and graphing software from Corda Technologies, concept and keyword
search functionality from Autonomy, Inc. and Convera Technologies, Inc., application services from BEA Systems, Inc., and other software that is integrated with internally developed software. To the extent we could not maintain licenses to some or
all of this third-party software, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and
financial condition.



Employees



As of December 31, 2003, we had 805 employees, including 231 in research and development,
234 in sales and marketing, 243 in professional services and customer support, and 97 in finance and administration. Following the completion of integration activities related to the Tower Technology acquisition on March 1, 2004, we expect our total
headcount to be approximately 950. 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 finance organizations. We also outsource certain development, including product development and quality assurance. 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 FUTURE RESULTS



You should carefully consider the following risks before making an investment decision. The risks described below are not the only ones that we face. Our business,
operating results or financial condition could be materially adversely affected by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you as an investor may lose all or part of your
investment. You should also refer to the other information set forth in this report, including our consolidated financial statements and the related notes.



Risks Related to Our Business



We Expect to Incur Future Losses



We have not consistently achieved profitability and we expect to incur net operating losses in the coming quarter and potentially in future quarters. To date, we have
primarily funded our operations from the sale of equity securities. We expect to continue to incur significant product development, sales and marketing, and administrative expenses and, as a result, we will need to generate significant revenues to
maintain profitability. We cannot be certain that we will achieve sufficient revenues to maintain profitability. If we do return to profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in
the future.



Our Limited Operating History Makes Financial Forecasting
Difficult



We were founded in December 1995 and thus have a limited
operating history. As a result of our limited operating history and the unpredictability of market demand since our inception, we cannot forecast revenue and operating expenses based on our historical results. Accordingly, we base our expenses in
part on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenues are lower than we had projected. Our ability to forecast accurately



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our quarterly revenue is limited because our software products have a long sales cycle that makes it difficult to predict the quarter in which sales will
occur. We would expect our business, operating results and financial condition to be materially adversely affected if our revenues do not meet our projections and that net losses in a given quarter would be greater than expected.



Recent Acquisitions, Including Our Acquisitions of Epicentric, Inc., Intraspect Software,
Inc. (Intraspect) and Tower Technology PTY Limited (Tower Technology), Could Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value and Adversely Affect Our Operating Results



We completed our acquisitions of Epicentric, Inc. in December 2002, Intraspect Software,
Inc. in December 2003 and Tower Technology Pty Limited in March 2004. Failure to successfully address the risks associated with these acquisitions could harm our ability to fully integrate and market products based on the acquired technology. We may
discover liabilities and risks associated with these acquisitions that were not discovered in our due diligence prior to signing the respective definitive merger agreements. Although, in each acquisition, a portion of the purchase price was placed
in escrow to cover such liabilities, it is possible that the actual amounts required to cover such liabilities will exceed the escrow amount. Additionally, we may acquire other businesses in the future, which would complicate our management tasks.
We may need to integrate widely dispersed operations that have different and unfamiliar corporate cultures. These integration efforts may not succeed or may distract managements attention from existing business operations. Failure to
successfully integrate acquisitions could seriously harm our business. Also, our existing stockholders would experience dilution if we financed subsequent acquisitions by issuing equity securities.



We Must Succeed in the Portal, Collaboration and Content Management Market as Well as the
Enterprise Content Management and the Document and Records Management Markets if We Are to Realize the Expected Benefits of the Tower Technology and Intraspect Acquisitions



Our long-term strategic plan depends upon the successful development and introduction of products and solutions that address the needs of
the portal, collaboration and content management market as well as the enterprise content management and the document and records management markets. For us to succeed in these markets, we must align strategies and objectives and focus a significant
portion of our resources towards serving this market.



The challenges involved
in this integration include the following:



| |  | coordinating and integrating international and domestic operations;
| | - | -------------------------------------------------------------------



| |  | combining product offerings and product lines quickly and effectively;
| | - | ----------------------------------------------------------------------



| |  | successfully managing difficulties associated with transitioning current customers to new product lines;
| | - | --------------------------------------------------------------------------------------------------------



| |  | demonstrating to our customers that the acquisition will not result in adverse changes in customer service standards or business focus;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | retaining key alliances; and
| | - | ----------------------------



| |  | persuading our employees that our business cultures are compatible.
| | - | -------------------------------------------------------------------



In addition, our success in this new market will depend on several factors, many of which are outside our control including:



| |  | continued growth of the portal, collaboration and content management market;
| | - | ----------------------------------------------------------------------------



| |  | continued growth of the enterprise content management and document and records management markets;
| | - | --------------------------------------------------------------------------------------------------



| |  | deployment of the combined companys products by enterprises; and
| | - | -----------------------------------------------------------------



| |  | emergence of substitute technologies and products.
| | - | --------------------------------------------------



If we are unable to succeed in this market, our business may be harmed and we may be prevented from realizing the anticipated benefits of the acquisition.



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We Must Overcome Significant Challenges in Integrating Businesses Operations and Product Offerings to Realize the
Benefits of our Recent Acquisitions of Tower Technology and Intraspect



The Tower Technology and Intraspect acquisitions will not achieve their anticipated benefits unless we successfully combine and integrate business operations and products in a timely manner. Integrating will be a complex, time-consuming and
expensive process and may result in revenue disruption and operational difficulties if not completed in a timely and efficient manner. Prior to the acquisitions, each company operated independently, each with its own business, business culture,
markets, clients, employees and systems. Following the acquisitions, we must operate as a combined organization utilizing common information communication systems, operating procedures, financial controls and human resource practices, including
benefits, training and professional development programs. There may be substantial difficulties, costs and delays involved in the integration. These difficulties, costs and delays may include:



| |  | the potential difficulties of integrating international and domestic operations;
| | - | --------------------------------------------------------------------------------



| |  | the potential disruption of our ongoing business and diversion of management resources;
| | - | ---------------------------------------------------------------------------------------



| |  | the possibility that the business cultures will not be compatible;
| | - | ------------------------------------------------------------------



| |  | the difficulty of incorporating acquired technology and rights into our products and services;
| | - | ----------------------------------------------------------------------------------------------



| |  | unanticipated expenses related to integration of operations;
| | - | ------------------------------------------------------------



| |  | the impairment of relationships with employees and customers as a result of any integration of new personnel;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | potential unknown liabilities associated with the acquired business and technology;
| | - | -----------------------------------------------------------------------------------



| |  | costs and delays in implementing common systems and procedures, including financial accounting systems and customer information systems; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | potential inability to retain, integrate and motivate key management, marketing, technical sales and customer support personnel.
| | - | --------------------------------------------------------------------------------------------------------------------------------



We may not succeed in addressing these risks or any other problems encountered in connection
with the acquisition. If the benefits of the acquisition do not exceed the costs associated with the acquisition, including the dilution to our stockholders resulting from the issuance of shares in connection with the acquisition, our financial
results could be harmed.



Delays in the Integration of Tower Technology and
Intraspects Technology Could Result in the Loss of the Benefits of the Acquisitions



We operate in a highly competitive environment, characterized by rapid technological change and evolution of standards and frequent new product introductions. To obtain the full potential benefits of the acquisition,
we must promptly integrate our business operations, technology and product offerings. We cannot assure you that we will be able to integrate their technology offerings and operations quickly and smoothly. We may be required to spend additional time
or money on integration that would otherwise be spent on developing our business or on other matters. If we do not integrate our operations and technology smoothly or if management spends too much time on integration issues, it could harm our
business, financial condition and results of operations and diminish the benefits of the acquisition as well as harm our content management business.



Both Vignette and Tower Technology Have Incurred Significant Costs Associated With the Acquisition



We estimate that we have incurred direct transaction costs of approximately $4 million associated with the acquisition, which will be
included as a part of the total purchase cost for accounting purposes. In addition, Tower Technology has incurred direct transaction costs of approximately $2.5 million. We believe the combined entity may incur charges to operations, which are not
currently reasonably estimable, in the quarter in which the acquisition was completed or the following quarters, to reflect costs associated with integrating the two companies. We expect to incur an in-process research and development charge in the
quarter in which the acquisition was completed and we expect ongoing charges for amortization of intangibles, consisting primarily of purchased technology, acquired in the acquisition. There can be no assurance that the combined company will not
incur additional material charges in subsequent quarters to reflect additional costs associated with the acquisition.



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The Market Price of Our Common Stock May Decline as a Result of the Tower Technology and Intraspect Acquisitions



The market price of our common stock could decline as a result of the
acquisitions, based on the occurrence of a number of events, including:



| |  | the failure to successfully integrate;
| | - | --------------------------------------



| |  | delays or failure in the integration of technology;
| | - | ---------------------------------------------------



| |  | the belief that we have not realized the perceived benefits of the acquisitions in a timely manner or at all;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | the issuance of our shares to the Tower Technology and Intraspect stockholders; and
| | - | -----------------------------------------------------------------------------------



| |  | the potential negative effect of the acquisitions on our operating results, including the impact of amortization of intangible assets, other than goodwill, created by the
acquisitions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There May Be Sales of Substantial Amounts of
Our Common Stock After the Tower Technology Acquisition, Which Could Cause Our Stock Price to Fall



A substantial number of shares of our common stock may be sold into the public within a short period of time following the closing of the acquisition. As a result, our stock price could fall. Of the approximately
29,814,035 shares of our common stock issued in connection with the acquisition, approximately 11,925,000 shares will be immediately available for resale (after the applicable registration statement becomes effective) by the former shareholders of
Tower Technology. Under the lock-up agreements, the remaining shares will be released and available for sale in the public market in varying amounts between the registration date and 360 days after the closing date of the acquisition. In comparison,
the average daily trading volume of our common stock for the five-day period ending on February 10, 2004, was approximately 1,922,999 shares. A sale of a large number of newly-released shares of our common stock could therefore result in a sharp
decline in our stock price. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock.



Our Business May Become Increasingly Susceptible to Numerous Risks Associated with International Operations



International operations are generally subject to a number of risks, including:



| |  | expenses associated with customizing products for foreign countries;
| | - | --------------------------------------------------------------------



| |  | protectionist laws and business practices that favor local competition;
| | - | -----------------------------------------------------------------------



| |  | changes in jurisdictional tax laws including laws regulating intercompany transactions;
| | - | ---------------------------------------------------------------------------------------



| |  | dependence on local vendors;
| | - | ----------------------------



| |  | multiple, conflicting and changing governmental laws and regulations;
| | - | ---------------------------------------------------------------------



| |  | longer sales cycles;
| | - | --------------------



| |  | difficulties in collecting accounts receivable;
| | - | -----------------------------------------------



| |  | foreign currency exchange rate fluctuations; and
| | - | ------------------------------------------------



| |  | political and economic instability.
| | - | -----------------------------------



We recorded 26% of our total revenue for the year ended December 31, 2003 through licenses and services sold to customers located outside of the United States. We expect
international revenue to remain a large percentage of total revenue and we believe that we must continue to expand our international sales activities to be successful. Our international sales growth will be limited if we are unable to establish
appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, customize products for local markets, develop relationships with international service providers and establish
relationships with additional distributors and third-party integrators. In that case, our business, operating results and financial condition could be materially adversely affected. Even if we are able to successfully expand international
operations, we cannot be certain that we will be able to maintain or increase international market demand for our products.



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To date, a majority of our international revenues and costs have been denominated in foreign currencies. A majority of
our international revenues and costs will be denominated in foreign currencies in the future. To date, we have not engaged in any foreign exchange hedging transactions and we are, therefore, subject to foreign currency risk.



We Expect Our Quarterly Revenues and Operating Results to Fluctuate



Our revenues and operating results have varied significantly from quarter to quarter in the
past and we expect that our operating results will continue to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, including:



| |  | demand for our products and services;
| | - | -------------------------------------



| |  | the timing of sales of our products and services;
| | - | -------------------------------------------------



| |  | the timing of customer orders and product implementations;
| | - | ----------------------------------------------------------



| |  | seasonal fluctuations in information technology purchasing;
| | - | -----------------------------------------------------------



| |  | unexpected delays in introducing new products and services;
| | - | -----------------------------------------------------------



| |  | increased expenses, whether related to sales and marketing, product development, product migration and customer support, or administration;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in the rapidly evolving market for Web-based applications;
| | - | ------------------------------------------------------------------



| |  | the mix of product license and services revenue, as well as the mix of products licensed;
| | - | -----------------------------------------------------------------------------------------



| |  | the mix of services provided and whether services are provided by our own staff or third-party contractors;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | the mix of domestic and international sales;
| | - | --------------------------------------------



| |  | difficulties in collecting accounts receivable;
| | - | -----------------------------------------------



| |  | costs related to possible acquisitions of technology or businesses;
| | - | -------------------------------------------------------------------



| |  | global events, including terrorist activities, military operations and widespread epidemics; and
| | - | ------------------------------------------------------------------------------------------------



| |  | the general economic climate;
| | - | -----------------------------



| |  | changes to our licensing and pricing model.
| | - | -------------------------------------------



Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one
quarter as an indication of future performance.



We will continue to invest in
our research and development, sales and marketing, professional services and general and administrative organizations. We expect such overall spending, in absolute dollars, will increase in future periods, particularly given our recent acquisitions.
If our revenue expectations are not achieved, our business, operating results or financial condition could be materially adversely affected and net losses in a given quarter would be greater than expected.



Our Quarterly Results May Depend on a Small Number of Large Orders



In previous quarters, we derived a significant portion of our software license revenues from
a small number of relatively large orders. Our operating results could be materially adversely affected if we are unable to complete a significant order that we expected to complete in a specific quarter.



If We Experienced a Product Liability Claim We Could Incur Substantial Litigation Costs



Since our customers use our products for mission-critical applications,
errors, defects or other performance problems could result in financial or other damages to our customers. They could seek damages for losses from us, which, if successful, could have a material adverse effect on our business, operating results and
financial condition. 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 or alter such limitation of
liability provisions. Such claims, if brought against us, even if not successful, would likely be time consuming and costly.



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We Face Intense Competition from Other Software Companies, Which Could Make it Difficult to Compete Successfully



Our market is intensely competitive. Our customers requirements and
the technology available to satisfy those requirements continually change. We expect competition to persist and intensify in the future, including competition resulting from consolidations in the software industry.



Our principal competitors include: in-house development efforts by potential customers or
partners; other vendors of software that directly address elements of Web-based applications; and developers of software that address only certain technology components of Web-based applications (e.g., content management, portal management, document
management, process, collaboration, integration or analytics). In addition, we face increased competition from large companies that includes capabilities similar to our software in larger integrated product offerings.



Many of these companies have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do. Many of these companies can also leverage extensive customer bases and adopt aggressive pricing policies to gain market share. Potential competitors may bundle or license their products in a
manner that may discourage users from purchasing our products. In addition, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.



Competitive pressures may make it difficult for us to acquire and retain customers and may
require us to reduce the price of our software. We cannot be certain that we will be able to compete successfully with existing or new competitors. If we fail to compete successfully against current or future competitors, our business, operating
results and financial condition would be materially adversely affected.



We
Depend on Increased Business from Our Current and New Customers and, if We Fail to Grow Our Customer Base or Generate Repeat Business, Our Operating Results Could Be Harmed



If we fail to grow our customer base or generate repeat and expanded business from our current and new customers, our business and operating
results would be seriously harmed. Many of our customers initially make a limited purchase of our products and services. Some of these customers may not choose to purchase additional licenses to expand their use of our products. Some of these
customers have not yet developed or deployed initial applications based on our products. If these customers do not successfully develop and deploy such initial applications, they may not choose to purchase deployment licenses or additional
development licenses. Our business model depends on the expanded use of our products within our customers organizations.



In addition, as we introduce new versions of our products or new products, our current customers may not require the functionality of our new products and may not
ultimately license these products. Because the total amount of maintenance and support fees we receive in any period depends in large part on the size and number of licenses that we have previously sold, any downturn in our software license revenue
would negatively impact our future services revenue. In addition, if customers elect not to renew their maintenance agreements, our services revenue could be significantly adversely affected.



We Have Relied and Expect to Continue to Rely on Sales of Our Earlier Vignette Software
Versions for Revenue



We currently derive a substantial portion of our
revenues from the product licenses and related upgrades, professional services and support of our earlier Vignette software versions. We continue to market and license our new-generation Vignette product offerings, but we cannot be certain how
successful we will be. We expect that we will continue to receive some revenue from earlier versions for at least the next several quarters. If we do not continue to increase revenue related to our earlier software versions or generate revenue from
new products and services, our business, operating results and financial condition would be materially adversely affected.



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Our Future Revenue is Dependent Upon Our Ability to Successfully Market Our Existing and Future Products



We expect that our future financial performance will depend significantly
on revenue from existing and future software products and the related tools that we plan to develop. There are significant risks inherent in a product introduction, such as our Vignette V7 software products and the recently acquired products. Market
acceptance of these and future products will depend on continued market development for Web applications and services and the continued commercial adoption of Vignette V7. We cannot be certain that either will occur. We cannot be certain that our
existing or future products will meet customer performance needs or expectations when released or that they will be free of significant software defects or bugs. If our products do not meet customer needs or expectations, for whatever reason,
upgrading or enhancing the product could be costly and time consuming.



Our
Operating Results May Be Adversely Affected by Small Delays in Customer Orders or Product Implementations



Small delays in customer orders or product implementations can cause significant variability in our license revenues and operating results for any particular period. We
derive a substantial portion of our revenue from the sale of products with related services. In certain cases, our revenue recognition policy requires us to substantially complete the implementation of our product before we can recognize software
license revenue, and any end-of-quarter delays in product implementation could materially adversely affect operating results for that quarter.



To Increase Market Awareness of Our Products and Generate Increased Revenue We Need to Continue to Strengthen Our Sales and Distribution Capabilities



Our direct and indirect sales operations must increase market awareness of our products
to generate increased revenue. We cannot be certain that we will be successful in these efforts. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective customers. All new hires will
require training and will take time to achieve full productivity. We cannot be certain that our new hires will become as productive as necessary or that we will be able to hire enough qualified individuals or retain existing employees in the future.
We plan to expand our relationships with systems integrators and certain third-party resellers to build an indirect influence and sales channel. In addition, we will need to manage potential conflicts between our direct sales force and any
third-party reselling efforts.



Failure to Maintain the Support of
Third-Party Systems Integrators May Limit Our Ability to Penetrate Our Markets



A significant portion of our sales are influenced by the recommendations of our products made by systems integrators, consulting firms and other third parties that help develop and deploy Web-based applications for our customers. Losing the
support of these third parties may limit our ability to penetrate our markets. These third parties are under no obligation to recommend or support our products. These companies could recommend or give higher priority to the products of other
companies or to their own products. A significant shift by these companies toward favoring competing products could negatively affect our license and services revenue. Additionally, these organizations may acquire or distribute software products
that compete with our products in future periods. If they become our competitors, this could negatively affect our license and services revenue.



Our Lengthy Sales Cycle and Product Implementation Makes It Difficult to Predict Our Quarterly Results



We have a long sales cycle because we generally need to educate potential customers
regarding the use and benefits of Web-based applications. Our long sales cycle makes it difficult to predict the quarter in which sales may fall. In addition, since we recognize a portion of our revenue from product sales upon implementation of our
product, the timing of product implementation could cause significant variability in our license revenues and operating results for any particular period. The implementation of our products requires a significant commitment of resources by our
customers, third-party professional services organizations or



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##### Index to Financial Statements

our professional services organization, which makes it difficult to predict the quarter when implementation will be completed.



We May Be Unable to Adequately Sustain a Profitable Professional Services Organization,
Which Could Affect Both Our Operating Results and Our Ability to Assist Our Customers with the Implementation of Our Products



Customers that license our software often engage our professional services organization to assist with support, training, consulting and implementation of their Web
solutions. We believe that growth in our product sales depends in part on our continuing ability to provide our customers with these services and to educate third-party resellers on how to use our products.



During recent quarters, our professional services organization achieved profitability.
However, prior to 2000, services costs related to professional services had exceeded, or had been substantially equal to, professional services-related revenue. In this current economic climate, we make periodic capacity decisions based on estimates
of future sales, anticipated existing customer needs, and general market conditions. Although we expect that our professional services-related revenue will continue to exceed professional services-related costs in future periods, we cannot be
certain that this will occur.



We generally bill our customers for our services
on a time-and-materials basis. However, from time to time we enter into fixed-price contracts for services, and may include terms and conditions that may extend the recognition of revenue for work performed into following quarters. On occasion, the
costs of providing the services have exceeded our fees from these contracts and such contracts have negatively impacted our operating results.



We May Be Unable to Attract Necessary Third-Party Service Providers, Which Could Affect Our Ability to Provide Sufficient Support, Consulting and Implementation
Services for Our Products



We are actively supplementing the capabilities
of our services organization by contracting with and educating third-party service providers and consultants to also provide these services to our customers. We may not be successful in attracting additional third-party providers or in educating or
maintaining the interest of current third-party providers. In addition, these third parties may not devote sufficient resources to these activities to meet customers demand to adequately supplement our services. Additionally, these
organizations may acquire or distribute software products that compete with our products in future periods. If they become our competitors, this could negatively affect our revenue.



To Properly Manage Future Growth, We May Need to Continue to Improve Our Operational Systems on a Timely Basis



We have experienced periods of rapid expansion and contraction since our inception. Rapid
fluctuations place a significant demand on management and operational resources. To manage such fluctuations effectively, we must continue to improve our operational systems, procedures and controls on a timely basis. If we fail to continue to
improve these systems, our business, operating results and financial condition will be materially adversely affected.



We May Be Adversely Affected if We Lose Key Personnel



Our success depends largely on the skills, experience and performance of some key members of our management. If we lose one or more of our key employees, our business,
operating results and financial condition could be materially adversely affected. In addition, our future success will depend largely on our ability to continue to attract and retain highly skilled personnel. Like other software companies, we face
competition for qualified personnel, particularly in the Austin, Texas area. We cannot be certain that we will be successful in attracting, assimilating or retaining qualified personnel in the future.



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##### Index to Financial Statements

If We are Unable to Meet the Rapid Changes in Software Technology, 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, changes in packaging and combination of existing products and evolving industry standards. We cannot be
certain that we will successfully develop and market new products, new product enhancements or new products compliant with present or emerging Internet technology standards. New products based on new technologies, new industry standards or new
combinations of existing products as bundled products can render existing products obsolete and unmarketable. To succeed, we will need to enhance our current products and develop new products on a timely basis to keep pace with developments related
to Internet technology and to satisfy the increasingly sophisticated requirements of our customers. Internet commerce technology, particularly Web-based applications technology, is complex and new products and product enhancements can require long
development and testing periods. Any delays in developing and releasing enhanced or new products could have a material adverse effect on our business, operating results and financial condition.



We Develop Complex Software Products Susceptible to Software Errors or Defects that Could
Result in Lost Revenues, or Delayed or Limited Market Acceptance



Complex
software products such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite internal testing and testing by current and potential 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, which would have a material adverse effect on our business, operating results and financial condition.



Our Product Shipments Could Be Delayed if Third-Party Software Incorporated in Our
Products is No Longer Available



We integrate third-party software as a
component of our software. The third-party software may not continue to be available to us on commercially reasonable terms. If we cannot maintain positive relationships and licenses to key third-party software, shipments of our products could be
delayed or disrupted until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and financial condition.



Our Business is Based on Our Intellectual Property and We Could Incur Substantial Costs
Defending Our Intellectual Property from Infringement or a Claim of Infringement



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 such litigation. Although we are not involved
in any such litigation that we believe is material to our business, if we become a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others intellectual property, we may be
forced to do one or more of the following:



| |  | cease selling, incorporating or using products or services that incorporate the challenged intellectual property;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | redesign those products or services that incorporate such technology; and
| | - | -------------------------------------------------------------------------



| |  | refund a pro-rata portion of the original license consideration paid by the customer.
| | - | -------------------------------------------------------------------------------------



We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our technology. These
legal protections provide only limited protection. If we litigated to enforce our rights, it would be expensive, divert management resources and may not be adequate to protect our business.



20



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##### Index to Financial Statements

Anti-Takeover Provisions in Our Corporate Documents and Delaware Law Could Prevent or Delay a Change in Control of Our
Company



Certain provisions of our certificate of incorporation and bylaws
may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. Such provisions include:



| |  | authorizing the issuance of blank check preferred stock;
| | - | ----------------------------------------------------------



| |  | providing for a classified Board of Directors with staggered, three-year terms;
| | - | -------------------------------------------------------------------------------



| |  | prohibiting cumulative voting in the election of directors;
| | - | -----------------------------------------------------------



| |  | requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | limiting the persons who may call special meetings of stockholders;
| | - | -------------------------------------------------------------------



| |  | prohibiting stockholder action by written consent; and
| | - | ------------------------------------------------------



| |  | establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted on by stockholders at stockholder
meetings.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain provisions of Delaware law and our stock
incentive plans may also discourage, delay or prevent someone from acquiring or merging with us.



Further, in April 2002, our Board of Directors approved, adopted and entered into a shareholder rights plan referred to as the Plan. The Plan was not adopted in response to any attempt to acquire us, nor were we aware
of any such efforts at the time of adoption.



The Plan was designed to enable
our stockholders to realize the full value of their investment by providing for fair and equal treatment of all stockholders in the event that an unsolicited attempt is made to acquire us. Adoption of the Plan was intended to guard shareholders
against abusive and coercive takeover tactics.



Under the Plan, stockholders of
record as of the close of business on May 6, 2002, received one right to purchase a one one-thousandth of a share of Series A Junior Participating Preferred Stock, par $0.01 per share, at a price of $30.00 per one one-thousandth, subject to
adjustment. The rights were issued as a non-taxable dividend and will expire 10 years from the date of the adoption of the rights Plan, unless earlier redeemed or exchanged. The rights are not immediately exercisable; however, they will become
exercisable upon the earlier to occur of (i) the close of business on the tenth day after a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of our outstanding common stock or (ii) the close of
business on the tenth day (or such later date as may be determined by the Board of Directors prior to such time as any person becomes an acquiring person) following the commencement of, or announcement of an intention to make, a tender offer or
exchange offer that would result in the beneficial ownership by a person or group of 15 percent or more of our outstanding common stock. If a person or group acquires 15 percent or more of our common stock, then all rights holders except the
acquirer will be entitled to acquire our common stock at a significant discount. The intended effect will be to discourage acquisitions of 15 percent or more of our common stock without negotiation with the Board of Directors.



Recent Terrorist Activities and Resulting Military and Other Actions Could Adversely
Affect Our Business



The continued threat of terrorism within the United
States and abroad, military action in other countries, and heightened security measures may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a
general decrease in corporate spending on information technology, or our inability to effectively market, sell and deploy our software and services, our business and results of operations could be materially and adversely affected. We are unable to
predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term material adverse effect on our business, results of operations or financial
condition.



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##### Index to Financial Statements

If We Account for Our Employee Stock Option and Employee Stock Purchase Plans Using the Fair Value Method, Our
Operating Results May be Adversely Affected



It is possible that future
laws, rules or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method. We are not currently required to record any compensation expense using the fair value method in connection with
option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan. If we elected or were required to record an expense for our stock-based compensation plans using the fair value
method, we could have significant accounting charges. For example, if we had accounted for stock-based compensation plans using the fair value method, our loss per share for the year ended December 31, 2003 would have been increased by $(0.17) per
share.



We Have Incurred Increased Costs in Response to Recently Enacted and
Proposed Regulations



Recently enacted and proposed changes in the laws
and regulations affecting public companies, including but not limited to the Sarbanes-Oxley Act of 2002, have caused us to incur increased costs as we evaluate and respond to the resulting requirements. The new rules could make it more difficult for
us to obtain certain types of insurance, and we may incur higher costs to obtain coverage similar to our existing policies. Additionally, we have incurred and expect to incur on an ongoing basis increased accounting, audit and legal fees to assist
us assess, implement and comply with such rules. The new and proposed rules could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors. Although we are evaluating and monitoring developments
with respect to these new and proposed rules, we cannot estimate the amount of the additional costs we may incur or the timing of such costs at this time.



Our Financial Statements Could be Impacted by Unauthorized and Improper Actions of Our Personnel



Our financial statements could be adversely impacted by our employees errant or improper actions. For instance, revenue recognition
depends on, among other criteria, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to prevent and discourage
such conduct, but there can be no assurance that such policies will be followed. For instance, in the event that our sales personnel have negotiated terms that do not appear in the contract and of which we are unaware, whether the additional terms
are written or oral, we could be prevented from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized actions and the size of transactions involved, we may have to restate our financial statements
for a previously reported period, which would seriously harm our business, operating results and financial condition.



Risks Related to the Software Industry



Our Business is Sensitive to the Overall Economic Environment; the Continued Slowdown in Information Technology Spending Could Harm Our Operating Results



The primary customers for our products are enterprises seeking to launch
or expand Web-based initiatives. The continued significant downturn in our customers markets and in general economic conditions that result in reduced information technology spending budgets would likely result in a decreased demand for our
products and services and harm our business. Industry downturns like these have been, and may continue to be, characterized by diminished product demand, erosion of average selling prices, lower than expected revenues and difficulty making
collections from existing customers.



Our Performance Will Depend on the
Market for Web-Based Applications Software



The market for Web-based
applications software is rapidly evolving. We expect that we will continue to need intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our products and services. Accordingly, we cannot be certain
that a viable market for our products will emerge or be sustainable. Enterprises that have already invested substantial resources in other methods of conducting business may be reluctant or slow to adopt a new approach that may replace, limit or
compete



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##### Index to Financial Statements

with their existing systems. Similarly, individuals have established patterns of purchasing goods and services. They may be reluctant to alter those
patterns. They may also resist providing the personal data necessary to support our existing and potential product uses. Any of these factors could inhibit the growth of online business generally and the markets acceptance of our products and
services in particular.



There is Substantial Risk that Future Regulations
Could Be Enacted that Either Directly Restrict Our Business or Indirectly Impact Our Business by Limiting the Growth of Internet Commerce



As Internet commerce evolves, we expect that federal, state or foreign agencies will adopt regulations covering issues such as user privacy, pricing, content and quality
of products and services. If enacted, such laws, rules or regulations could limit the market for our products and services, which could materially adversely affect our business, financial condition and operating results. Although many of these
regulations may 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 Telecommunications Act 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 such legislation could expose companies involved in Internet commerce
to liability, which could limit the growth of Internet 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 communications and
commercial medium.



The United States government also regulates the export of
encryption technology, which our products incorporate. If our export authority is revoked or modified, if our software is unlawfully exported or if the United States government adopts new legislation or regulation restricting export of software and
encryption technology, our business, operating results and financial condition could be materially adversely affected. Current or future export regulations may limit our ability to distribute our software outside the United States. Although we take
precautions against unlawful export of our software, we cannot effectively control the unauthorized distribution of software across the Internet.



Risks Related to the Securities Markets



Our Stock May Not Meet Market Listing Requirements



On October 14, 2002, we received a notice from the Nasdaq Qualifications Department. Such notice indicated that our common stock had closed for 30 consecutive trading
days below the applicable minimum bid price of $1.00. The Nasdaq affords a company 90 calendar days in which to demonstrate compliance with National Market Marketplace Rules; specifically, a companys common stock must close at or above a bid
price of $1.00 per share for a minimum of ten consecutive trading days. On November 13, 2002, our stock closed at or above a bid price of $1.00 per share for the tenth consecutive trading day, demonstrating compliance with the National Market
Marketplace Rules.



There can be no assurance that we will maintain compliance
with the minimum bid price trading requirements, or other requirements, for continued listing on the Nasdaq National Market. Noncompliance with Nasdaqs Marketplace Rules may materially impair the ability of stockholders to buy and sell shares
of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock, and could significantly impair our ability to raise capital in the public markets should we desire to do so
in the future.



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##### Index to Financial Statements

Our Stock Price May Be Volatile



The market price of our common stock has been highly volatile and has fluctuated significantly in the past. We believe that it may continue
to fluctuate significantly in the future in response to the following factors, some of which are beyond our control:



| |  | variations in quarterly operating results;
| | - | ------------------------------------------



| |  | changes in financial estimates by securities analysts;
| | - | ------------------------------------------------------



| |  | changes in market valuations of Internet software companies;
| | - | ------------------------------------------------------------



| |  | announcements by us of significant contracts, acquisitions, restructurings, strategic partnerships, joint ventures or capital commitments;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | loss of a major customer or failure to complete significant license transactions;
| | - | ---------------------------------------------------------------------------------



| |  | additions or departures of key personnel;
| | - | -----------------------------------------



| |  | difficulties in collecting accounts receivable;
| | - | -----------------------------------------------



| |  | sales of common stock in the future; and
| | - | ----------------------------------------



| |  | fluctuations in stock market price and volume, which are particularly common among highly volatile securities of Internet and software companies.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



Our Business May Be Adversely Affected by Class Action Litigation Due to Stock Price
Volatility



In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of its securities. We are a party to the securities class action litigation described in Part I, Item 3  Legal Proceedings of this Report. The defense of
this litigation described in Part I, Item 3 may increase our expenses and divert our managements attention and resources, and an adverse outcome could harm our business and results of operations. Additionally, we may in the future be the
target of similar litigation. Future securities litigation could result in substantial costs and divert managements attention and resources, which could have a material adverse effect on our business, operating results and financial condition.



We May Be Unable to Meet Our Future Capital Requirements



Although we expect our cash balances to decline in the near future, we expect the cash on
hand, cash equivalents and short-term investments to meet our working capital and capital expenditure needs for at least the next 12 months. We may need to raise additional funds and we cannot be certain that we would be able to obtain additional
financing on favorable terms, if at all. Further, if we issue equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common
stock. If we cannot raise funds, if needed, on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a
material adverse effect on our business, operating results and financial condition.



We May Need to Raise Additional Capital Which May Be Dilutive to Our Stockholders



We may need to raise additional funds for other purposes and we cannot be certain that we would be able to obtain additional financing on favorable terms, if at all. Further, if we issue equity securities,
stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds, if needed, on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, operating results and financial condition.



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##### Index to Financial Statements

|ITEM 2. | PROPERTIES
|------- | ----------



Our principal research, development, sales, marketing and administrative headquarter offices are located in Austin, Texas. We do not own any real estate or facilities. As of December 31, 2003, we leased office space
in: Austin, Texas; San Francisco and Brisbane, California; New York, New York; Waltham, Massachusetts; Chicago, Illinois; Reston, Virginia; Maidenhead, England; Madrid, Spain; and Sydney, Australia. Such leases have remaining terms of up to 8 years.
All offices listed above support sales and services activity, and we have research and development activity in our Austin, Texas, San Francisco, California and Waltham, Massachusetts offices. In March 2004 we assumed leases through our acquisition
of Tower Technology for properties in Boston, Massachusetts; Slough, England; and Sydney, Australia.



Additionally, we lease several full-service managed suites and executive suites as small sales offices across the United States and around the world. These small offices generally have lease terms of less than one
year, allowing us to adjust to changing business and customer support requirements. As of December 31, 2003, we leased office space in 15 countries outside of the United States.



Throughout 2002 and 2003, we consolidated our leased office portfolio. Some of the resulting excess lease space expired in 2003, or will
expire in the near term, and we successfully negotiated early terminations of some leases, in part or in whole. We currently sublease some surplus office space in Austin, Texas; San Francisco, California; and New York, New York to unrelated
third-parties. We are actively marketing and attempting to sublease or negotiate early terminations of our remaining surplus properties, including, but not limited to, space in Austin, Texas; San Francisco, California; Chicago, Illinois; and New
York, New York for the respective remaining lease terms.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



Securities Class Action



On October 26,
2001, a class action lawsuit was filed against us and certain of our current and former officers and directors in the United States District Court for the Southern District of New York in an action captioned Leon Leybovich v. Vignette Corporation,
et al., seeking unspecified damages on behalf of a purported class that purchased our common stock between February 18, 1999 and December 6, 2000. Also named as defendants were four underwriters involved in our initial public offering of stock in
February 1999 and our secondary public offering of stock in December 1999  Morgan Stanley Dean Witter, Inc., Hambrecht & Quist, LLC, Dain Rauscher Wessels and U.S. Bancorp Piper Jaffray, Inc. A Consolidated Amended Complaint, which is now
the operative complaint, was filed on April 19, 2002. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under,
based on, among other things, claims that the four underwriters awarded material portions of the shares in our initial and secondary public offerings to certain customers in exchange for excessive commissions. The complaint also asserts that the
underwriters engaged in tie-in arrangements whereby certain customers were allocated shares of our stock sold in the initial and secondary public offerings in exchange for an agreement to purchase additional shares in the aftermarket at
pre-determined prices. With respect to us, the complaint alleges that we and our officers and directors failed to disclose the existence of these purported excessive commissions and tie-in arrangements in the prospectus and registration statement
for our initial public offering and the prospectus and registration statement for our secondary public offering. The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. On July 15, 2002,
we moved to dismiss all claims against us. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. This dismissal
disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against us. We have
approved a Memorandum of Understanding (MOU) and related agreements that set forth the terms of a settlement between us, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions,
the settlement contemplated by the MOU provides for our release as well as the individual defendants for the conduct



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##### Table of Contents

##### Index to Financial Statements

alleged in the action to be wrongful. We would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain
potential claims we may have against our underwriters. It is anticipated that any potential financial obligation of ours to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, we do
not expect that the settlement will involve any payment by us. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. We cannot opine as to whether
or when a settlement will occur or be finalized and are unable at this time to determine whether the outcome of the litigation will have a material impact on our results of operations or financial condition in any future period.



Litigation and Other Claims



We are also subject to various legal proceedings and claims arising in the ordinary course
of business. Our management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on our financial condition, results of operations or cash flows.



|ITEM 4. | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ----------------------------------------------------



No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.



PART II.



|ITEM 5. | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------------------



Our common stock is listed on the Nasdaq National Market under the symbol VIGN. Public trading of the common stock commenced on
February 19, 1999. Prior to that, there was no public market for the common stock. The following table sets forth the high and low closing sale price per share of our common stock on the Nasdaq National Market in each of the last eight fiscal
quarters.



|                              |  |      |      |     |   |     
|----------------------------- |  | ---- | ---- | --- | - | ----
|                              |  | High |      | Low
|Year Ended December 31, 2003: |  |      |      |     |   |     
|Fourth Quarter                |  | $    | 3.08 |     | $ | 2.08
|Third Quarter                 |  |      | 2.82 |     |   | 2.00
|Second Quarter                |  |      | 2.50 |     |   | 1.46
|First Quarter                 |  |      | 1.90 |     |   | 1.29
|Year Ended December 31, 2002: |  |      |      |     |   |     
|Fourth Quarter                |  | $    | 1.79 |     | $ | 0.73
|Third Quarter                 |  |      | 1.88 |     |   | 0.80
|Second Quarter                |  |      | 3.95 |     |   | 1.35
|First Quarter                 |  |      | 5.47 |     |   | 2.75



At February 27, 2004, there were
approximately 1,336 holders of record of our common stock and the closing price of our common stock was $2.26 per share.



We have never declared or paid any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future.



26



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##### Index to Financial Statements

|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA
|------- | ------------------------------------



The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto, Managements
Discussion and Analysis of Financial Condition and Results of Operations and other financial data included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2003, 2002
and 2001 and the consolidated balance sheet data at December 31, 2003 and 2002 are derived from audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the
years ended December 31, 2000 and 1999 and the consolidated balance sheet data at December 31, 2001, 2000 and 1999 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.



|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | -------- | - | -------- | ---- |  | - | ---------- | - |  | -------- | -------- | - |  | - | ------- | -
|                                                                                     |  | Year ended December 31,               |        
|                                                                                     |  | 1999 (2)                              |         |   | 2000 (3) |   |          | 2001 |  |   | 2002 (4)   |   |  | 2003 (5) |         
|                                                                                     |  | (in thousands, except per share data) |        
|Consolidated Statements of Operations Data:                                          |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Revenue:                                                                             |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Product license                                                                      |  | $                                     | 46,292  |   |          | $ | 216,257  |      |  | $ | 154,381    |   |  | $        | 62,418   |   |  | $ | 60,986  |  
|Services                                                                             |  |                                       | 42,893  |   |          |   | 150,404  |      |  |   | 142,369    |   |  |          | 92,720   |   |  |   | 97,328  |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Total revenue                                                                        |  |                                       | 89,185  |   |          |   | 366,661  |      |  |   | 296,750    |   |  |          | 155,138  |   |  |   | 158,314 |  
|Cost of revenue:                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Product license                                                                      |  |                                       | 3,306   |   |          |   | 7,611    |      |  |   | 5,243      |   |  |          | 2,388    |   |  |   | 2,844   |  
|Amortization of acquired technology                                                  |  |                                       |        |   |          |   |         |      |  |   |           |   |  |          | 267      |   |  |   | 3,450   |  
|Services (1)                                                                         |  |                                       | 32,815  |   |          |   | 109,039  |      |  |   | 78,299     |   |  |          | 43,674   |   |  |   | 39,531  |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Total cost of revenue                                                                |  |                                       | 36,121  |   |          |   | 116,650  |      |  |   | 83,542     |   |  |          | 46,329   |   |  |   | 45,825  |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Gross profit                                                                         |  |                                       | 53,064  |   |          |   | 250,011  |      |  |   | 213,208    |   |  |          | 108,809  |   |  |   | 112,489 |  
|Operating expenses:                                                                  |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Research and development (1)                                                         |  |                                       | 16,447  |   |          |   | 58,324   |      |  |   | 64,850     |   |  |          | 51,334   |   |  |   | 39,923  |  
|Sales and marketing (1)                                                              |  |                                       | 50,232  |   |          |   | 177,391  |      |  |   | 178,282    |   |  |          | 84,775   |   |  |   | 68,160  |  
|General and administrative (1)                                                       |  |                                       | 9,494   |   |          |   | 38,625   |      |  |   | 29,907     |   |  |          | 21,344   |   |  |   | 15,727  |  
|Purchased in-process research and development, acquisition-related and other charges |  |                                       | 15,641  |   |          |   | 169,885  |      |  |   | 1,919      |   |  |          | 1,786    |   |  |   | 4,258   |  
|Impairment of intangible assets                                                      |  |                                       |        |   |          |   |         |      |  |   | 799,169    |   |  |          | 147,269  |   |  |   |        |  
|Business restructuring charges                                                       |  |                                       |        |   |          |   |         |      |  |   | 120,935    |   |  |          | 35,822   |   |  |   | (14,687 | )
|Amortization of deferred stock compensation                                          |  |                                       | 5,654   |   |          |   | 33,863   |      |  |   | 8,734      |   |  |          | 1,396    |   |  |   | 1,107   |  
|Amortization of intangible assets                                                    |  |                                       | 1,796   |   |          |   | 328,691  |      |  |   | 500,045    |   |  |          | 16,060   |   |  |   | 1,965   |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Total operating expenses                                                             |  |                                       | 99,264  |   |          |   | 806,779  |      |  |   | 1,703,841  |   |  |          | 359,786  |   |  |   | 116,453 |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Loss from operations                                                                 |  |                                       | (46,200 | ) |          |   | (556,768 | )    |  |   | (1,490,633 | ) |  |          | (250,977 | ) |  |   | (3,964  | )
|Other income (expense), net                                                          |  |                                       | 3,723   |   |          |   | 25,992   |      |  |   | (35,275    | ) |  |          | (517     | ) |  |   | 5,068   |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Income (loss) before income taxes                                                    |  |                                       | (42,477 | ) |          |   | (530,776 | )    |  |   | (1,525,908 | ) |  |          | (251,494 | ) |  |   | 1,104   |  
|Provision for income taxes                                                           |  |                                       |        |   |          |   | 1,449    |      |  |   | 1,731      |   |  |          | 1,319    |   |  |   | 1,137   |  
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Net loss                                                                             |  | $                                     | (42,477 | ) |          | $ | (532,225 | )    |  | $ | (1,527,639 | ) |  | $        | (252,813 | ) |  | $ | (33     | )
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Basic net loss per share                                                             |  | $                                     | (0.31   | ) |          | $ | (2.59    | )    |  | $ | (6.32      | ) |  | $        | (1.01    | ) |  | $ | (0.00   | )
|                                                                                     |  |                                       |         |   |          |   |          |      |  |   |            |   |  |          |          |   |  |   |         |  
|Shares used in computing basic net loss per share                                    |  |                                       | 137,253 |   |          |   | 205,885  |      |  |   | 241,762    |   |  |          | 249,212  |   |  |   | 253,100 |  

---

|(1) | Excludes amortization of deferred stock compensation as follows:
|--- | ----------------------------------------------------------------



|                           |  |                         |       |          |   |        |  |          |       |          |   |       |  |   |      
|-------------------------- |  | ----------------------- | ----- | -------- | - | ------ |  | -------- | ----- | -------- | - | ----- |  | - | -----
|                           |  | Year ended December 31,
|                           |  | 1999 (2)                |       | 2000 (3) |   | 2001   |  | 2002 (4) |       | 2003 (5)
|Cost of revenue  services |  | $                       | 820   |          | $ | 2,968  |  | $        | 1,965 |          | $ | 170   |  | $ |     
|Research and development   |  |                         | 1,059 |          |   | 12,300 |  |          | 2,446 |          |   | 441   |  |   | 324  
|Sales and marketing        |  |                         | 2,248 |          |   | 11,785 |  |          | 3,066 |          |   | 416   |  |   | 69   
|General and administrative |  |                         | 1,527 |          |   | 6,810  |  |          | 1,257 |          |   | 369   |  |   | 714  
|                           |  |                         |       |          |   |        |  |          |       |          |   |       |  |   |      
|                           |  | $                       | 5,654 |          | $ | 33,863 |  | $        | 8,734 |          | $ | 1,396 |  | $ | 1,107
|                           |  |                         |       |          |   |        |  |          |       |          |   |       |  |   |      



27



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##### Index to Financial Statements

|                                                                   |  |                    |         |          |   |           |  |          |         |          |   |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | -------- | - | --------- |  | -------- | ------- | -------- | - | ------- |  | - | -------
|                                                                   |  | As of December 31,
|                                                                   |  | 1999 (2)           |         | 2000 (3) |   | 2001      |  | 2002 (4) |         | 2003 (5)
|                                                                   |  | (in thousands)    
|Consolidated Balance Sheet Data:                                   |  |                    |         |          |   |           |  |          |         |          |   |         |  |   |        
|Cash, cash equivalents and short-term investments                  |  | $                  | 402,229 |          | $ | 447,833   |  | $        | 391,632 |          | $ | 307,754 |  | $ | 239,513
|Working capital                                                    |  |                    | 375,211 |          |   | 389,831   |  |          | 311,921 |          |   | 214,625 |  |   | 205,749
|Total assets                                                       |  |                    | 498,166 |          |   | 2,190,954 |  |          | 663,026 |          |   | 424,612 |  |   | 366,116
|Long-term debt and capital lease obligations, less current portion |  |                    |        |          |   | 782       |  |          | 240     |          |   | 53      |  |   | 10     
|Total stockholders equity                                         |  |                    | 437,059 |          |   | 2,024,513 |  |          | 510,301 |          |   | 265,852 |  |   | 281,346

---

|(2) | Reflects the acquisition of Diffusion, Inc. on June 30, 1999.
|--- | -------------------------------------------------------------



|(3) | Reflects the acquisitions of Engine 5, Ltd. on January 18, 2000, DataSage, Inc. on February 15, 2000 and OnDisplay, Inc. on July 5, 2000.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(4) | Reflects the acquisition of Epicentric, Inc. on December 3, 2002.
|--- | -----------------------------------------------------------------



|(5) | Reflects the acquisition of Intraspect, Inc. on December 10, 2003.
|--- | ------------------------------------------------------------------



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



Overview



Vignettes software and expertise help organizations harness the power of information and the Web to deliver measurable improvements in business efficiency. Vignette
helps organizations increase productivity, reduce costs, improve user experiences and manage risk. Vignettes intranet, extranet and Internet solutions incorporate portal, integration, enterprise content management and collaboration
capabilities that can rapidly deliver unique advantages through an open, scalable and adaptable architecture that integrates with legacy systems. Vignette is headquartered in Austin, Texas, with local operations worldwide.



2003 Highlights



Operating Results



Following a significant decline in revenue in 2002, we stabilized our total revenue in 2003. However, deferred revenue declined significantly. This was due, in part, to
the weak macroeconomic conditions and, in particular, the slowed pace of investment in information technology generally and the application software industry specifically. Contributions from our international businesses declined from 32% of revenue
in 2002 and represented approximately 26% of total revenue in 2003. No customer accounted for more than 10% our revenues.



Throughout 2003, we continued our cost control efforts and saw a significant decline in operating expenses. A substantial portion of the decline in operating expenses was
driven by reduced impairment charges, changes to our real estate restructuring assumptions and reductions in our headcount-related costs.



During the fourth quarter of 2003, we reevaluated our office space portfolio and decided to vacate our Austin, Texas, headquarters to relocate to nearby office space that
we had previously identified as restructuring space. This relocation decision resulted in a net benefit in the fourth quarter of $14 million based on the application of EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). We also changed certain other restructuring assumptions related to real estate, which yielded an additional benefit of



28



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##### Index to Financial Statements

$700,000. In addition, we incurred restructuring expenses of $2.0 million. Taken together, these activities caused us to record a net restructuring benefit
of $12.7 million during the quarter. In the first quarter of 2004, we moved out of our existing headquarters and relocated to the nearby office space that now serves as our headquarters. As such, we expect to record a restructuring charge of
approximately $7.1 million in the first quarter of 2004 pursuant to FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities.



Our headcount was 805 as of December 31, 2003, down from 1,079 at December 31, 2002, but remained relatively stable over the last three
quarters of 2003. Following the completion of integration activities related to the Tower Technology acquisition on March 1, 2004, we expect our total headcount to be approximately 950. Finally, our total cash and short-term investments balance
totaled approximately $240 million as of December 31, 2003, and decreased approximately $68 million from December 31, 2002, primarily due to acquisition-related payments, payments under lease obligations and overall net losses incurred.



Acquisitions



We have strengthened our product portfolio through acquisitions to increase our competitive
differentiation as an enterprise Web solution provider. We acquired Intraspect Software, Inc., a leading provider of enterprise collaboration solutions in late 2003, and we acquired Tower Technology Pty Limited, a leading enterprise document and
records management, imaging and workflow vendor in early 2004.



On December 11,
2003, we completed the acquisition of privately held Intraspect Software, Inc., a leading provider of enterprise collaboration solutions. With the acquisition of Intraspect, we are able to offer a Java-based suite of technologies that includes
portal, Web content management and collaboration functionality. The consideration paid for Intraspect was comprised of $10 million in cash and approximately 4.2 million shares of Vignette stock.



On March 1, 2004, we completed the acquisition of privately held Tower Technology Pty
Limited, a leading enterprise document and records management, imaging and workflow vendor. With the completion of the Tower Technology acquisition, we are able to offer enterprise content management capabilities for managing high volumes of
documents, online transactions and records, in combination with our portal, Web content management and collaboration technologies. The consideration paid to the Tower Technology stockholders was comprised of approximately $45 million in cash and
approximately 29.8 million shares of our stock.



With the completion of these
two acquisitions, we are in a unique position to provide an integrated suite of technology that enables our customers to capture, manage and deliver information on an enterprise-wide basis.



Outlook



Our objective is to maintain and extend our leadership position as a global provider of applications and products that enable organizations
to harness the power of information and the Web to deliver measurable improvements in business efficiency. We will focus on delivering sustained revenue growth, expanding our customer base of global 2000 organizations both at the enterprise and
departmental levels, extending our technology and product leadership through internal investment in research and development, expanding our global sales capabilities and extending our partnership alliances with leading technology and services
companies.



Our strategy from an execution and distribution perspective is to
change our selling approach and messaging. Specifically, we will increasingly focus on business problems and their corresponding solutions. We will address specific business imperatives, such as compliance, self-service, employee productivity,
partner and supplier collaboration, demand generation and expense reduction through areas such as site consolidation and the elimination of labor-based paper processing. We will also focus on the indirect channel, particularly opportunities to
expand our OEM business, and continue our commitment to customer service. We believe these efforts, combined with the new breadth of our solutions, will better position us to meet and exceed customer demands for an integrated set of best-of-breed
applications and capture market share.



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The primary risk to achieving our goals is competitive pressure, particularly from larger companies with much longer
operating histories and greater resources. Moreover, many of these companies can adopt aggressive pricing policies and provide customers with consolidated offerings that may include some of our product capabilities. Other key risks include market
acceptance of our products, successful integration of the Intraspect and Tower Technology acquisitions, the overall level of information technology spending and our ability to maintain control over expenses and cash. Our prospects must be considered
in light of these risks, particularly given that we operate in new and rapidly evolving markets, have completed several acquisitions and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties.
Please refer to the Risk Factors that May Affect Future Results section for more information.



Option Exchange Offer



On
February 12, 2004, we offered eligible employees the right to exchange certain outstanding stock options for new ones. The decline in the market value of our common stock since 2000 has resulted in a stock price that is substantially below the
strike price of many employee stock options granted during the past several years. This voluntary exchange program was designed to retain our employees and provide them with a long-term incentive to maximize stockholder value. The offer period is
expected to end on March 24, 2004. The exercise price of new options to be granted will depend on the closing price of our common stock on the grant date (which will be at least six months and one day from the cancellation date) and the total number
of options issued will range from 20% to 100% of the total options canceled based on a pre-determined formula. The program has been organized to comply with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, and is not expected to result in any additional compensation charges or variable plan accounting.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions 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. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.



Management has discussed with and agreed upon the development and selection of
the following critical accounting policies with the Audit Committee of the Board of Directors:



| |  | Revenue recognition;
| | - | --------------------



| |  | Estimating the allowance for doubtful accounts;
| | - | -----------------------------------------------



| |  | Valuation of long-term investments;
| | - | -----------------------------------



| |  | Estimating business restructuring accruals; and
| | - | -----------------------------------------------



| |  | Valuation of goodwill and identifiable intangible assets.
| | - | ---------------------------------------------------------



Revenue recognitionRevenue consists of product and service fees. Product fee income is earned through the licensing or right to use our software and from the sale
of specific software products. Service fee income is earned through the sale of maintenance and technical support, consulting services and training services.



We do not recognize revenue for agreements with rights of return, refundable fees, cancellation rights or acceptance clauses until such rights to return, refund or cancel
have expired or acceptance has occurred.



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We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as
amended by SOP 98-4 and SOP 98-9, and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements as revised by SAB 104.



Where software licenses are sold with maintenance or other services, we allocate the total
fee to the various elements based on the fair values of the elements specific to us. We determine the fair value of each element in the arrangement based on vendor-specific objective evidence (VSOE) of fair value. VSOE of fair value is
based upon the normal pricing and discounting practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If we do not have VSOE for one of the delivered elements of an
arrangement, but do have VSOE for all undelivered elements, we use the residual method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the
remaining arrangement fee, including any discount, is allocated to the delivered element. If the residual method is not used, discounts, if any, are applied proportionately to each element included in the arrangement based on each elements
fair value without regard to the discount.



Revenue allocated to product
license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, we have no significant remaining obligations with regard to implementation, and collection of a fixed or determinable fee is probable.
We consider all payments outside our normal payment terms, including all amounts due in excess of one year, to not be fixed and determinable, and such amounts are recognized as revenue as they become due. If collectibility is not considered
probable, revenue is recognized when the fee is collected. For software arrangements where we are obligated to perform professional services for implementation, we do not consider delivery to have occurred or customer payment to be probable of
collection until no significant obligations with regard to implementation remain. Generally, this would occur when substantially all service work has been completed in accordance with the terms and conditions of the customers implementation
requirements but may vary depending on factors such as an individual customers payment history or order type (e.g., initial versus follow-on).



Revenue from perpetual licenses that include unspecified, additional software products is recognized ratably over the term of the arrangement, beginning with the delivery
of the first product.



Revenue allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year).



Revenue
allocated to training and consulting service elements is recognized as the services are performed. Our consulting services are not essential to the functionality of our products as (i) such services are available from other vendors and (ii) we have
sufficient experience in providing such services.



Deferred revenue includes
amounts received from customers in excess of revenue recognized. Accounts receivable includes amounts due from customers for which revenue has been recognized.



We follow very specific and detailed guidelines, discussed above, in determining revenues; however, certain judgments and estimates are made and used to determine
revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized for any period if different conditions were to prevail. For example, in determining whether collection is probable, we assess
our customers ability and intent to pay. Our actual experience with respect to collections could differ from our initial assessment if, for instance, unforeseen declines in the overall economy occur and negatively impact our customers
financial condition.



Allowance for doubtful accounts We continuously
assess the collectibility of outstanding customer invoices and in doing such, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as:
historical collection experience, a customers current credit-worthiness, customer concentrations, age of the receivable balance, both individually and in the aggregate, and general economic conditions that may affect a customers ability
to pay. Actual customer collections could differ from our estimates. For example, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



31



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Long-term investments Long-term investments include investments in equity securities of both private and public
companies and restricted certificates of deposit with original maturities in excess of one year. Long-term investments are recorded at their estimated fair value. We periodically analyze our long-term investments for impairments considered other
than temporary. In performing this analysis, we evaluate whether general market conditions which reflect prospects for the economy as a whole, or information pertaining to an investments industry or that individual company, indicates that a
decline in value that is other than temporary has occurred. If so, we consider specific factors, including the financial condition and near-term prospects of each investment, any event that may affect the investee company, and our intent and ability
to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. We record an investment impairment charge in the line item Other income (expense), net when we believe an investment has
experienced a decline in value that is other than temporary.



Future adverse
changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investments current carrying value,
thereby possibly requiring an impairment charge in the future.



Business
restructuring We vacated excess leased facilities as a result of the restructuring plan we initiated in 2001 and subsequently expanded in 2002. We recorded an accrual for the remaining lease liabilities of such vacated properties as well as
brokerage commissions, partially offset by estimated sublease income. We estimated the costs of these excess leased facilities, including estimated costs to sublease and sublease income, based on market information and trend analysis. We continually
assess our real estate portfolio and may vacate or occupy other leased space as dictated by our analysis. Actual results could differ from these estimates. In particular, actual sublease income attributable to the consolidation of excess facilities
might deviate from the assumptions used to calculate our accrual for facility lease commitments.



Goodwill and identifiable intangible assets We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(Statement 142) on January 1, 2002. In
accordance with Statement 142, we replaced the ratable amortization of goodwill and other indefinite-lived intangible assets with a periodic review and analysis for possible impairment. We were required to perform a transitional impairment review
which involved a two-step process: Step 1 involves identifying reporting units, determining the fair value of each reporting unit, and determining if the fair value of each reporting unit is less than its carrying amount. If necessary, Step 2 is to
be completed before the end of the year in which the company adopts the statement. Step 2 measures the impairment charge and is completed if the fair value is less than the carrying value, as determined in Step 1. The completion of this impairment
review required management to make complex estimates and assumptions, including but not limited to determining our reporting unit(s), selecting the appropriate methodology to determine the estimated fair value of a reporting unit as well as the
actual fair value estimation of each reporting unit. If our estimates or assumptions were to change, this could result in a materially different impairment conclusion.



We performed the required transitional impairment test of goodwill during the first quarter of 2002 and determined that we did not have a
transitional impairment of goodwill. Subsequent to the transitional impairment test, we must assess goodwill for impairment at least annually. We assess our goodwill on October 1 of each year and during an interim period if facts or circumstances
would more likely than not suggest that the fair value of an identified reporting unit is below its carrying value. Such periodic assessment of goodwill resulted in a significant goodwill impairment charge during the quarter ended December 31, 2002.
There was no impairment charge related to goodwill or other intangible assets in 2003.



Accounting Reclassification and Change in Accounting Estimate



Effective December 31, 2001, we report all bad debt expense in the operating expense cost category, Sales and marketing. Prior to December 31, 2001, we reported a portion of bad debt expense in Cost of revenue 
services. Bad debt expense reported in Cost of revenue  services for the prior periods presented in this Report has been reclassified to conform to the current period presentation. Such reclassification had no impact on the
reported net loss, net loss per share or stockholders equity. Bad debt



32



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##### Index to Financial Statements

expense reclassified from Cost of revenue  services to Sales and marketing was $5.7 million in 2001. This reclassification
increased gross margin by approximately 2% in 2001 and increased Sales and marketing as a percentage of sales by a comparable amount.



We periodically review the valuation and amortization of our identifiable intangible assets, taking into consideration any events or circumstances that might result in a
diminished fair value or useful life. During the quarter ended March 31, 2002, we changed the estimated useful life of technologies purchased as part of the July 2000 acquisition of OnDisplay, Inc.. Due to changes in product architecture and
anticipated future product offerings, we reduced the technologys estimated life from four years to two years. For the year ended December 31, 2002, this change increased net loss by $(8.0) million and net loss per share by $(0.03).



Results of Operations



The following table sets forth, for the periods indicated, certain items from our
Consolidated Statements of Operations, expressed as a percentage of total revenues:



|                                                                                     |  |                         |    |  |      |    |  |      |   
|------------------------------------------------------------------------------------ |  | ----------------------- | -- |  | ---- | -- |  | ---- | --
|                                                                                     |  | Year Ended December 31, |   
|                                                                                     |  | 2001                    |    |  | 2002 |    |  | 2003 |   
|Revenue:                                                                             |  |                         |    |  |      |    |  |      |   
|Product license                                                                      |  | 52                      | %  |  | 40   | %  |  | 39   | % 
|Services                                                                             |  | 48                      |    |  | 60   |    |  | 61   |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Total revenue                                                                        |  | 100                     |    |  | 100  |    |  | 100  |   
|Cost of revenue:                                                                     |  |                         |    |  |      |    |  |      |   
|Product license                                                                      |  | 2                       |    |  | 2    |    |  | 2    |   
|Amortization of acquired technology                                                  |  |                        |    |  |     |    |  | 2    |   
|Services                                                                             |  | 26                      |    |  | 28   |    |  | 25   |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Total cost of revenue                                                                |  | 28                      |    |  | 30   |    |  | 29   |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Gross profit                                                                         |  | 72                      |    |  | 70   |    |  | 71   |   
|Operating expenses:                                                                  |  |                         |    |  |      |    |  |      |   
|Research and development                                                             |  | 22                      |    |  | 33   |    |  | 25   |   
|Sales and marketing                                                                  |  | 60                      |    |  | 55   |    |  | 43   |   
|General and administrative                                                           |  | 10                      |    |  | 14   |    |  | 10   |   
|Purchased in-process research and development, acquisition-related and other charges |  | 1                       |    |  | 1    |    |  | 3    |   
|Impairment of intangible assets                                                      |  | 269                     |    |  | 95   |    |  |     |   
|Business restructuring charges                                                       |  | 41                      |    |  | 23   |    |  | (9   | ) 
|Amortization of deferred stock compensation                                          |  | 3                       |    |  | 1    |    |  | 1    |   
|Amortization of intangible assets                                                    |  | 168                     |    |  | 10   |    |  | 1    |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Total operating expenses                                                             |  | 574                     |    |  | 232  |    |  | 74   |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Loss from operations                                                                 |  | (502                    | )  |  | (162 | )  |  | (3   | ) 
|Other income (expense), net                                                          |  | (12                     | )  |  |     |    |  | 3    |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Profit/(loss) before income taxes                                                    |  | (514                    | )  |  | (162 | )  |  | (   | ) 
|Provision for income taxes                                                           |  | 1                       |    |  | 1    |    |  |     |   
|                                                                                     |  |                         |    |  |      |    |  |      |   
|Net loss                                                                             |  | (515                    | )% |  | (163 | )% |  | (0   | )%
|                                                                                     |  |                         |    |  |      |    |  |      |   



33



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##### Index to Financial Statements

Comparison of fiscal years ended December 31, 2003, 2002 and 2001 (in thousands, unless otherwise noted)



Revenue



|                        |  |                         |         |                     |   |         |                     |   |         |  |     |    |  |    |   
|----------------------- |  | ----------------------- | ------- | ------------------- | - | ------- | ------------------- | - | ------- |  | --- | -- |  | -- | --
|                        |  | Year Ended December 31, |         | 2002Comparedto 2001 |   |         | 2003Comparedto 2002 |  
|                        |  | 2001                    |         | 2002                |   | 2003    |                     |  
|Product license         |  | $                       | 154,381 |                     | $ | 62,418  |                     | $ | 60,986  |  | (60 | )% |  | (2 | )%
|Maintenance and support |  |                         | 56,253  |                     |   | 53,135  |                     |   | 61,186  |  | (6  | )  |  | 15 |   
|Professional services   |  |                         | 86,116  |                     |   | 39,585  |                     |   | 36,142  |  | (54 | )  |  | (9 | ) 
|                        |  |                         |         |                     |   |         |                     |   |         |  |     |    |  |    |   
|Total services revenue  |  |                         | 142,369 |                     |   | 92,720  |                     |   | 97,328  |  | (35 | )  |  | 5  |   
|                        |  |                         |         |                     |   |         |                     |   |         |  |     |    |  |    |   
|Total revenue           |  | $                       | 296,750 |                     | $ | 155,138 |                     | $ | 158,314 |  | (48 | )% |  | 2  | % 
|                        |  |                         |         |                     |   |         |                     |   |         |  |     |    |  |    |   



Total revenue increased by 2% in 2003
and decreased by 48% in 2002. The increase in revenue for 2003 was primarily due to the sales of portal product acquired in our December 2002 business combination with Epicentric and the introduction of new and upgraded products, as partially offset
by the effects of slow information technology spending. The significant decline in 2002 was primarily due to the sustained global economic slowdown that originated in late 2000. We expect total revenue across both license and services to grow in
2004, particularly in light of our recent acquisitions of Intraspect in December 2003 and Tower Technology in March 2004.



Product license. Product license revenue decreased 2% in 2003 and 60% in 2002. The stabilization in 2003 was primarily due the sales of portal product acquired in
our December 2002 business combination with Epicentric and the introduction of new and upgraded products, as partially offset by the effects of slow information technology spending. The significant decline in 2002 was primarily due to the sustained
global economic slowdown that originated in late 2000.



Services.
Services revenue increased 5% in 2003 and decreased 35% in 2002. The increase in 2003 was driven by higher maintenance and support revenue related to increases in our install base and consistent levels of maintenance renewals, partially offset by a
decrease in professional services revenue. The decreases in 2002 relates primarily to decreased professional services revenue, which dropped 54% in 2002. Professional services revenue was impacted in 2003 and 2002 by fewer new product engagements
and lower billing rates.



During 2003, 2002 and 2001, no single customer
accounted for more than 10% of our total revenues. International revenue was $41.8 million, $50.3 million and $106.1 million, or 26%, 32% and 36% of total revenues, in 2003, 2002, and 2001, respectively.



Gross Profit



Cost of revenue consists of costs to manufacture, package and distribute our products and related documentation, the costs of licensing
third-party software incorporated into our products, the amortization of certain acquired technology, and personnel and other expenses related to providing professional and maintenance services.



34



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##### Index to Financial Statements

Gross profit amounts and percentages are as follows:



|                                    |  |                         |         |      |                     |         |      |                     |   |         |   |  |     |    |  |       |   
|----------------------------------- |  | ----------------------- | ------- | ---- | ------------------- | ------- | ---- | ------------------- | - | ------- | - |  | --- | -- |  | ----- | --
|                                    |  | Year ended December 31, |         |      | 2002Comparedto 2001 |         |      | 2003Comparedto 2002 |  
|                                    |  | 2001                    |         | 2002 |                     |         | 2003 |                     |   |        
|Product license                     |  | $                       | 149,138 |      | $                   | 60,030  |      |                     | $ | 58,142  |   |  | (60 | )% |  | (3    | )%
|Amortization of acquired technology |  |                         |        |      |                     | (267    | )    |                     |   | (3,450  | ) |  | 100 |    |  | 1,192 |   
|Maintenance and support             |  |                         | 49,617  |      |                     | 46,163  |      |                     |   | 53,421  |   |  | (7  | )  |  | 16    |   
|Professional services               |  |                         | 14,453  |      |                     | 2,883   |      |                     |   | 4,376   |   |  | (80 | )  |  | 52    |   
|Total services                      |  |                         | 64,070  |      |                     | 49,046  |      |                     |   | 57,796  |   |  | (23 | )  |  | 18    |   
|                                    |  |                         |         |      |                     |         |      |                     |   |         |   |  |     |    |  |       |   
|Total gross profit                  |  | $                       | 213,208 |      | $                   | 108,809 |      |                     | $ | 112,489 |   |  | (49 | )  |  | 3     |   
|                                    |  |                         |         |      |                     |         |      |                     |   |         |   |  |     |    |  |       |   



As a percent of sales, gross profit
represented 71%, 70% and 72% in 2003, 2002 and 2001, respectively. The improvement in 2003 was primarily due to the decrease in professional services costs related primarily to lower headcount. The decrease in 2002 was primarily attributable to
reduced license sales resulting in decreased utilization of internal consultants. We expect gross margin to remain constant at 70% in future periods.



Operating expenses



|                                                                                     |  |                         |           |      |                     |         |  |                     |         |   |  |     |    |  |      |   
|------------------------------------------------------------------------------------ |  | ----------------------- | --------- | ---- | ------------------- | ------- |  | ------------------- | ------- | - |  | --- | -- |  | ---- | --
|                                                                                     |  | Year Ended December 31, |           |      | 2002Comparedto 2001 |         |  | 2003Comparedto 2002 |        
|                                                                                     |  | 2001                    |           | 2002 |                     | 2003    |  |                     |        
|Research and development                                                             |  | $                       | 64,850    |      | $                   | 51,334  |  | $                   | 39,923  |   |  | (21 | )% |  | (22  | )%
|Sales and marketing                                                                  |  |                         | 178,282   |      |                     | 84,775  |  |                     | 68,160  |   |  | (52 | )  |  | (20  | ) 
|General and administrative                                                           |  |                         | 29,907    |      |                     | 21,344  |  |                     | 15,727  |   |  | (29 | )  |  | (26  | ) 
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 1,919     |      |                     | 1,786   |  |                     | 4,258   |   |  | (7  | )  |  | 138  |   
|Impairment of intangible assets                                                      |  |                         | 799,169   |      |                     | 147,269 |  |                     |        |   |  | (82 | )  |  | (100 | ) 
|Business restructuring charges                                                       |  |                         | 120,935   |      |                     | 35,822  |  |                     | (14,687 | ) |  | (70 | )  |  | (141 | ) 
|Amortization of deferred stock compensation                                          |  |                         | 8,734     |      |                     | 1,396   |  |                     | 1,107   |   |  | (84 | )  |  | (21  | ) 
|Amortization of intangible assets                                                    |  |                         | 500,045   |      |                     | 16,060  |  |                     | 1,965   |   |  | (97 | )  |  | (88  | ) 
|                                                                                     |  |                         |           |      |                     |         |  |                     |         |   |  |     |    |  |      |   
|Total operating expenses                                                             |  | $                       | 1,703,841 |      | $                   | 359,786 |  | $                   | 116,453 |   |  | (79 | )% |  | (68  | )%
|                                                                                     |  |                         |           |      |                     |         |  |                     |         |   |  |     |    |  |      |   



Research and development.
Research and development expenses consist primarily of personnel costs to support product development. Research and development expenses decreased 22% and 21% in 2003 and in 2002, respectively. The decrease in research and development costs in each
period relates primarily to our restructuring efforts via reduced engineering headcount and other cost-saving measures. The increase as a percentage of revenue in 2002 as compared to 2001 resulted from the decrease in total revenue. We believe that
continued investment in research and development is critical to attaining our strategic objectives. We, therefore, expect that spending on research and development will increase in future periods, particularly in light of our acquisition of Tower
Technology in March 2004.



Software development costs that were capitalized in
accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, totaled $0.0, $0.7 million and $0.7 million in 2003, 2002 and 2001, respectively.These capitalized costs relate to software developed by third parties that were not acquired in a business combination. They are amortized using the straightline method over the estimated useful life, generally 18 months. Amortization expense
was $0.5 million, $0.1 million and $0.7 million in 2003, 2002 and 2001, respectively, and is included in Cost of revenue  license on the Consolidated Statements of Operations. In connection with the restructuring plan implemented
during 2001, we decided to no longer sell or support certain software products, resulting in an impairment of $1.9 million of previously capitalized software.



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##### Index to Financial Statements

Sales and marketing. Sales and marketing expenses consist primarily of salaries and other related costs for sales,
marketing and customer care personnel, sales commissions, public relations, marketing materials and tradeshows as well as bad debt charges. Sales and marketing expenses decreased 20% and 52% in 2003 and 2002, respectively. The decrease in absolute
dollars and as a percentage of total revenue in each period relates primarily to our restructuring efforts via reduced headcount and other cost-saving measures, lower commissions due to lower product sales, as well as reduced bad debt charges. We
expect sales and marketing expenses to increase in absolute dollars in future periods and to fluctuate as a percentage of total revenue from period to period based on our recent acquisition of Tower Technology, the timing of new product releases and
entry into new market areas, investment in marketing efforts and the timing of domestic and international conferences and trade shows.



General and administrative. General and administrative expenses consist primarily of salaries and other related costs for human resources, finance, accounting,
facilities, information technology and legal employees. General and administrative expenses decreased 26% in 2003 and 29% in 2002. The decrease in absolute dollars in each period relates primarily to our restructuring efforts via reduced headcount
and other cost-saving measures. In 2002, the increase as a percentage of revenue resulted from a decrease in total revenue. We expect general and administrative expenses in future periods to increase in absolute dollars and to fluctuate as a
percentage of total revenue from period to period based on our recent acquisition of Tower Technology, regulatory requirements, legal proceedings and fees paid to outside professional service providers.



Purchased in-process research and development, acquisition-related and other charges.
During the three years ended December 31, 2003, we acquired a series of complementary businesses. The following table summarizes costs related to our business combinations (in thousands):



|                                              |  |                         |       |      |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                              |  | Year Ended December 31,
|                                              |  | 2001                    |       | 2002 |   | 2003 
|Purchased in-process research and development |  | $                       |      |      | $ | 800   |  | $ | 1,100
|Cross-training, product integration and other |  |                         | 94    |      |   | 404   |  |   | 490  
|Severance and other employee-related costs    |  |                         |      |      |   |      |  |   | 136  
|Contingent compensation                       |  |                         | 1,825 |      |   | 582   |  |   | 2,532
|                                              |  |                         |       |      |   |       |  |   |      
|                                              |  | $                       | 1,919 |      | $ | 1,786 |  | $ | 4,258
|                                              |  |                         |       |      |   |       |  |   |      



Included in the acquired net assets of
Epicentric, Inc. and Intraspect Software, Inc. was purchased in-process research and development (IPR&D) efforts that we intended to substantially rework before integrating into our products (in thousands):



|                                                     |  |                                                                                                                                                                                                                                                                                               |  |                     |       |                                     |                                                                                                       
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- | ----------------------------------- | ------------------------------------------------------------------------------------------------------
|Acquired Company                                     |  | Acquired IPR&D - Project Description                                                                                                                                                                                                                                                          |  | EstimatedFair Value |       | Current Status at December 31, 2002
|Epicentric, Inc. (2002) portal software applications |  | Foundation Server Allows rapid construction and delivery of interactive business portals                                                                                                                                                                                                     |  | $                   | 800   |                                     | Application from this project has been fully integrated into our product                              
|                                                     |  |                                                                                                                                                                                                                                                                                               | 
|Intraspect Software, Inc. (2003)                     |  | Intraspect 5.6.2  Collaboration solution that will simplify the integration between Vignette Portal and Vignette Business Collaboration server. Modifications include rebranding
user interface and other fixes and changes to support other application servers and Web server combinations |  | $                   | 1,100 |                                     | Application from this project is being reworked and is expected to be integrated into our product line



The amounts allocated to IPR&D
were based on discounted cash flow models, as modified to conform to Securities and Exchange Commission guidelines. Specifically, these models employed cash flow projections for revenue based on the projected incremental increase in revenue that the
acquired company expected to receive from the completed IPR&D. Such assumptions were based on managements estimates and the growth potential of the market. Revenue for the projection periods assumed an annual compound growth rate of 17.2%
and 5.0% for Epicentric, Inc., and Intraspect Software, Inc., respectively, and was



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##### Index to Financial Statements

adjusted to reflect the percentage of research and development determined to be complete as of the acquisition date. Cost of revenue, selling, general and
administrative expense, and research and development expense were estimated as a percent of revenue based on each acquired companys historical results and industry averages. The cost to complete the in-process products was removed from the
research and development expense. These estimated operating expenses as well as capital charges and applicable income taxes were deducted to arrive at an estimated after-tax cash flow. The after-tax cash flow projections were discounted using a
risk-adjusted rate of return, of 40% and 19%, respectively. Such discount rates were based on each acquired companys weighted average cost of capital of 36% and 17%, respectively, as adjusted upwards for the additional risk related to the
projects development and success.



The resulting IPR&D was expensed
at the time of purchase because technological feasibility had not been established and no future alternative uses existed. The efforts required to develop the purchased IPR&D into commercially viable products related to the completion of all
planning, designing, prototyping, verification and testing activities that would be necessary to establish that the products could be produced to meet their design specifications, including functions, features and technical performance requirements.
The timing for the completion of such efforts was expected to range between twelve and eighteen months. Further, we were uncertain of our ability to complete the products within a timeframe acceptable to the market and ahead of competitors.



Impairment of intangible assets.Impairment of intangible assets
decreased 100% and 82% in 2003 and 2002, respectively. These fluctuations relate primarily to the impairment of goodwill in 2001 and 2002. There was no impairment charge related to goodwill or other intangible assets in 2003.



We assess our goodwill annually or more frequently if events or changes in circumstances
indicate that goodwill might be impaired. We completed the 2002 annual assessment of goodwill using the two-step approach, pursuant to Statement 142, and as a result recorded a $147.0 million charge. The impairment was recorded in light of sustained
negative industry and economic trends impacting current operations, the significant decline in our stock price for a sustained period of time and our market capitalization relative to our net book value. The impaired goodwill was originally recorded
in connection with the four business combinations effected during 1999 and 2000. Such acquisitions were completed during a period when stock valuations for software companies were generally at much higher levels.



The value determined in Step 1 of the assessment, which involves comparing the fair value to
the carrying value of the reporting unit, indicated a goodwill impairment. We estimated fair value based on market capitalization, as complemented by a discounted cash flow analysis. We measured the impairment loss by completing Step 2 during the
fourth quarter of 2002. Step 2 involved determining the enterprises implied fair value of goodwill. The carrying amount of our goodwill was greater than the implied fair value of goodwill, resulting in full impairment of the remaining goodwill
recorded in connection with our 1999 and 2000 business combinations.



Also in
2002, the DataSage, Inc. trademark was impaired due to changes in product offerings. Such changes altered the packaging and marketing of certain technology and therefore rendered the related trademark obsolete, resulting in a $0.3 million impairment
charge.



Prior to the adoption of Statement 142 in 2002, we evaluated
enterprise-level goodwill pursuant to APB Opinion No. 17, Intangible Assets, and recorded an impairment charge in 2001. The impairment was recorded in light of significant negative industry and economic trends impacting our operations, the
significant decline in our stock price for a sustained period of time and our market capitalization relative to our net book value. The overall decline in industry and economic growth rates indicated that this trend may continue for an indefinite
period. Using a discounted cash flow approach, we recorded a $799.2 million non-cash impairment charge in the quarter ended December 31, 2001 to reduce enterprise-level goodwill to its estimated fair value. Goodwill was originally recorded in
connection with our four business acquisitions completed during fiscal years 1999 and 2000. Such acquisitions were generally completed during a period when stock valuations for companies in the software sector were at a much higher level. The
estimate of fair value was based upon the discounted estimated cash flows using a discount rate of 24% and an estimated terminal growth rate of 6%. The discount rate was based upon our risk-adjusted weighted average cost of capital. The assumptions
supporting the estimated cash flows, including the discount rate and estimated



37



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##### Table of Contents

##### Index to Financial Statements

terminal value, reflect managements best estimates. It is reasonably possible that the estimates and assumptions used may change.



We review goodwill and other intangible assets for possible impairment periodically.
Sustained negative industry and economic trends, a decline in our stock price and market capitalization for an extended period of time, or changes in our product offerings could result in future impairment charges that are material to our
consolidated financial statements.



Business restructuring charges. In
2001, we initiated a restructuring program to align our expense and revenue levels and to better position us for growth and profitability. In 2002 and 2003, we expanded those restructuring efforts. Although we have substantially implemented our
restructuring activities, there can be no assurance that the estimated costs of our restructuring efforts will not change. Components of business restructuring charges and the remaining restructuring accruals as of December 31, 2003 are as follows
(in thousands):



|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -------------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Facility LeaseCommitments |         |   | AssetImpairments |   |         | EmployeeSeparationand OtherCosts |  |   | Total   |  
|Balance at December 31, 2000                      |  | $                         |        |   |                  | $ |        |                                  |  | $ |        |   |  | $ |        |  
|Total restructuring charge                        |  |                           | 55,150  |   |                  |   | 33,683  |                                  |  |   | 32,102  |   |  |   | 120,935 |  
|Cash activity                                     |  |                           | (12,397 | ) |                  |   | (878    | )                                |  |   | (22,773 | ) |  |   | (36,048 | )
|Non-cash activity                                 |  |                           | (292    | ) |                  |   | (32,805 | )                                |  |   | (1,918  | ) |  |   | (35,015 | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                      |  |                           | 42,461  |   |                  |   |        |                                  |  |   | 7,411   |   |  |   | 49,872  |  
|Effect of expanded restructuring plan             |  |                           | 6,518   |   |                  |   | 8,730   |                                  |  |   | 11,118  |   |  |   | 26,366  |  
|Adjustment to accrual                             |  |                           | 9,538   |   |                  |   | 463     |                                  |  |   | (545    | ) |  |   | 9,456   |  
|Cash activity                                     |  |                           | (21,959 | ) |                  |   |        |                                  |  |   | (11,342 | ) |  |   | (33,301 | )
|Non-cash activity                                 |  |                           |        |   |                  |   | (9,193  | )                                |  |   | (36     | ) |  |   | (9,229  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                      |  | $                         | 36,558  |   |                  | $ |        |                                  |  | $ | 6,606   |   |  |   | 43,164  |  
|Effect of expanded restructuring plan             |  |                           | 9       |   |                  |   |        |                                  |  |   | 2,076   |   |  |   | 2,085   |  
|Adjustment to accrual                             |  |                           | (13,422 | ) |                  |   |        |                                  |  |   | (3,349  | ) |  |   | (16,771 | )
|Cash activity                                     |  |                           | (10,620 | ) |                  |   |        |                                  |  |   | (4,961  | ) |  |   | (15,581 | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                      |  | $                         | 12,525  |   |                  |   |        |                                  |  | $ | 372     |   |  |   | 12,897  |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Less: current portion                             |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   | 5,509   |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Accrued restructuring costs, less current portion |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  | $ | 7,388   |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  



During 2003 we adjusted our existing
restructuring accruals, resulting in net a restructuring gain of $14.7 million. A substantial portion of this income was primarily driven by non-recurring charges related to changes in real estate restructuring assumptions. Specifically, during the
fourth quarter we reevaluated our office space portfolio and decided to vacate our Austin, Texas, headquarters to relocate to nearby office space that we had previously identified as restructuring space. This relocation resulted in a net benefit of
approximately $14.0 million in the fourth quarter of 2003. We also increased our estimates regarding sublease income. In the first quarter of 2004, we moved out of our existing headquarters and relocated to our new one and, as such, we expect to
record a restructuring charge of approximately $7.1 million in the first quarter of 2004.



Including the aforementioned $7.1 million charge, remaining cash expenditures resulting from the restructuring are estimated to be $20.0 million and relate primarily to facility lease commitments, of which the
remaining maximum lease commitment is eight years. We have substantially implemented our restructuring efforts initiated in conjunction with this restructuring plan; however, there can be no assurance that the estimated costs of our restructuring
efforts will not change.



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##### Index to Financial Statements

Facility lease commitments relate to lease obligations for excess office space that we have vacated as a result of the
restructuring plan. Total lease commitments include the remaining lease liabilities and brokerage commissions, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and
any resulting sublease income, were based on market information and trend analysis. We continually assess our estimates of our real estate portfolio and may vacate and/or occupy other leased space as dictated by its analysis. It is reasonably
possible that actual results could continue to differ from these estimates in the near term, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess
facilities might deviate from the assumptions used to calculate our accrual for facility lease commitments. Facility lease commitments relate to our departure from certain office space in Austin and Houston, Texas; Redwood City, Los Angeles and San
Ramon, California; Boston, Waltham, Reading and Cambridge, Massachusetts; New York, New York; Maidenhead, United Kingdom; Paris, France; Hamburg, Germany; Madrid, Spain; Sydney and Melbourne, Australia; Bangalore and Guragon, India; Hong Kong,
China; and Singapore. The maximum lease commitment of such vacated properties is eight years from December 31, 2003.



Asset impairments relate to the impairment of certain fixed assets, prepaid royalties and intangible assets. These fixed assets were impaired as a result of our decision
to vacate certain office space and align its infrastructure with current and projected headcount.



Employee separation and other costs include severance, related taxes, outplacement and other restructuring charges. As a result of the restructuring activities, we have severed approximately 1,525 employees during the
past three years. Employee groups impacted by the restructuring efforts include personnel in positions throughout the sales, marketing, professional services, engineering and general and administrative functions in all geographies. During 2003, we
favorably resolved certain employee matters that related to our reduction in force. This resolution resulted in a $3.3 million decrease in the employee separation and other costs accrual.



Amortization of deferred stock compensation. For stock options issued to employees, we record deferred compensation at the grant date
if a difference exists between the exercise price and the market value of our common stock. For restricted share issuances, we record deferred compensation equal to the market value on the issue date. For the stock options we assumed in connection
with our acquisition of OnDisplay, Inc. in July 2000, we have recorded deferred compensation for the difference between the exercise price of the unvested stock options and the fair value of our common stock at the acquisition date.



Deferred stock compensation is amortized on an accelerated basis over the vesting periods of
the applicable options and restricted share grants. Amortization of deferred stock compensation is attributable to the following cost categories (in thousands):



|                           |  |                         |       |      |   |       |  |   |      
|-------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                           |  | Year Ended December 31,
|                           |  | 2001                    |       | 2002 |   | 2003 
|Cost of revenue  services |  | $                       | 1,965 |      | $ | 170   |  | $ |     
|Research and development   |  |                         | 2,446 |      |   | 441   |  |   | 324  
|Sales and marketing        |  |                         | 3,066 |      |   | 416   |  |   | 69   
|General and administrative |  |                         | 1,257 |      |   | 369   |  |   | 714  
|                           |  |                         |       |      |   |       |  |   |      
|                           |  | $                       | 8,734 |      | $ | 1,396 |  | $ | 1,107
|                           |  |                         |       |      |   |       |  |   |      



Amortization of intangible
assets. Intangible amortization expense decreased 88% and 97% in 2003 and 2002, respectively. In 2002, the decrease relates to our adoption of Statement 142. For goodwill and other indefinite-lived intangible assets, Statement 142 requires that
ratable amortization be replaced with periodic review and analysis for possible impairment. An intangible asset with a definite life must continue to be amortized over its estimated useful life. The decrease in 2003 relates to a change in the
estimated useful life of technologies purchased as part of the OnDisplay, Inc. acquisition. Due to changes in our product architecture and anticipated future product offerings, the estimated life of this acquired technology was reduced from four
years to two years. Such technology was fully amortized at June 30, 2002.



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##### Index to Financial Statements

Other income and expense



Other income and expense, net consists primarily of interest income and expense, recognized investment gains and losses as well as foreign
currency exchange gains and losses.



|                            |  |                         |         |                     |      |   |                     |      |  |   |       |  |    |   |  |       |  
|--------------------------- |  | ----------------------- | ------- | ------------------- | ---- | - | ------------------- | ---- |  | - | ----- |  | -- | - |  | ----- | -
|                            |  | Year Ended December 31, |         | 2002Comparedto 2001 |      |   | 2003Comparedto 2002 |     
|                            |  | 2001                    |         |                     | 2002 |   |                     | 2003 |  |  
|Other income (expense), net |  | $                       | (35,275 | )                   |      | $ | (517                | )    |  | $ | 5,068 |  | 99 | % |  | 1,081 | %



Other income and expense improved in
2003 and 2002 primarily due to the impairment of certain long-term investments in 2002 and 2001, as partially offset by decreasing yields on lower cash and short-term investment balances. The impaired long-term investments generally consist of
redeemable convertible preferred stock in privately-held technology companies as well as common stock in publicly-held technology companies. We periodically analyze our long-term investments for impairments that are considered other than temporary.
As a result, we recognized impairment charges of $0, $6.5 million and $51.6 million in 2003, 2002 and 2001, respectively.



At December 31, 2003, our unrestricted, long-term investments totaled $2.2 million. Future adverse changes in market conditions or poor operating results of an investee
could require future impairment charges.



Provision for income taxes



Income tax expense consists primarily of estimated withholdings and
income taxes due in certain foreign jurisdictions.



|                           |  |                         |       |                     |   |       |                     |   |       |  |     |    |  |     |   
|-------------------------- |  | ----------------------- | ----- | ------------------- | - | ----- | ------------------- | - | ----- |  | --- | -- |  | --- | --
|                           |  | Year Ended December 31, |       | 2002Comparedto 2001 |   |       | 2003Comparedto 2002 |  
|                           |  | 2001                    |       | 2002                |   | 2003  |                     |  
|Provision for income taxes |  | $                       | 1,731 |                     | $ | 1,319 |                     | $ | 1,137 |  | (24 | )% |  | (14 | )%



We have provided a full valuation
allowance on our net deferred tax assets, which includes net operating loss, capital loss and research tax credit carryforwards, because of the uncertainty regarding their realization. Our accounting for deferred taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement 109), involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was
required, we primarily considered such factors as our history of operating losses and expected future losses and the nature of our deferred tax assets.



Quarterly Results



The table on pages F-33 to F-34 of the Consolidated Financial Statements section sets forth certain unaudited consolidated statements of operations data, both in absolute dollars and as a percent of
revenue, for each of the last consecutive eight quarters.



As a result of our
limited operating history, we cannot forecast operating expenses based on historical results. Accordingly, we base our forecast for expenses in part on future revenue projections. Many of these expenses are fixed in the short term, and we may not be
able to quickly reduce spending if revenues are lower than we have projected. Our ability to accurately forecast our quarterly revenue is limited due to the long sales cycle of our software products, which makes it difficult to predict the quarter
in which product implementation will occur, and the variability of customer demand for professional services. We would expect our business, operating results and financial condition to be materially adversely affected if revenues do not meet
projections and that net losses in a given quarter would be even greater than expected.



40



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##### Index to Financial Statements

Our operating results have varied significantly from quarter to quarter in the past and we expect our operating results
will continue to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, including:



| |  | demand for our products and services;
| | - | -------------------------------------



| |  | the timing of sales of our products and services;
| | - | -------------------------------------------------



| |  | the timing of customer orders and product implementations;
| | - | ----------------------------------------------------------



| |  | seasonal fluctuations in information technology purchasing;
| | - | -----------------------------------------------------------



| |  | unexpected delays in introducing new products and services;
| | - | -----------------------------------------------------------



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



| |  | changes in the rapidly evolving market for Web-based applications;
| | - | ------------------------------------------------------------------



| |  | the mix of product license and services revenue, as well as the mix of products licensed;
| | - | -----------------------------------------------------------------------------------------



| |  | the mix of services provided and whether services are provided by our own staff or third-party contractors;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | the mix of domestic and international sales;
| | - | --------------------------------------------



| |  | difficulties in collecting accounts receivable;
| | - | -----------------------------------------------



| |  | costs related to possible acquisitions of technology or businesses;
| | - | -------------------------------------------------------------------



| |  | global events, including terrorist activities and military operations;
| | - | ----------------------------------------------------------------------



| |  | the general economic climate; and
| | - | ---------------------------------



| |  | changes to our licensing and pricing model.
| | - | -------------------------------------------



Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one
quarter as an indication of future performance.



Net Operating Losses and
Tax Credit Carryforwards



As of December 31, 2003, we had federal net
operating losses carried forward, research and development carryforwards and capital loss carryforwards of approximately $712.0 million and $11.3 million, and $25.4 million, respectively. The net operating loss, credit carryforwards and capital loss
carryforwards will expire at various dates, between 2004 and 2024, if not utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses, tax credits, and capital loss carryforwards in the event of
an ownership change of a corporation. Net operating loss carryforwards of approximately $160.5 million and tax credit carryforwards of $2.9 million at December 31, 2003 were incurred by businesses we acquired and will be subject to
annual limitation. These restrictions may severely limit the benefit of these tax attributes in future periods. In addition, the remaining net operating loss of $551.5 million and tax credit carryover $8.4 million may be subject to this limitation.
These restrictions may severely limit the benefit of these tax attributes in future periods. As a result, substantial amounts of our net operating loss and credit carryforwards may expire prior to utilization.



We have provided a full valuation allowance on our net deferred tax assets, which include net
operating losses carried forward, and research and development carryforwards, and capital loss carryforwards because of the uncertainty regarding their realization. Our accounting for deferred taxes under Statement 109 involves the evaluation of a
number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was required, we primarily considered such factors as our history of operating losses and expected future losses and the nature
of our deferred tax assets.



As of December 31, 2003, the valuation allowance
includes approximately $22.1 million related to the acquisition of Epicentric, Inc., and Intraspect Software, Inc. net deferred tax assets. The initial recognition of these acquired deferred tax asset items will first reduce goodwill, then other
non-current intangible assets of the acquired entity. Approximately $145.2 million of the valuation allowance relates to tax benefits for stock option deductions included in the net operating loss carryforward, substantially all of which, when
realized, will be allocated directly to contributed capital to the extent the benefits exceed amounts attributable to compensation expense.



41



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##### Table of Contents

##### Index to Financial Statements

Liquidity and Capital Resources



The following table presents selected financial statistics and information at December 31, unless otherwise noted (dollars in thousands):



|                                                  |  |      |         |      |   |         |  |   |        
|------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                  |  | 2001 |         | 2002 |   | 2003   
|Cash and cash equivalents                         |  | $    | 348,916 |      | $ | 216,076 |  | $ | 171,939
|Short-term investments                            |  | $    | 42,716  |      | $ | 91,678  |  | $ | 67,574 
|Working capital                                   |  | $    | 311,921 |      | $ | 214,625 |  | $ | 205,749
|Current ratio                                     |  |      | 3.6:1   |      |   | 2.7:1   |  |   | 3.9:1  
|Days of sales outstanding  for the quarter ended |  |      | 61      |      |   | 65      |  |   | 70     



At December 31, 2003, we had $239.5
million in cash, cash equivalents and short-term investments and no debt. We invest cash exceeding our operating requirements in short-term, investment-grade securities and classify these investments as available-for-sale.



Net cash used in operating activities was $43.4 million, $76.2 million and $43.4 million in
2003, 2002 and 2001, respectively. The decrease in operating cash outflows in 2003 was due primarily to decrease in net losses, excluding non-cash and restructuring charges, and changes in working capital. The increase in operating cash outflows in
2002 was due primarily to increases in our net losses, excluding non-cash and restructuring charges, and changes in working capital.



Net cash used in investing activities was $6.5 million, $64.3 million and $51.6 million in 2003, 2002 and 2001, respectively. The decrease in cash use in 2003 was due
primarily to the maturity of our investments in short-term marketable securities, partially offset by purchase consideration for our acquisitions of Epicentric, Inc. and Intraspect Software, Inc. In 2002, the increase in cash use was due primarily
to our increased investment in short-term marketable securities and the purchase of Epicentric, Inc., partially offset by decreased capital expenditures. We expect that our future investing activities will generally consist of capital expenditures
to support our future needs, investment in short-term securities to maximize investment yields while preserving cash flow for operational purposes, and acquisition of intellectual property or complementary businesses to expand our market.



Net cash provided by financing activities was $3.0 million, $5.3 million and
$11.8 million in 2003, 2002 and 2001, respectively. Our financing activities consisted primarily of employee stock option exercises and purchases of employee stock purchase plan shares. Also included in our financing activities during 2002 and 2001
were payments for the repurchase of 0.2 million and 1.4 million shares of our common stock, totaling $0.2 million and $5.5 million, respectively.



Our long-term investments are classified as available-for-sale and generally consist of common stock in publicly-held technology companies, limited partnership interests
in a technology incubator, and cash collateral pledged for certain lease obligations. At December 31, 2003 and 2002, long-term investments totaled $12.4 million and $13.7 million, respectively. The decrease relates primarily to the maturity of
certain investments. We may continue to invest in companies strategic to our business; however, we do not expect future investments to significantly impact our liquidity position.



At December 31, 2003 and 2002, we had pledged $10.2 million and $11.7 million, respectively, as cash collateral for certain of our lease
obligations. These investments will remain restricted to the extent that the security requirements exist.



We expect our existing cash, cash equivalents and short-term investment balances will decline in the near future. We expect to fund our operations, capital expenditures and investments from a combination of available
cash and short-term investment balances and, to a lesser extent, internally generated funds. During the quarter ended March 31, 2004, we paid approximately $45.0 million in cash to purchase Tower Technology. In addition to the cash consideration, we
issued approximately 29.8 million shares of our common stock. We believe that our existing balances will be sufficient to meet our working capital, capital expenditure and investment requirements for at least the next 12 months. We may require
additional funds



42



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##### Index to Financial Statements

for other purposes and may seek to raise such additional funds through public and private equity financings or from other sources. However, there can be no
assurance that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us or that any additional financing will not be dilutive.



Future minimum payments as of December 31, 2003 under our lease obligations, including
operating lease commitments for all vacated properties, are as follows (in thousands):



|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|------------------------------------------------------------------------------ |  | --------------- | ------ | --------------- | - | ------------- |  | - | -- | -
|                                                                               |  | OperatingLeases |        | Sublease Income |   | CapitalLeases | 
|2004                                                                           |  | $               | 15,711 |                 | $ | 2,431         |  | $ | 68 |  
|2005                                                                           |  |                 | 13,245 |                 |   | 2,083         |  |   | 11 |  
|2006                                                                           |  |                 | 6,963  |                 |   | 1,006         |  |   |   |  
|2007                                                                           |  |                 | 4,197  |                 |   | 712           |  |   |   |  
|2008                                                                           |  |                 | 3,476  |                 |   | 678           |  |   |   |  
|Thereafter                                                                     |  |                 | 7,645  |                 |   | 793           |  |   |   |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Total minimum lease payments                                                   |  | $               | 51,237 |                 |   |              |  |   | 79 |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Total minimum sublease rentals                                                 |  |                 |        |                 | $ | 7,703         |  |   |   |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Amounts representing interest                                                  |  |                 |        |                 |   |               |  |   | (2 | )
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Present value of net minimum lease payments (including current portion of $68) |  |                 |        |                 |   |               |  | $ | 77 |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  



We do not have any significant
contractual obligations other than those leases disclosed above.



Recent
Accounting Pronouncements



In January 2003, the FASB issued FASB
Interpretation No. 46 (Interpretation 46), Consolidation of Variable Interest Entities. Interpretation 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
Interpretation 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions of Interpretation 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The adoption of Interpretation 46 did not have a material impact on our consolidated financial statements



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity(Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments
entered into or modified after May 31, 2003. We adopted SFAS No. 150 on June 1, 2003. The adoption of Statement 150 did not have a material impact on our consolidated financial statements.



In December 2003, the SEC issued Staff Accounting Bulletin No. 104 Revenue Recognition
(SAB 104). SAB 104 revises or rescinds portions of SAB 101, Revenue Recognition, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The
changes noted in SAB 104 did not have a material impact on our consolidated financial statements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Foreign Currency Exchange Rate Risk



The majority of our operations are based in the United States of America and accordingly, the majority of our transactions are denominated in U.S. Dollars. We have
operations throughout the Americas, Europe, Asia and Australia where transactions are denominated in the local currency of each location. As a



43



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##### Index to Financial Statements

result, our financial results could be affected by changes in foreign currency exchange rates. We currently do not use derivatives to hedge potential
exposure to foreign currency exchange rate risk.



Interest Rate Risk



Cash, cash equivalents and short-term investments.Our interest
income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that we do not have
material interest risk exposure. Our investment policy requires us to invest funds in excess of current operating requirements in:



| |  | obligations of the U.S. government and its agencies;
| | - | ----------------------------------------------------



| |  | investment grade state and local government obligations;
| | - | --------------------------------------------------------



| |  | securities of U.S. corporations rated A1 or P1 by Standard & Poors or the Moodys equivalents; and
| | - | --------------------------------------------------------------------------------------------------



| |  | money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting certain credit rating and net worth requirements with maturities of less
than two years.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2003, our cash and cash
equivalents consisted primarily of commercial paper. Our short-term investments will mature in less than one year from December 31, 2003 and were invested in corporate notes, corporate bonds and medium-term notes in large U.S. institutions and
governmental agencies. These securities are classified as available-for-sale and are recorded at their estimated fair value.



Long-term investments. We invest in emerging technology companies considered strategic to our software business. At December 31, 2003, long-term investments
consisted of common stock held in publicly-traded technology companies and a limited partnership interest in a technology incubator. We periodically analyze our long-term investments for impairments that could be considered other than temporary. Our
investments in redeemable convertible preferred stock in privately-held technology companies were fully impaired as of June 30, 2002. Fair values were based on quoted market prices where available. If quoted market prices were not available, we use
a composite of quoted market prices of companies that are comparable in size and industry classification to our portfolio. We classify our long-term investments as available-for-sale and have recorded a cumulative net unrealized loss of $0.01
million and a net unrealized gain of $0.1 million related to these securities at December 31, 2003 and 2002, respectively.



In addition to strategic investments, we held $10.2 million and $11.7 million in restricted investments at December 31, 2003 and 2002, respectively. At December 31, 2003,
restricted investments were composed of a certificate of deposit and investment grade securities placed with a high credit quality financial institution. Such restricted investments collateralize letters of credit related to certain leased office
space security deposits. These investments will remain restricted to the extent that the security requirements exist. All restricted investments mature in 2004 and the average yield of these investments is approximately 1.34%.



|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | --------------------------------------------------------



Reference is made to the Index to Consolidated Financial Statements that appears on page F1 of this Report. The Report of Independent Auditors, the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements, listed in the Index to Consolidated Financial Statements, which appear beginning on page F2 of this Report, are incorporated by reference into this Item 8.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



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##### Index to Financial Statements

|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of disclosure controls and procedures Our Management, under supervision and with the participation of the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported in a timely manner.



Changes in internal control over financial reporting There have been no
changes in our internal controls over financial reporting that occurred during the last fiscal quarter covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.



PART III.



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



The information required by this item is incorporated herein by reference to the information under the sections entitled Proposal No. 1- Election of
Directors, Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance and Code of Ethics of our definitive Proxy Statement (the Proxy Statement) to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for our Annual Meeting of Stockholders to be held on May 21, 2004. We anticipate filing the Proxy Statement within 120 days of the end of our fiscal year ended December 31, 2003.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The information regarding executive compensation is incorporated herein by reference from the section entitled Executive Compensation and Related Information
of the Proxy Statement.



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##### Index to Financial Statements

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the
section entitled Share Ownership of Certain Beneficial Owners and Management of the Proxy Statement. The table presents the following information as of December 31, 2003: (i) aggregate number of securities to be issued under the stock
plans upon exercise of outstanding options, warrants and other rights, (ii) the related weighted-average exercise price and (iii) the aggregate number of securities reserved for future issuance under such plans. The table does not include
information with respect to shares subject to outstanding options assumed by the Company in business combinations. Note (5) to the table sets forth information for options assumed by the Company.



|                                                               |  |                                                                                          |     |  |                                                                            |      |     |                                                                                                                                       |            |    
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | --- |  | -------------------------------------------------------------------------- | ---- | --- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ---
|                                                               |  | Number ofSecurities to BeIssued uponExercise ofOutstandingOptions,Warrants andRights (i) |     |  | Weighted-AverageExercisePrice ofOutstandingOptions,Warrants andRights (ii) |      |     | Number ofSecuritiesRemainingAvailable forFutureIssuance underEquityCompensationPlans[ExcludingSecuritiesReflected
inColumn (i)] (iii) |           
|Equity compensation plans approved by security holders (1)     |  | 17,864,308                                                                               | (3) |  | $                                                                          | 4.21 | (3) |                                                                                                                                       | 42,591,678 | (4)
|Equity compensation plans not approved by security holders (2) |  | 22,688,546                                                                               |     |  | $                                                                          | 4.61 |     |                                                                                                                                       | 15,589,197 |    
|                                                               |  |                                                                                          |     |  |                                                                            |      |     |                                                                                                                                       |            |    
|                                                               |  | 40,552,854                                                                               |     |  | $                                                                          | 4.43 |     |                                                                                                                                       | 58,180,875 |    
|                                                               |  |                                                                                          |     |  |                                                                            |      |     |                                                                                                                                       |            |    

---

|(1) | Consists of the following plans: 1995 Stock Option/Stock Issuance Plan, the 1999 Equity Incentive Plan, the 1999 Non-Employee Directors Plan and the Employee Stock Option Plan
(ESPP). Each fiscal year, commencing with the year 2000 and ending with the year 2002, the aggregate number of shares authorized under the 1999 Equity Incentive Plan automatically increased by the lesser of (i) 5% of the total number of
shares of the common stock then outstanding or (ii) 11,804,820 shares. Each fiscal year, commencing with the year 2000 and ending with the year 2002, the number of shares under the ESPP automatically increased by the lesser of (i) 2% of the total
number of shares of common stock then outstanding or (ii) 4,500,000 shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46



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##### Index to Financial Statements

|(2) | Consists of the 1999 Supplemental Stock Option Plan (the 1999 Supplemental Plan) as well as inducement option grants for certain Company officers at the time of hire. As
it relates to the 1999 Supplemental Plan, a total of 16,376,046 shares of the Companys common stock were issuable upon exercise of outstanding options at December 31, 2003. The weighted average exercise price of those outstanding options was
$5.03 per share. No options were granted and no shares were issued under the 1999 Supplemental Plan to any of the Companys directors or executive officers. The material features of the 1999 Supplemental Plan are outlined in Note 5 to the
Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As it relates to inducement
options granted to Company officers, such grants were issued pursuant to NASD Rule 4350(i). As of December 31, 2003, a total of 6,312,500 shares of the Companys common stock were issuable upon exercise of such outstanding options. The weighted
average exercise price of those outstanding options was $3.53 per share. In addition to the individual terms summarized in items (a)  (e) below, if there is a change in control of the Company and the respective officers employment is
terminated within eighteen months of the change in control, then the remaining unvested options will become immediately exercisable.



(a) On December 9, 2002, the Company granted Michael K. Crosno, Executive Vice President  Worldwide Operations, 1,850,000 stock options at an
exercise price of $1.37 per share. These options expire on December 9, 2010 and become exercisable as follows: 25% on December 2, 2003 and 6.25% quarterly thereafter. Also on December 9, 2002, the Company issued Mr. Crosno 500,000 shares of
restricted stock, subject to the Companys right to repurchase unvested shares. The restricted stock vests 50% on November 15, 2003 and 12.5% quarterly thereafter. Mr. Crosno resigned from the Company in December 2003. Under the terms of his
employment agreement, the remaining unvested restricted stock became immediately vested upon termination of his employment with the Company. Since these restricted shares have been issued, they have been excluded from the table, above. Due to his
resignation, Mr. Crosnos stock options expired on March 4, 2004



(b) On July 21, 2002, the Company granted Jon O. Niess, Senior Vice President  Worldwide Sales and Operations, 1,000,000 stock options at an exercise price of $1.42 per share. These options expire on July 21, 2010 and become
exercisable as follows: 25% on July 8, 2003 and 6.25% quarterly thereafter. As of December 31, 2003, 850,000 stock options under this grant remain outstanding.



(c) On February 22, 2002, the Company granted Jeanne K. Urich, Senior Vice President  Global Professional Services, 1,000,000 stock options at an
exercise price of $2.82 per share. These options expire on February 22, 2010 and become exercisable as follows: 6.25% on May 22, 2002 and 6.25% quarterly thereafter. If Ms. Urichs employment is terminated without cause, then the options remain
exercisable for six months to the extent vested. As of December 31, 2003, 1,000,000 stock options under this grant remain outstanding.



(d) On April 6, 2001, the Company granted Thomas E. Hogan, President, Chief Executive Officer and Director, 3,450,000 stock options at an exercise price
of $3.88. These options expire on April 6, 2009 and become exercisable as follows: 862,500 options become exercisable at a rate of 25% per quarter over one year beginning April 6, 2001; and 2,587,500 options become exercisable at a rate of 6.25% per
quarter beginning April 6, 2001 If Mr. Hogans employment is terminated for any reason other than cause or if Mr. Hogan resigns under certain circumstances, then the options will vest as though Mr. Hogan completed one additional year of
employment, but not more than 25% of the then unvested shares will vest. As of December 31, 2003, 3,450,000 stock options under this grant remain outstanding.



(e) On January 22, 2001, the Company granted Bryce M. Johnson, Senior Vice President, General Counsel and Secretary, 550,000 stock options at an
exercise price of $7.75 per share. These options expire on January 22, 2009 and become exercisable as follows: 25% on January 22, 2002 and 6.25% quarterly thereafter. As of December 31, 2003, 550,000 stock options under this grant remain
outstanding.



|(3) | Excludes purchase rights accrued under the ESPP.
|--- | ------------------------------------------------



|(4) | Includes shares available for future issuance under the ESPP. As of December 31, 2003, there were 13,891,547 shares available for future issuance under the ESPP.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Excludes information for options assumed by the Company in business combinations. As of December 31, 2003, a total of 260,985 shares of the Companys common stock were issuable
upon exercise of outstanding assumed options under the assumed plans. The related weighted average exercise price of those outstanding options was $20.99 per share. Upon assumption by the Company, no additional options may be granted under these
plans.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47



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##### Index to Financial Statements

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The information regarding certain relationships and related transactions is incorporated herein by reference from the section entitled Certain Relationships and
Related Transactions of the Proxy Statement.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The information related to audit fees and services paid to Ernst & Young LLP appearing in the Proxy Statement, is incorporated herein by reference.



PART IV.



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|-------- | ---------------------------------------------------------------



(a) The following documents are filed as part of this Annual Report on Form 10-K:



| | (1) | Financial Statements
| | --- | --------------------



The Companys consolidated financial statements, listed on the Index to Consolidated Financial Statements, on page F-1.



| | (2) | Financial Statement Schedules.
| | --- | ------------------------------



Financial Statement Schedules have been omitted as the information required to be set forth therein is either not applicable or is included in the
Consolidated Financial Statements or the notes thereto. See also Item 14(d) below.



| | (3) | Exhibits
| | --- | --------



Reference is made to Item 15(c) of this Annual Report on Form 10-K.



(b) Reports on Form 8-K.



| | (i) | Report on Form 8-K filed on October 23, 2003 (Item 5 and 7) referencing the press release dated October 23, 2003 announcing the financial results for the fiscal quarter ended
September 30, 2003.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Report on Form 8-K filed November 3, 2003 (Item 5 and 7), referencing the press release dated November 3, 2003 announcing the appointment of Mr. Joseph M. Grant to its Board of
Directors.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Report on Form 8-K filed December 11, 2003 (Item 5 and 7), referencing the press release dated December 11, 2003, announcing that the Company acquired all of the issued and
outstanding shares of Intraspect Software, Inc.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48



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##### Index to Financial Statements

(c) Exhibits



Exhibits submitted with this Annual Report on Form 10-K, as filed with the Securities and Exchange Commission and those incorporated by reference to other filings, are
listed, below.



|               |  |                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                         
|               | 
|2.1*           |  | Agreement between Registrant and Diffusion, Inc. dated May 10, 1999.                                                                                
|               | 
|2.2**          |  | Agreement between Registrant and DataSage, Inc. dated January 7, 2000.                                                                              
|               | 
|2.3****        |  | Agreement and Plan of Merger, among Registrant, Wheels Acquisition Corp. and OnDisplay, Inc. dated May 21, 2000.                                    
|               | 
|3.1           |  | Certificate of Incorporation of the Registrant.                                                                                                     
|               | 
|3.2***         |  | Amendment to Certificate of Incorporation of the Registrant.                                                                                        
|               | 
|3.3           |  | Bylaws of the Registrant.                                                                                                                           
|               | 
|3.4        |  | Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant.                                                      
|               | 
|4.1            |  | Reference is made to Exhibits 3.1, 3.2. and 3.3                                                                                                     
|               | 
|4.2           |  | Specimen common stock certificate.                                                                                                                  
|               | 
|4.3           |  | Fifth Amended and Restated Registration Rights Agreement dated November 30, 1998.                                                                   
|               | 
|4.4        |  | Rights Agreement dated April 25, 2002 between the Company and Mellon Investor Services, LLC.                                                        
|               | 
|10.1          |  | Form of Indemnification Agreements.                                                                                                                 
|               | 
|10.2          |  | 1995 Stock Option/Stock Issuance Plan and forms of agreements thereunder.                                                                           
|               | 
|10.3          |  | 1999 Equity Incentive Plan.                                                                                                                         
|               | 
|10.4        |  | Amended and Restated Employee Stock Purchase Plan.                                                                                                  
|               | 
|10.5          |  | 1999 Non-Employee Directors Option Plan.                                                                                                            
|               | 
|10.6^          |  | 1999 Supplemental Stock Option Plan.                                                                                                                
|               | 
|10.11         |  | Prism Development and Marketing Agreement dated July 19, 1996 between the Registrant and CNET, Inc.                                               
|               | 
|10.12         |  | Letter Amendment to Prism Development and Marketing Agreement between the Registrant and CNET, Inc. dated August 15, 1998 and attachments thereto.
|               | 
|10.18        |  | Lease Agreement dated March 3, 2000 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                                       
|               | 
|10.19        |  | First Amendment to Lease Agreement dated September 1, 2000 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                
|               | 
|10.20        |  | Sublease dated September 26, 2000 among the Registrant, Aptis, Inc. and Billing Concepts Corp.                                                      
|               | 
|10.21^         |  | Stock Option Agreement  Michael K. Crosno.                                                                                                         
|               | 
|10.22^         |  | Restricted Stock Agreement  Michael K. Crosno                                                                                                      
|               | 
|10.23^         |  | Stock Option Agreement  Jon. O. Niess.                                                                                                             
|               | 
|10.24^         |  | Stock Option Agreement  Jeanne K. Urich.                                                                                                           
|               | 
|10.25^         |  | Stock Option Agreement I  Thomas E. Hogan.                                                                                                         
|               | 
|10.26^         |  | Stock Option Agreement II  Thomas E. Hogan.                                                                                                        
|               | 
|10.27^         |  | Stock Option Agreement  Bryce M. Johnson.                                                                                                          
|               | 
|21.1           |  | Subsidiaries List.                                                                                                                                  
|               | 
|23.1           |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                 
|               | 
|31.1           |  | Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                              
|               | 
|31.2           |  | Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.                                              
|               | 
|32.1           |  | Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                         

---

|     |  |                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------
|    |  | Incorporated by reference to the Companys Registration Statement on Form S-1, as amended (File No. 333-68345).                    
|     | 
|   |  | Incorporated by reference to the Companys Form 10-K/A filed on March 30, 2001 (File No. 000-25375).                               
|     | 
|  |  | Incorporated by reference to the Companys Form 10-K filed on March 29, 2002 (File No. 000-25375).                                 
|     | 
| |  | Incorporated by reference to the Companys Registration Statement on Form 8-A filed on April 30, 2002 (File No. 000-25375).        
|     | 
|*    |  | Incorporated by reference to the Companys Form 8-K filed on July 15, 1999 (File No. 000-25375).                                   
|     | 
|**   |  | Incorporated by reference to the Companys Form 8-K filed on February 29, 2000 (File No. 000-25375).                               
|     | 
|***  |  | Incorporated by reference to the Companys definitive Proxy Statement for Special Meeting of Stockholders, dated February 17, 2000.
|     | 
|**** |  | Incorporated by reference to the Companys Registration Statement on Form S-4, as amended (File No. 333-38478).                    
|     | 
|^    |  | Incorporated by reference to the Companys Form 10-K filed on March 28, 2003 (File No. 000-25375).                                 



49



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##### Index to Financial Statements

SIGNATURES



Pursuant to the requirements 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.



Vignette Corporation (Registrant)By:

/s/ THOMAS E. HOGANThomas E. Hogan President and Chief Executive Officer




Dated: March 12, 2004



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on the dates indicated:



|                                           |  |                                                 |  |               
|------------------------------------------ |  | ----------------------------------------------- |  | --------------
|Signature                                  |  | Title                                           |  | Date          
|                                           |  |                                                
|/s/ THOMAS E.
HOGANThomas E.
Hogan         |  | President, Chief Executive Officer and Director |  | March 12, 2004
|                                           |  |                                                
|/s/ CHARLES W.
SANSBURYCharles W.
Sansbury |  | Chief Financial Officer                         |  | March 12, 2004
|                                           |  |                                                
|/s/ MICHAEL D.
LAMBERTMichael D.
Lambert   |  | Chairman of the Board of Directors              |  | March 12, 2004
|                                           |  |                                                
|/s/ ROBERT E.
DAVOLIRobert E.
Davoli       |  | Director                                        |  | March 12, 2004
|                                           |  |                                                
|/s/ JOSEPH M.
GRANTJoseph M.
Grant         |  | Director                                        |  | March 12, 2004
|                                           |  |                                                
|/s/ JEFFREY S.
HAWNJeffrey S.
Hawn         |  | Director                                        |  | March 12, 2004
|                                           |  |                                                
|/s/ JAN H.
LINDELOWJan H.
Lindelow         |  | Director                                        |  | March 12, 2004
|                                           |  |                                                
|/s/ GREGORY A.
PETERSGregory A.
Peters     |  | Director                                        |  | March 12, 2004



50



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##### Index to Financial Statements

VIGNETTE CORPORATION



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|Report of Independent Auditors                                                                                  |  | F2 
|                                                                                                                | 
|Consolidated Balance Sheets at December 31, 2002 and 2003                                                       |  | F3 
|                                                                                                                | 
|Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003                      |  | F4 
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2001, 2002 and 2003 |  | F5 
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                      |  | F7 
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F8 



F - 1



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##### Index to Financial Statements

REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders

Vignette Corporation



We have audited the accompanying consolidated balance sheets of Vignette Corporation (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Vignette Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted in the United States.



As discussed in Note 2 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets upon the
required adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.



/s/ ERNST & YOUNG LLP



Austin, Texas

January 17, 2004



F - 2



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                                           |  | December 31, |           
|                                                                                                                                                                                                                                                                           |  | 2002         |            |   | 2003 |  
|ASSETS                                                                                                                                                                                                                                                                     |  |              |            |   |      |   |            |  
|Current assets:                                                                                                                                                                                                                                                            |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                                                  |  | $            | 216,076    |   |      | $ | 171,939    |  
|Short-term investments                                                                                                                                                                                                                                                     |  |              | 91,678     |   |      |   | 67,574     |  
|Accounts receivable, net of allowance of $7,726 and $3,344 as of December 31, 2002 and 2003, respectively                                                                                                                                                                  |  |              | 28,817     |   |      |   | 29,987     |  
|Prepaid expenses and other                                                                                                                                                                                                                                                 |  |              | 4,044      |   |      |   | 6,425      |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                                                                                       |  |              | 340,615    |   |      |   | 275,925    |  
|Property and equipment:                                                                                                                                                                                                                                                    |  |              |            |   |      |   |            |  
|Equipment                                                                                                                                                                                                                                                                  |  |              | 1,401      |   |      |   | 1,645      |  
|Computers and purchased software                                                                                                                                                                                                                                           |  |              | 41,840     |   |      |   | 42,965     |  
|Furniture and fixtures                                                                                                                                                                                                                                                     |  |              | 2,792      |   |      |   | 2,884      |  
|Leasehold improvements                                                                                                                                                                                                                                                     |  |              | 10,948     |   |      |   | 13,844     |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                                                                                           |  |              | 56,981     |   |      |   | 61,338     |  
|Accumulated depreciation                                                                                                                                                                                                                                                   |  |              | (33,481    | ) |      |   | (44,667    | )
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                                                                                           |  |              | 23,500     |   |      |   | 16,671     |  
|Investments                                                                                                                                                                                                                                                                |  |              | 13,652     |   |      |   | 12,446     |  
|Goodwill                                                                                                                                                                                                                                                                   |  |              | 32,993     |   |      |   | 46,969     |  
|Other intangible assets, net of accumulated amortization and impairment charges of $36,463 and $42,344 as of December 31, 2002 and 2003,
respectively                                                                                                                      |  |              | 11,637     |   |      |   | 11,355     |  
|Other assets                                                                                                                                                                                                                                                               |  |              | 2,215      |   |      |   | 2,750      |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total assets                                                                                                                                                                                                                                                               |  | $            | 424,612    |   |      | $ | 366,116    |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                       |  |              |            |   |      |   |            |  
|Current liabilities:                                                                                                                                                                                                                                                       |  |              |            |   |      |   |            |  
|Accounts payable                                                                                                                                                                                                                                                           |  | $            | 3,151      |   |      | $ | 2,205      |  
|Accrued employee liabilities                                                                                                                                                                                                                                               |  |              | 15,955     |   |      |   | 9,324      |  
|Accrued restructuring charges                                                                                                                                                                                                                                              |  |              | 19,759     |   |      |   | 5,509      |  
|Accrued exit and severance costs                                                                                                                                                                                                                                           |  |              | 5,027      |   |      |   | 2,660      |  
|Accrued acquisition consideration                                                                                                                                                                                                                                          |  |              | 13,854     |   |      |   | 258        |  
|Accrued other charges                                                                                                                                                                                                                                                      |  |              | 19,901     |   |      |   | 10,739     |  
|Deferred revenue                                                                                                                                                                                                                                                           |  |              | 41,644     |   |      |   | 34,164     |  
|Current portion of capital lease obligation                                                                                                                                                                                                                                |  |              | 324        |   |      |   | 67         |  
|Other current liabilities                                                                                                                                                                                                                                                  |  |              | 6,375      |   |      |   | 5,250      |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                                                                                                  |  |              | 125,990    |   |      |   | 70,176     |  
|Accrued restructuring charges, less current portion                                                                                                                                                                                                                        |  |              | 23,405     |   |      |   | 7,388      |  
|Accrued exit and severance costs, less current portion                                                                                                                                                                                                                     |  |              | 6,662      |   |      |   | 5,893      |  
|Deferred revenue, less current portion                                                                                                                                                                                                                                     |  |              | 2,650      |   |      |   | 1,303      |  
|Capital lease obligation, less current portion                                                                                                                                                                                                                             |  |              | 53         |   |      |   | 10         |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                                                                                          |  |              | 158,760    |   |      |   | 84,770     |  
|Stockholders equity:                                                                                                                                                                                                                                                      |  |              |            |   |      |   |            |  
|Common stock  $0.01 par value; 500,000,000 shares authorized; 251,842,374 and 260,053,388 shares issued and outstanding as of December
31, 2002 and 2003, respectively (net of treasury shares of 2,387,843 and 1,779,157 as of December 31, 2002 and 2003, respectively) |  |              | 2,518      |   |      |   | 2,601      |  
|Additional paid-in capital                                                                                                                                                                                                                                                 |  |              | 2,657,014  |   |      |   | 2,671,792  |  
|Notes receivable for purchase of common stock                                                                                                                                                                                                                              |  |              | (32        | ) |      |   |           |  
|Deferred stock compensation                                                                                                                                                                                                                                                |  |              | (1,367     | ) |      |   | (1,260     | )
|Accumulated other comprehensive income                                                                                                                                                                                                                                     |  |              | 170        |   |      |   | 697        |  
|Accumulated deficit                                                                                                                                                                                                                                                        |  |              | (2,392,451 | ) |      |   | (2,392,484 | )
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                                                                                                 |  |              | 265,852    |   |      |   | 281,346    |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                 |  | $            | 424,612    |   |      | $ | 366,116    |  
|                                                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  



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



F - 3



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                     |  | Year Ended December 31, |           
|                                                                                     |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Revenue:                                                                             |  |                         |            |   |      |   |          |      |  |   |         |  
|Product license                                                                      |  | $                       | 154,381    |   |      | $ | 62,418   |      |  | $ | 60,986  |  
|Services                                                                             |  |                         | 142,369    |   |      |   | 92,720   |      |  |   | 97,328  |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Total revenue                                                                        |  |                         | 296,750    |   |      |   | 155,138  |      |  |   | 158,314 |  
|Cost of revenue:                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Product license                                                                      |  |                         | 5,243      |   |      |   | 2,388    |      |  |   | 2,844   |  
|Amortization of acquired technology                                                  |  |                         |           |   |      |   | 267      |      |  |   | 3,450   |  
|Services (1)                                                                         |  |                         | 78,299     |   |      |   | 43,674   |      |  |   | 39,531  |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Total cost of revenue                                                                |  |                         | 83,542     |   |      |   | 46,329   |      |  |   | 45,825  |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Gross profit                                                                         |  |                         | 213,208    |   |      |   | 108,809  |      |  |   | 112,489 |  
|Operating expenses:                                                                  |  |                         |            |   |      |   |          |      |  |   |         |  
|Research and development (1)                                                         |  |                         | 64,850     |   |      |   | 51,334   |      |  |   | 39,923  |  
|Sales and marketing (1)                                                              |  |                         | 178,282    |   |      |   | 84,775   |      |  |   | 68,160  |  
|General and administrative (1)                                                       |  |                         | 29,907     |   |      |   | 21,344   |      |  |   | 15,727  |  
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 1,919      |   |      |   | 1,786    |      |  |   | 4,258   |  
|Impairment of intangible assets                                                      |  |                         | 799,169    |   |      |   | 147,269  |      |  |   |        |  
|Business restructuring charges (gain)                                                |  |                         | 120,935    |   |      |   | 35,822   |      |  |   | (14,687 | )
|Amortization of deferred stock compensation                                          |  |                         | 8,734      |   |      |   | 1,396    |      |  |   | 1,107   |  
|Amortization of intangible assets                                                    |  |                         | 500,045    |   |      |   | 16,060   |      |  |   | 1,965   |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Total operating expenses                                                             |  |                         | 1,703,841  |   |      |   | 359,786  |      |  |   | 116,453 |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Loss from operations                                                                 |  |                         | (1,490,633 | ) |      |   | (250,977 | )    |  |   | (3,964  | )
|Other income (expense):                                                              |  |                         |            |   |      |   |          |      |  |   |         |  
|Interest income                                                                      |  |                         | 17,173     |   |      |   | 7,100    |      |  |   | 3,747   |  
|Interest expense                                                                     |  |                         | (191       | ) |      |   | (29      | )    |  |   | (29     | )
|Other                                                                                |  |                         | (52,257    | ) |      |   | (7,588   | )    |  |   | 1,350   |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Total other income (expense), net                                                    |  |                         | (35,275    | ) |      |   | (517     | )    |  |   | 5,068   |  
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Income (loss) before income taxes                                                    |  |                         | (1,525,908 | ) |      |   | (251,494 | )    |  |   | 1,104   |  
|Provision for income taxes                                                           |  |                         | (1,731     | ) |      |   | (1,319   | )    |  |   | (1,137  | )
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Net loss                                                                             |  | $                       | (1,527,639 | ) |      | $ | (252,813 | )    |  | $ | (33     | )
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Basic net loss per share                                                             |  | $                       | (6.32      | ) |      | $ | (1.01    | )    |  | $ | (0.00   | )
|                                                                                     |  |                         |            |   |      |   |          |      |  |   |         |  
|Shares used in computing basic net loss per share                                    |  |                         | 241,762    |   |      |   | 249,212  |      |  |   | 253,100 |  



|                                                                     |  |                         |       |      |   |       |  |   |      
|-------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                                     | 
|                                                                     |  | Year Ended December 31,
|                                                                     |  | 2001                    |       | 2002 |   | 2003 
|(1) Excludes amortization of deferred stock compensation as follows: |  |                         |       |      |   |       |  |   |      
|Cost of revenue - services                                           |  | $                       | 1,965 |      | $ | 170   |  | $ |     
|Research and development                                             |  |                         | 2,446 |      |   | 441   |  |   | 324  
|Sales and marketing                                                  |  |                         | 3,066 |      |   | 416   |  |   | 69   
|General and administrative                                           |  |                         | 1,257 |      |   | 369   |  |   | 714  
|                                                                     |  |                         |       |      |   |       |  |   |      
|                                                                     |  | $                       | 8,734 |      | $ | 1,396 |  | $ | 1,107
|                                                                     |  |                         |       |      |   |       |  |   |      



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



F - 4



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                                                                      |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- | --------------- | ------------ | - | --------- | ------------------------ | ----- | - | ----------------------------------------- | - | --------- | -------------------------- |  | - | --------------------------------------------- | - |  | ------------------- | ------- | - | -------------------------- | - | ------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                      |                 | Common Stock |   |           | AdditionalPaid-inCapital |       |   | NotesReceivable forPurchase ofCommonStock |   |           | Deferred StockCompensation |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Accumulated Deficit |         |   | Total Stockholders Equity |  
|                                                                                                      | Number ofShares |              |   | Par Value |                          |       |   |                                           |   |           |                           
|Balance at December 31, 2000                                                                          |                 | 237,765,075  |   |           | $                        | 2,380 |   |                                           | $ | 2,642,494 |                            |  | $ | (900                                          | ) |  | $                   | (19,786 | ) |                            | $ | 12,324  |   |  | $ | (611,999   | ) |  | $ | 2,024,513  |  
|Issuance of common stock in purchase of businesses, for contingent purchase price                     |                 | 121,751      |   |           |                          | 1     |   |                                           |   | 2,630     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 2,631      |  
|Issuance of common stock pursuant to employee stock purchase plan                                     |                 | 2,182,189    |   |           |                          | 22    |   |                                           |   | 9,806     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 9,828      |  
|Stock options exercised                                                                               |                 | 6,953,197    |   |           |                          | 70    |   |                                           |   | 7,581     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 7,651      |  
|Issuance of common stock pursuant to option exchange program                                          |                 | 1,788,929    |   |           |                          | 17    |   |                                           |   | 14,961    |                            |  |   |                                              |   |  |                     | (14,978 | ) |                            |   |        |   |  |   |           |   |  |   |           |  
|Issuance of common stock pursuant to business restructuring activities                                |                 | 122,552      |   |           |                          | 1     |   |                                           |   | 1,961     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 1,962      |  
|Repurchase of unvested common stock                                                                   |                 | (1,052,968   | ) |           |                          | (10   | ) |                                           |   | (313      | )                          |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | (323       | )
|Repurchase of common stock                                                                            |                 | (1,400,000   | ) |           |                          | (14   | ) |                                           |   | (5,436    | )                          |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | (5,450     | )
|Payments on notes receivable for purchase of common stock                                             |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   | 868                                           |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 868        |  
|Deferred stock compensation related to stock options                                                  |                 |             |   |           |                          |      |   |                                           |   | 623       |                            |  |   |                                              |   |  |                     | (623    | ) |                            |   |        |   |  |   |           |   |  |   |           |  
|Forfeiture of stock options                                                                           |                 |             |   |           |                          |      |   |                                           |   | (25,600   | )                          |  |   |                                              |   |  |                     | 25,919  |   |                            |   |        |   |  |   |           |   |  |   | 319        |  
|Amortization of deferred stock compensation                                                           |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     | 8,734   |   |                            |   |        |   |  |   |           |   |  |   | 8,734      |  
|Other                                                                                                 |                 | 3,207        |   |           |                          | (2    | ) |                                           |   | (19       | )                          |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | (21        | )
|Comprehensive loss:                                                                                   |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|Net loss                                                                                              |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   | (1,527,639 | ) |  |   | (1,527,639 | )
|Unrealized Investment losses                                                                          |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   | (10,846 | ) |  |   |           |   |  |   | (10,846    | )
|Foreign currency translation adjustment, cumulative translation loss of $(1,642) at December 31, 2001 |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   | (1,926  | ) |  |   |           |   |  |   | (1,926     | )
|                                                                                                      |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|Total comprehensive loss                                                                              |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   | (1,540,411 | )
|                                                                                                      |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2001                                                                          |                 | 246,483,932  |   |           |                          | 2,465 |   |                                           |   | 2,648,688 |                            |  |   | (32                                           | ) |  |                     | (734    | ) |                            |   | (448    | ) |  |   | (2,139,638 | ) |  |   | 510,301    |  
|Issuance of common stock pursuant to employee stock purchase plan                                     |                 | 1,777,475    |   |           |                          | 18    |   |                                           |   | 4,162     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 4,180      |  
|Stock options exercised                                                                               |                 | 2,653,595    |   |           |                          | 26    |   |                                           |   | 2,327     |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 2,353      |  
|Issuance of common stock pursuant to business restructuring activities                                |                 | 111,046      |   |           |                          | 1     |   |                                           |   | 94        |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | 95         |  
|Repurchase of unvested common stock                                                                   |                 | (49,416      | ) |           |                          | (1    | ) |                                           |   | (175      | )                          |  |   |                                              |   |  |                     | 144     |   |                            |   |        |   |  |   |           |   |  |   | (32        | )
|Repurchase of common stock                                                                            |                 | (232,500     | ) |           |                          | (2    | ) |                                           |   | (246      | )                          |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   |           |   |  |   | (248       | )
|Deferred stock compensation related to stock option and restricted stock grants                       |                 | 1,080,992    |   |           |                          | 11    |   |                                           |   | 2,234     |                            |  |   |                                              |   |  |                     | (2,245  | ) |                            |   |        |   |  |   |           |   |  |   |           |  
|Forfeiture of stock options                                                                           |                 |             |   |           |                          |      |   |                                           |   | (86       | )                          |  |   |                                              |   |  |                     | 86      |   |                            |   |        |   |  |   |           |   |  |   |           |  
|Amortization of deferred stock compensation                                                           |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     | 1,396   |   |                            |   |        |   |  |   |           |   |  |   | 1,396      |  
|Other                                                                                                 |                 | 17,250       |   |           |                          |      |   |                                           |   | 16        |                            |  |   |                                              |   |  |                     | (14     | ) |                            |   |        |   |  |   |           |   |  |   | 2          |  
|Comprehensive loss:                                                                                   |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|Net loss                                                                                              |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   |        |   |  |   | (252,813   | ) |  |   | (252,813   | )
|Unrealized Investment losses                                                                          |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   | (1,386  | ) |  |   |           |   |  |   | (1,386     | )
|Foreign currency translation adjustment, cumulative translation gain of $362 at December 31, 2002     |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |  |                     |        |   |                            |   | 2,004   |   |  |   |           |   |  |   | 2,004      |  
|                                                                                                      |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   |            |  
|Total comprehensive loss                                                                              |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |  |                     |         |   |                            |   |         |   |  |   |            |   |  |   | (252,195   | )



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



F - 5



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  (Continued)

(in thousands, except share data)



|                                                                                                  |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   |         |  
|------------------------------------------------------------------------------------------------- | --------------- | ------------ | - | --------- | ------------------------ | ----- | - | ----------------------------------------- | - | --------- | -------------------------- |  | - | --------------------------------------------- | - | ------------------- | - | ------ | -------------------------- |  | - | --- |  | - | ---------- | - |  | - | ------- | -
|                                                                                                  |                 | Common Stock |   |           | AdditionalPaid-inCapital |       |   | NotesReceivable forPurchase ofCommonStock |   |           | Deferred StockCompensation |  |   | Accumulated Other Comprehensive Income (Loss) |   | Accumulated Deficit |   |        | Total Stockholders Equity | 
|                                                                                                  | Number ofShares |              |   | Par Value |                          |       |   |                                           |   |           |                           
|Balance at December 31, 2002                                                                      |                 | 251,842,374  |   |           | $                        | 2,518 |   |                                           | $ | 2,657,014 |                            |  | $ | (32                                           | ) |                     | $ | (1,367 | )                          |  | $ | 170 |  | $ | (2,392,451 | ) |  | $ | 265,852 |  
|Issuance of common stock in purchase of business                                                  |                 | 4,172,565    |   |           |                          | 42    |   |                                           |   | 10,590    |                            |  |   |                                              |   |                     |   |       |                            |  |   |    |  |   |           |   |  |   | 10,632  |  
|Issuance of common stock pursuant to employee stock purchase plan                                 |                 | 1,038,964    |   |           |                          | 10    |   |                                           |   | 1,262     |                            |  |   |                                              |   |                     |   |       |                            |  |   |    |  |   |           |   |  |   | 1,272   |  
|Stock options exercised                                                                           |                 | 2,833,676    |   |           |                          | 29    |   |                                           |   | 2,383     |                            |  |   |                                              |   |                     |   |       |                            |  |   |    |  |   |           |   |  |   | 2,412   |  
|Repurchase of common stock                                                                        |                 | (176,758     | ) |           |                          | (1    | ) |                                           |   | (422      | )                          |  |   |                                              |   |                     |   |       |                            |  |   |    |  |   |           |   |  |   | (423    | )
|Deferred stock compensation related to stock option and restricted stock grants                   |                 | 431,034      |   |           |                          | 4     |   |                                           |   | 1,026     |                            |  |   |                                              |   |                     |   | (1,030 | )                          |  |   |    |  |   |           |   |  |   |        |  
|Forfeiture of stock options                                                                       |                 |             |   |           |                          |      |   |                                           |   | (30       | )                          |  |   |                                              |   |                     |   | 30     |                            |  |   |    |  |   |           |   |  |   |        |  
|Amortization of deferred stock compensation                                                       |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |                     |   | 1,107  |                            |  |   |    |  |   |           |   |  |   | 1,107   |  
|Other                                                                                             |                 | (88,467      | ) |           |                          | (1    | ) |                                           |   | (31       | )                          |  |   | 32                                            |   |                     |   |       |                            |  |   |    |  |   |           |   |  |   |        |  
|Comprehensive loss:                                                                               |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   |         |  
|Net loss                                                                                          |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   |    |  |   | (33        | ) |  |   | (33     | )
|Unrealized Investment losses                                                                      |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 166 |  |   |           |   |  |   | (49     | )
|Foreign currency translation adjustment, cumulative translation gain of $723 at December 31, 2003 |                 |             |   |           |                          |      |   |                                           |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 361 |  |   |           |   |  |   | 576     |  
|                                                                                                  |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   |         |  
|Total comprehensive income                                                                        |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   | 494     |  
|                                                                                                  |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   |         |  
|Balance at December 31, 2003                                                                      |                 | 260,053,388  |   |           | $                        | 2,601 |   |                                           | $ | 2,671,792 |                            |  | $ |                                              |   |                     | $ | (1,260 | )                          |  | $ | 697 |  | $ | (2,392,484 | ) |  | $ | 281,346 |  
|                                                                                                  |                 |              |   |           |                          |       |   |                                           |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |     |  |   |            |   |  |   |         |  



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



F - 6



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                               |  | Year Ended December 31, |           
|                                                                                               |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Operating activities:                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Net loss                                                                                       |  | $                       | (1,527,639 | ) |      | $ | (252,813 | )    |  | $ | (33     | )
|Adjustment to reconcile net loss to cash used in operating activities:                         |  |                         |            |   |      |   |          |      |  |   |         |  
|Depreciation                                                                                   |  |                         | 21,065     |   |      |   | 18,672   |      |  |   | 14,626  |  
|Amortization                                                                                   |  |                         | 500,574    |   |      |   | 16,444   |      |  |   | 5,881   |  
|Impairment of intangible assets                                                                |  |                         | 799,169    |   |      |   | 147,269  |      |  |   |        |  
|Noncash compensation expense                                                                   |  |                         | 8,734      |   |      |   | 1,396    |      |  |   | 1,107   |  
|Purchased in-process research and development, acquisition-related and other charges (noncash) |  |                         | 207        |   |      |   | 800      |      |  |   | 1,100   |  
|Noncash restructuring charges                                                                  |  |                         | 35,015     |   |      |   | 9,229    |      |  |   |        |  
|Fixed asset impairments                                                                        |  |                         |           |   |      |   | 792      |      |  |   |        |  
|Noncash investment impairments                                                                 |  |                         | 51,563     |   |      |   | 6,496    |      |  |   | 75      |  
|Interest on restricted cash investments                                                        |  |                         | (702       | ) |      |   | (207     | )    |  |   |        |  
|Other noncash items                                                                            |  |                         | 172        |   |      |   | 36       |      |  |   | (542    | )
|Changes in operating assets and liabilities, net of effects from purchases of businesses:      |  |                         |            |   |      |   |          |      |  |   |         |  
|Accounts receivable, net                                                                       |  |                         | 61,975     |   |      |   | 12,751   |      |  |   | 3,271   |  
|Prepaid expenses and other assets                                                              |  |                         | 4,352      |   |      |   | 578      |      |  |   | (2,984  | )
|Accounts payable                                                                               |  |                         | (8,482     | ) |      |   | (7,107   | )    |  |   | 473     |  
|Accrued expenses                                                                               |  |                         | 29,587     |   |      |   | (20,720  | )    |  |   | (52,245 | )
|Deferred revenue                                                                               |  |                         | (16,605    | ) |      |   | (9,914   | )    |  |   | (12,912 | )
|Other liabilities                                                                              |  |                         | (3,276     | ) |      |   | 128      |      |  |   | (1,228  | )
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Net cash used in operating activities                                                          |  |                         | (44,291    | ) |      |   | (76,170  | )    |  |   | (43,411 | )
|Investing activities:                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Purchase of property and equipment                                                             |  |                         | (20,686    | ) |      |   | (5,007   | )    |  |   | (7,408  | )
|Purchase of businesses, net of cash acquired                                                   |  |                         |           |   |      |   | (11,447  | )    |  |   | (24,439 | )
|Maturity of restricted investments                                                             |  |                         | 868        |   |      |   | 2,203    |      |  |   | 1,486   |  
|Purchase of marketable securities and short-term investments                                   |  |                         | (30,364    | ) |      |   | (48,962  | )    |  |   |        |  
|Maturity of marketable securities and short-term investments                                   |  |                         |           |   |      |   |         |      |  |   | 24,105  |  
|Purchase of equity securities                                                                  |  |                         | (555       | ) |      |   | (1,178   | )    |  |   | (334    | )
|Other                                                                                          |  |                         | (828       | ) |      |   | 105      |      |  |   | 114     |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities                                                          |  |                         | (51,565    | ) |      |   | (64,286  | )    |  |   | (6,476  | )
|Financing activities:                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Payments on long-term debt and capital lease obligations                                       |  |                         | (728       | ) |      |   | (914     | )    |  |   | (280    | )
|Proceeds from exercise of stock options and purchase of employee stock purchase plan shares    |  |                         | 17,479     |   |      |   | 6,537    |      |  |   | 3,684   |  
|Payments for repurchase of unvested common stock                                               |  |                         | (323       | ) |      |   | (32      | )    |  |   |        |  
|Purchase of Company common stock                                                               |  |                         | (5,450     | ) |      |   | (248     | )    |  |   | (423    | )
|Proceeds from repayment of stockholder notes receivable                                        |  |                         | 868        |   |      |   |         |      |  |   |        |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Net cash provided by financing activities                                                      |  |                         | 11,846     |   |      |   | 5,343    |      |  |   | 2,981   |  
|Effect of exchange rate changes on cash and cash equivalents                                   |  |                         | (2,555     | ) |      |   | 2,273    |      |  |   | 2,769   |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Net decrease in cash and cash equivalents                                                      |  |                         | (86,565    | ) |      |   | (132,840 | )    |  |   | (44,137 | )
|Cash and cash equivalents at beginning of year                                                 |  |                         | 435,481    |   |      |   | 348,916  |      |  |   | 216,076 |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of year                                                       |  | $                       | 348,916    |   |      | $ | 216,076  |      |  | $ | 171,939 |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                              |  |                         |            |   |      |   |          |      |  |   |         |  
|Interest paid                                                                                  |  | $                       | 191        |   |      | $ | 29       |      |  | $ | 29      |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Income taxes paid                                                                              |  | $                       |           |   |      | $ | 999      |      |  | $ | 911     |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Noncash activities:                                                                            |  |                         |            |   |      |   |          |      |  |   |         |  
|Common stock issued and stock options exchanged to acquire businesses                          |  | $                       |           |   |      | $ |         |      |  | $ | 10,632  |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  
|Common stock issued pursuant to business restructuring activities                              |  | $                       | 1,962      |   |      | $ | 95       |      |  | $ |        |  
|                                                                                               |  |                         |            |   |      |   |          |      |  |   |         |  



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



F - 7



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003



NOTE 1  Business



Vignette Corporation, along with its wholly-owned subsidiaries (collectively, the Company or
Vignette), provides Web applications designed to help companies drive revenue growth, cost reductions, increased employee productivity and improved customer satisfaction. The Companys portal, integration, content, analysis, process
and collaboration technologies give organizations the capability to provide a simple, personalized experience anytime, anywhere; integrate systems and information from inside and outside the organization; and manage the lifecycle of enterprise
information and collaborate by supporting ad-hoc and business process-based information sharing. Together, the Companys products and expertise help companies to harness the power of their information and the Web to deliver measurable
improvements in business efficiency.



The Company was
incorporated in Delaware on December 19, 1995. Vignette currently markets its products and services throughout the Americas, Europe, Asia and Australia. The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.



NOTE 2  Summary of Significant Accounting Policies



Use of estimates



The preparation of 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
periods. Actual results could differ from those estimates, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the
assumptions used to calculate the Companys accruals for facility lease commitments vacated as a result of both its business restructuring and business acquisitions. During the year ended December 31, 2003, the Company adjusted existing site
consolidation accruals resulting in (i) business a restructuring gain of $14.7 million and (ii) a $2.0 million decrease in goodwill. It is reasonably possible that such sublease assumptions could change further in the near term, requiring
adjustments to future income and goodwill.



The Company
periodically reviews the valuation and amortization of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a diminished fair value or useful life. During the quarter ended March 31, 2002,
the Company changed the estimated useful life of technologies purchased as part of the July 2000 acquisition of OnDisplay, Inc. Due to changes in product architecture and anticipated future product offerings, the Company reduced the
technologys estimated life from four years to two years. For the year ended December 31, 2002, this change increased net loss by $(8.0) million and net loss per share by $(0.03).



Revenue recognition



Revenue consists of product and service fees. Product fee income is earned through the licensing or right to use the Companys software and from the
sale of specific software products. Service fee income is earned through the sale of maintenance and technical support, consulting services and training services.



The Company does not recognize revenue for agreements with rights of return, refundable fees, cancellation rights or
acceptance clauses until such rights to return, refund or cancel have expired or acceptance has occurred.



The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP
98-4 and SOP 98-9, and Securities and Exchange Commission Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statementsas revised by SAB 104.



F - 8



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Where software licenses are sold with maintenance or other services, the Company allocates the total
fee to the various elements based on the fair values of the elements specific to the Company. The Company determines the fair value of each element in the arrangement based on vendor-specific objective evidence (VSOE) of fair value. VSOE
of fair value is based upon the normal pricing and discounting practices for those products and services when sold separately and, for support services, is additionally measured by the renewal rate. If the Company does not have VSOE for one of the
delivered elements of an arrangement, but does have VSOE for all undelivered elements, the Company uses the residual method to record revenue. Under the residual method, the arrangement fee is first allocated to the undelivered elements based upon
their VSOE of fair value; the remaining arrangement fee, including any discount, is allocated to the delivered element. If the residual method is not used, discounts, if any, are applied proportionately to each element included in the arrangement
based on each elements fair value without regard to the discount.



Revenue allocated to product license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations by the Company with regard to implementation remain, and collection of
a fixed or determinable fee is probable. The Company considers all payments outside the Companys normal payment terms, including all amounts due in excess of one year, to not be fixed and determinable, and such amounts are recognized as
revenue as they become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. For software arrangements where the Company is obligated to perform professional services for implementation, the Company does
not consider delivery to have occurred or customer payment to be probable of collection until no significant obligations with regard to implementation remain. Generally, this would occur when substantially all service work has been completed in
accordance with the terms and conditions of the customers implementation requirements but may vary depending on factors such as an individual customers payment history or order type (e.g., initial versus follow-on).



Revenue from perpetual licenses that include unspecified, additional software
products is recognized ratably over the term of the arrangement, beginning with the delivery of the first product.



Revenue allocated to maintenance and support is recognized ratably over the maintenance term (typically one year).



Revenue allocated to training and consulting service elements is recognized
as the services are performed. The Companys consulting services are not essential to the functionality of its products as (i) such services are available from other vendors and (ii) the Company has sufficient experience in providing such
services.



Deferred revenue includes amounts received from
customers in excess of revenue recognized. Accounts receivable includes amounts due from customers for which revenue has been recognized.



Accounts receivable



Accounts receivable are recorded at cost. Management periodically evaluates the allowance for accounts receivables.



Cash, cash equivalents and short-term investments



The Company considers all highly liquid investment securities with an
original maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments consist of marketable securities, excluding cash-equivalents, that have remaining maturities of less than one year from the respective
balance sheet date. Investment securities are classified as available-for-sale and are presented at estimated fair value with any unrealized gains or losses included in other comprehensive income (loss). Realized gains and losses are computed based
on the specific identification method. Realized gains and losses were not material for the years presented.



F - 9



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Short-term investments consist of the following at December 31, 2002 and 2003, respectively (in
thousands):



|                                       |  |                   |        |                       |   |     |                     |  |      |        |                      |   |        |                     |   |     |   |  |   |       
|-------------------------------------- |  | ----------------- | ------ | --------------------- | - | --- | ------------------- |  | ---- | ------ | -------------------- | - | ------ | ------------------- | - | --- | - |  | - | ------
|                                       |  | December 31, 2002 |        | December 31, 2003    
|                                       |  | Cost              |        | UnrealizedGain (Loss) |   |     | EstimatedFair Value |  | Cost |        | UnrealizedGain(Loss) |   |        | EstimatedFair Value
|Marketable securities:                 |  |                   |        |                       |   |     |                     |  |      |        |                      |   |        |                     |   |     |   |  |   |       
|Municipal and U.S. Government agencies |  | $                 | 10,010 |                       | $ | 4   |                     |  | $    | 10,014 |                      | $ | 23,583 |                     | $ | (1  | ) |  | $ | 23,582
|Corporate bonds                        |  |                   | 23,009 |                       |   | 29  |                     |  |      | 23,038 |                      |   |       |                     |   |    |   |  |   |      
|Corporate notes                        |  |                   | 36,551 |                       |   | (11 | )                   |  |      | 36,540 |                      |   | 22,424 |                     |   | (9  | ) |  |   | 22,415
|Medium term notes                      |  |                   | 22,056 |                       |   | 30  |                     |  |      | 22,086 |                      |   | 21,580 |                     |   | (3  | ) |  |   | 21,577
|                                       |  |                   |        |                       |   |     |                     |  |      |        |                      |   |        |                     |   |     |   |  |   |       
|                                       |  | $                 | 91,626 |                       | $ | 52  |                     |  | $    | 91,678 |                      | $ | 67,587 |                     | $ | (13 | ) |  | $ | 67,574
|                                       |  |                   |        |                       |   |     |                     |  |      |        |                      |   |        |                     |   |     |   |  |   |       



Long-term
investments



Long-term investments are classified as
available-for-sale and are presented at estimated fair value with any unrealized gains or losses included in other comprehensive income (loss). The Company holds a less than 20% interest in, and does not exert significant influence over, any of the
respective equity investees. The Company therefore applies the cost method. Long-term investments consisted of the following (in thousands):



|                                                      |  |              |        |      |   |       
|----------------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                                      |  | December 31,
|                                                      |  | 2002         |        | 2003
|Restricted investments (cost approximates fair value) |  | $            | 11,697 |      | $ | 10,229
|Equity investments:                                   |  |              |        |      |   |       
|Common stock                                          |  |              | 537    |      |   | 465   
|Limited partnership interest                          |  |              | 1,418  |      |   | 1,752 
|                                                      |  |              |        |      |   |       
|                                                      |  | $            | 13,652 |      | $ | 12,446
|                                                      |  |              |        |      |   |       



Fair values are based
on quoted market prices where available. If quoted market prices are not available, management estimates fair value by using a composite of quoted market prices of companies that are comparable in size and industry classification to the
Companys non-public investments.



The Company held
restricted investments in the form of a certificate of deposit and investment grade securities placed with a high credit quality financial institution. Such restricted investments collateralize letters of credit related to certain leased office
space security deposits. These investments will remain restricted to the extent that the security requirements exist.



The Company periodically analyzes its long-term investments for impairments considered other than temporary. In performing this analysis, the Company
evaluates whether general market conditions that reflect prospects for the economy as a whole or information pertaining to the specific investments industry, or that individual company, indicates that an other than temporary decline in value
has occurred. If so, the Company considers specific factors, including the financial condition and near-term prospect of each investment, any specific events that may affect the investee company, and the intent and ability of the Company to retain
the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of these reviews, the Company recognized impairment charges of $51.6, $6.5 million and $0.0 million for the years ended December 31,
2001, 2002 and 2003, respectively. Such impairments are recorded in Other income (expense) on the Consolidated Statements of Operations.



Concentration of credit risk



Financial instruments that potentially subject the Company to concentrations of credit risk consist of short-term investments, trade accounts receivable
and restricted investments. The Companys short-term investments and restricted investments are placed with high credit quality financial institutions and issuers.



F - 10



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The Company performs periodic credit evaluations of its customers financial condition and
generally does not require collateral. The Company maintains an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, the following factors are considered: historical collection
experience, a customers current credit-worthiness, customer concentrations, age of the receivable balance, both individually and in the aggregate, and general economic conditions that may affect a customers ability to pay. The following
table summarizes the changes in allowance for doubtful accounts for trade receivables (in thousands):



|                             |  |                               |       |                                      |   |        |                                      |  |   |                                   |   |  |                         |         |   |  |   |      
|---------------------------- |  | ----------------------------- | ----- | ------------------------------------ | - | ------ | ------------------------------------ |  | - | --------------------------------- | - |  | ----------------------- | ------- | - |  | - | -----
|                             |  | Balance atBeginning of Period |       | Charged toExpense, net of Recoveries |   |        | Adjustmentsfrom BusinessCombinations |  |   | Deduction ofUncollectibleAccounts |   |  | Balance atEnd of Period
|Year ended December 31, 2001 |  | $                             | 9,643 |                                      | $ | 17,899 |                                      |  | $ |                                  |   |  | $                       | (18,207 | ) |  | $ | 9,335
|Year ended December 31, 2002 |  |                               | 9,335 |                                      |   | (652   | )                                    |  |   | 1,556                             |   |  |                         | (2,513  | ) |  |   | 7,726
|Year ended December 31, 2003 |  |                               | 7,726 |                                      |   | 237    |                                      |  |   | (1,384                            | ) |  |                         | (3,235  | ) |  |   | 3,344



No customers accounted
for more than 10% of the Companys total revenue during the years ended December 31, 2001, 2002 or 2003.



Financial instruments



The reported amounts of certain of the Companys financial instruments, including cash and cash equivalents, short-term investments, accounts
receivables, accounts payable and accrued liabilities, approximate fair value. The Company has minimal use of derivative financial instruments. No significant derivative financial instruments were outstanding at December 31, 2002 or 2003.



Property and equipment



Property and equipment are stated at cost. Depreciation of assets is
computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Assets under capital lease are amortized using the straight-line method over the shorter of the lease term or the estimated
useful life. Amortization is included with depreciation expense.



Major improvements are capitalized, while maintenance and repairs that do not substantially enhance or extend the estimated useful life of the assets benefited are charged to expense in the period incurred. Upon asset retirement or
disposal, any resulting gain or loss is included in the results of operations.



Goodwill and other intangible assets



Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. Effective January 1, 2002, workforce no longer meets the definition of a
separately-identified intangible asset under the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations. As such, the Company reclassified acquired workforce of $2.4 million, net of accumulated amortization
and impairment charges, to goodwill. Also effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard 142, Goodwill and Other Intangible Assets (Statement 142), and no longer amortizes its goodwill or
trademark. In accordance with Statement 142, the Company periodically assesses its intangible assets, including goodwill, for indications of impairment. As a result of these assessments, the Company recorded an aggregate impairment charge of $147.3
million and $0.0 million to reduce goodwill and its acquired trademark to their estimated fair value during 2002 and 2003 respectively. Such charge is recorded in the Impairment of intangible assets on the Consolidated Statements of
Operations.



Other intangible assets, including amounts
allocated to acquired technology, non-compete contracts and customer relationships, are being amortized over the assets estimated useful lives using the straight-line method. Estimated useful lives range from two to three years. Amortization
is included in Amortization of intangibles in the accompanying Consolidated Statements of Operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events
or circumstances that might result in a diminished fair value or revised useful life. In 2002, the estimated useful



F - 11



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



life of technology acquired from OnDisplay, Inc. (OnDisplay) was reduced from four years to two years. Such revision resulted from changes in the
Companys product architecture and anticipated future product offerings.



Research and development



The Company capitalizes costs related to certain software development activities in accordance with Statement of Financial Accounting Standards 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed (Statement 86). Capitalization commences when technological feasibility has been established and ceases when the product is available for general release to customers. Based on the Companys product development process,
technological feasibility is established upon completion of a working model. To date, the time between achieving technological feasibility and the general availability of software has been short and internal costs qualifying for capitalization have
been insignificant.



Software development costs capitalized in
accordance with Statement 86 totaled $0.7 million, $0.7 million and $0.0 in 2001, 2002 and 2003, respectively. These capitalized costs relate to software developed by third-parties that were not acquired in a business combination. They are amortized
using the straight-line method over the estimated useful life, generally 18 months. Amortization expense was $0.7 million, $0.1 million and $0.5 million for the years ended 2001, 2002 and 2003, respectively and is included in Cost of revenue
 license on the Consolidated Statements of Operations. In connection with its restructuring plan implemented during 2001, the Company decided to no longer sell or support certain of its software products, resulting in an impairment of
$1.9 million of previously capitalized software.



Impairment
of long-lived assets



The Company periodically reviews the
carrying amounts of property and equipment, to determine whether current events or circumstances, as defined in Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
(Statement 144), warrant adjustment to such carrying amounts. In reviewing the carrying amounts of long-lived assets, the Company considers, among other factors, the future cash inflows expected to result from the use of the asset and
its eventual disposition less the future cash outflows expected to be necessary to obtain those inflows.



Foreign currency



The functional currency of the Companys foreign subsidiaries is the respective local currency. Assets and liabilities of these foreign subsidiaries
are translated to U.S. Dollars at year-end exchange rates. Income statement items are translated to U.S. dollars at average exchange rates prevailing during the period. Accumulated net translation adjustments are recorded in Accumulated other
comprehensive income, a separate component of stockholders equity. Gains and losses from foreign currency denominated transactions are included in Other income (expense) in the Consolidated Statements of Operations. Gains and
losses from foreign currency denominated transactions amounted to a $0.9 million gain, a $0.2 million loss, and a $0.9 million gain for the years ended December 31, 2001, 2002 and 2003, respectively.



Stock-based compensation



At December 31, 2003, the Company has five stock-based compensation plans,
which are described more fully in Note 5. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (Statement 123), prescribes accounting and reporting standards for all stock-based
compensation plans, including employee stock options. As allowed by Statement 123, the Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. When the Company issues options or its stock to its employees and Board of Directors at an exercise price equal to the market value of the underlying
common stock on the date of grant, no stock-based compensation costs are recorded. In the event that options are granted or restricted shares are issued at an exercise price that is less than the market value of the underlying common stock on the
date of grant or issuance, the Company records deferred compensation expense in an amount equivalent to the difference between the market value and the exercise price of the respective option or restricted stock.



F - 12



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Deferred stock compensation is amortized on an accelerated basis over the respective vesting periods of the underlying options or restricted stock, and is
recorded as Amortization of deferred stock compensation in the Consolidated Statements of Operations.



The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of
Statement 123 to stock-based employee compensation (in thousands, except per share data):



|                                                                                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                                                                          |  | Year ended December 31, |           
|                                                                                                                                          |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Net loss:                                                                                                                                 |  |                         |            |   |      |   |          |      |  |   |         |  
|Reported net loss                                                                                                                         |  | $                       | (1,527,639 | ) |      | $ | (252,813 | )    |  | $ | (33     | )
|Add: Total stock-based employee compensation expense included in the determination of net loss as reported, net of related tax
effects    |  |                         | 8,734      |   |      |   | 1,396    |      |  |   | 1,107   |  
|Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                         | (98,017    | ) |      |   | (99,070  | )    |  |   | (44,265 | )
|                                                                                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Pro forma net loss                                                                                                                        |  | $                       | (1,616,922 | ) |      | $ | (350,487 | )    |  | $ | (43,191 | )
|                                                                                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Basic net loss per share :                                                                                                                |  |                         |            |   |      |   |          |      |  |   |         |  
|Reported net loss per share                                                                                                               |  | $                       | (6.32      | ) |      | $ | (1.01    | )    |  | $ | (0.00   | )
|                                                                                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  
|Pro-forma net loss per share                                                                                                              |  | $                       | (6.69      | ) |      | $ | (1.41    | )    |  | $ | (0.17   | )
|                                                                                                                                          |  |                         |            |   |      |   |          |      |  |   |         |  



Equity instruments
issued to non-employees are accounted for in accordance with Statement 123 and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services.



Comprehensive income
(loss)



Comprehensive income (loss) includes net loss and
other comprehensive income (loss) and is presented in the Consolidated Statements of Changes in Stockholders Equity. SFAS No. 130, Reporting Comprehensive Income establishes standards for reporting comprehensive income and
its components in the financial statements. Accumulated other comprehensive income is displayed as a separate component of stockholders equity in the Companys Consolidated Balance Sheet and consisted of the following (in thousands):



|                                                          |  |              |      |   |      |   |     |  
|--------------------------------------------------------- |  | ------------ | ---- | - | ---- | - | --- | -
|                                                          |  | December 31, |     
|                                                          |  | 2002         |      |   | 2003 |  
|Foreign currency translation                              |  | $            | 362  |   |      | $ | 723 |  
|Unrealized gain (loss) on available-for-sale investments: |  |              |      |   |      |   |     |  
|Cash equivalents                                          |  |              | (250 | ) |      |   | 1   |  
|Short-term investments                                    |  |              | 52   |   |      |   | (13 | )
|Long-term investments                                     |  |              | 6    |   |      |   | (14 | )
|                                                          |  |              |      |   |      |   |     |  
|                                                          |  | $            | 170  |   |      | $ | 697 |  
|                                                          |  |              |      |   |      |   |     |  



Product warranties



The Company offers warranties to its customers, requiring
that the Company replace defective products within a specified time period from the date of sale. The Company records warranty costs as incurred and historically, such costs have not been material.



F - 13



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Advertising costs



Advertising costs are expensed as incurred. These expenses were approximately $1.0 million, $1.1 and $0 for the years ended
December 31, 2001, 2002 and 2003, respectively.



Income
taxes



The Company accounts for income taxes using the
liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.



Net
loss per share



Basic net loss per share is computed by
dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period, excluding shares subject to repurchase or forfeiture. Pursuant to Statement of Financial Accounting
Standards No. 128, Earnings Per Share, diluted net loss per share has not been presented as the effect of the assumed exercise of stock options, warrants and contingently issued shares is antidilutive. The Company had outstanding common stock
options of 47,148,500, 46,041,561 and 40,813,839 at December 31, 2001, 2002 and 2003, respectively. Such outstanding common stock options have been excluded from the calculation of diluted net loss per share as the effect of their exercise would be
antidilutive.



The following table presents the calculation of
basic net loss per share (in thousands, except per share data):



|                                                                                      |  |                         |            |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                      |  | Year Ended December 31, |           
|                                                                                      |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Net loss                                                                              |  | $                       | (1,527,639 | ) |      | $ | (252,813 | )    |  | $ | (33     | )
|                                                                                      |  |                         |            |   |      |   |          |      |  |   |         |  
|Basic:                                                                                |  |                         |            |   |      |   |          |      |  |   |         |  
|Weighted-average common shares outstanding                                            |  |                         | 242,572    |   |      |   | 249,284  |      |  |   | 263,964 |  
|Weighted-average common shares subject to repurchase or forfeiture                    |  |                         | (810       | ) |      |   | (72      | )    |  |   | (864    | )
|                                                                                      |  |                         |            |   |      |   |          |      |  |   |         |  
|Weighted-average common shares used in computing basic and diluted net loss per share |  |                         | 241,762    |   |      |   | 249,212  |      |  |   | 253,100 |  
|                                                                                      |  |                         |            |   |      |   |          |      |  |   |         |  
|Basic net loss per share                                                              |  | $                       | (6.32      | ) |      | $ | (1.01    | )    |  | $ | (0.00   | )
|                                                                                      |  |                         |            |   |      |   |          |      |  |   |         |  



Segments



The Company applies Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, and considers its business activities to constitute a single segment.



Employee 401(k) plan



In 1997, the Company established a voluntary defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code of 1986.
The Company made no contributions in the years ended December 31, 2001, 2002, and 2003.



Through its recent business combinations, the Company has assumed the 401(k) Plans of both Epicentric Inc and Intraspect Software, Inc Both plans are voluntary defined contribution retirement plans qualifying under
Section 401(k) of the Internal Revenue Code of 1986. Under the terms of the assumed Plans, the Company may match employee contributions; however, no such contributions have been made by the Company to date.



F - 14



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Recent accounting pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46
(Interpretation 46), Consolidation of Variable Interest Entities. Interpretation 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Interpretation 46 is effective
for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions of Interpretation 46 must be applied for the first interim or annual period beginning
after December 15, 2003. The adoption of Interpretation 46 did not have a material impact on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into
or modified after May 31, 2003. The Company adopted SFAS No. 150 on June 1, 2003. The adoption of Statement 150 did not have a material impact on the Companys consolidated financial statements.



NOTE 3  Business Combinations and Acquired In-Process Research and Development



Acquisition of Intraspect



On December 10, 2003, the Company acquired all issued and outstanding shares
of Intraspect Software, Inc. (Intraspect) in exchange for $10 million in cash and approximately 4.2 million shares of Vignette common stock. Intraspect provided business collaboration solutions. The total purchase price, including $0.5
million in transaction costs related to banking, legal and accounting activities, was $20.4 million. By adding collaboration capabilities to its existing and future product suites, the Company has the ability to deliver a unified content management,
portal and collaboration solution that incorporates business process and delivers advanced capabilities to harness the power of their information and the Web to deliver measurable improvements in business efficiency. The results of Intraspects
operations have been included with those of the Company for the period subsequent to the acquisition date.



In accordance with SFAS 141 Business Combinations, the total purchase consideration has been allocated to the assets acquired and liabilities
assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such allocation resulted in goodwill of $16.0 million. Goodwill is assigned at the enterprise level and is not expected to be
deductible for income tax purposes.



F - 15



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The following unaudited condensed consolidated balance sheet data presents the fair value of the
assets acquired and liabilities assumed. Such balance sheet information includes accruals related to employee severance, relocation and exit costs, as estimated on the date of acquisition (in thousands):



|                                                                                   |  |       |  |   |        |  
|---------------------------------------------------------------------------------- |  | ----- |  | - | ------ | -
|Cash and cash equivalents                                                          |  |       |  | $ | 1,822  |  
|Accounts receivable                                                                |  |       |  |   | 1,631  |  
|Prepaid expenses and other current assets                                          |  |       |  |   | 355    |  
|Property and equipment                                                             |  |       |  |   | 316    |  
|Other assets                                                                       |  |       |  |   | 17     |  
|Intangible assets subject to amortization (two year weighted-average useful life): |  |       |  |   |        |  
|Technology (two year useful life)                                                  |  | 4,500 |  |   |        |  
|Customer relationships (three year useful life)                                    |  | 1,100 |  |   |        |  
|In-process research and development                                                |  | 1,100 |  |   |        |  
|                                                                                   |  |       |  |   |        |  
|Total intangible assets                                                            |  |       |  |   | 6,700  |  
|Goodwill                                                                           |  |       |  |   | 15,958 |  
|                                                                                   |  |       |  |   |        |  
|Total assets acquired                                                              |  |       |  |   | 26,799 |  
|Accounts payable                                                                   |  |       |  |   | (1     | )
|Accrued exit costs                                                                 |  |       |  |   | (2,250 | )
|Accrued severance and relocation                                                   |  |       |  |   | (543   | )
|Accrued other expenses                                                             |  |       |  |   | (1,017 | )
|Deferred revenue                                                                   |  |       |  |   | (2,606 | )
|                                                                                   |  |       |  |   |        |  
|Total liabilities assumed                                                          |  |       |  |   | (6,417 | )
|                                                                                   |  |       |  |   |        |  
|Net assets acquired                                                                |  |       |  | $ | 20,382 |  
|                                                                                   |  |       |  |   |        |  



Accrued exit costs of
$2.3 million relate to lease obligations for excess office space that the Company has vacated or intends to vacate under the approved facilities exit plan. The total lease commitments include the remaining lease liabilities and brokerage
commissions, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and sublease income, were based on market information and trend analysis as estimated by the Company. It
is reasonably possible that actual results could differ from these estimates in the near term, and such differences would result in adjustments to the purchase price allocation and, ultimately, the amount allocated to goodwill. The impacted site is
office space located in Brisbane, California and has a lease commitment that expires in September 2006.



Accrued severance and relocation costs of $0.5 million relate to severance, payroll taxes, outplacement and relocation benefits for certain Intraspect
employees impacted by the approved plan of termination and relocation. Approximately 10 employees were severed in the sales, marketing, professional services, engineering and general and administrative departments.



The following table summarizes activity for exit costs, employee severance
and relocation costs (in thousands).



|                                                  |  |           |       |   |                        |   |      |       |  |   |       |  
|------------------------------------------------- |  | --------- | ----- | - | ---------------------- | - | ---- | ----- |  | - | ----- | -
|                                                  |  | ExitCosts |       |   | Severanceandrelocation |   |      | Total | 
|Initial accrual at December 10, 2003              |  | $         | 2,250 |   |                        | $ | 543  |       |  | $ | 2,793 |  
|Adjustment to accrual                             |  |           |      |   |                        |   | (30  | )     |  |   | (30   | )
|Cash activity                                     |  |           | (67   | ) |                        |   | (507 | )     |  |   | (574  | )
|                                                  |  |           |       |   |                        |   |      |       |  |   |       |  
|Balance at December 31, 2003                      |  | $         | 2,183 |   |                        | $ | 6    |       |  |   | 2,189 |  
|                                                  |  |           |       |   |                        |   |      |       |  |   |       |  
|Less: current portion                             |  |           |       |   |                        |   |      |       |  |   | 836   |  
|                                                  |  |           |       |   |                        |   |      |       |  |   |       |  
|Long term exit costs and severance and relocation |  |           |       |   |                        |   |      |       |  | $ | 1,353 |  
|                                                  |  |           |       |   |                        |   |      |       |  |   |       |  



F - 16



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The Company estimates that the severance and relocation costs will be substantially paid within six
months of December 31, 2003.



Acquisition of Epicentric



On December 3, 2002, the Company acquired all issued and
outstanding shares of Epicentric, Inc. (Epicentric) for $29.1 million in cash, including $3.1 million in transaction costs related to banking, legal and accounting activities. Epicentric provided business portal solutions. By adding
advanced portal and delivery management capabilities to its existing and future product suites, the Company has the capability to deliver real-time enterprise Web applications. The results of Epicentrics operations have been included with
those of the Company for the period subsequent to the acquisition date.



In accordance with SFAS 141, Business Combinations,the total purchase consideration has been allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values
at the date of acquisition. Such allocation resulted in goodwill of $33.0 million. Goodwill is assigned at the enterprise level and is not expected to be deductible for income tax purposes. The following unaudited condensed consolidated balance
sheet data presents the fair value of the assets acquired and liabilities assumed.



Such balance sheet information includes accruals related to employee severance, relocation and exit costs, as estimated on the date of acquisition (in thousands):



|                                                                                   |  |       |  |   |         |  
|---------------------------------------------------------------------------------- |  | ----- |  | - | ------- | -
|Cash and cash equivalents                                                          |  |       |  | $ | 1,293   |  
|Accounts receivable                                                                |  |       |  |   | 5,362   |  
|Prepaid expenses and other current assets                                          |  |       |  |   | 923     |  
|Property and equipment                                                             |  |       |  |   | 2,705   |  
|Other assets                                                                       |  |       |  |   | 115     |  
|Intangible assets subject to amortization (two year weighted-average useful life): |  |       |  |   |         |  
|Technology (two year useful life)                                                  |  | 6,400 |  |   |         |  
|Non-compete contracts (two year useful life)                                       |  | 800   |  |   |         |  
|Customer relationships (three year useful life)                                    |  | 4,100 |  |   |         |  
|In-process research and development                                                |  | 800   |  |   |         |  
|                                                                                   |  |       |  |   |         |  
|Total intangible assets                                                            |  |       |  |   | 12,100  |  
|Goodwill                                                                           |  |       |  |   | 32,993  |  
|                                                                                   |  |       |  |   |         |  
|Total assets acquired                                                              |  |       |  |   | 55,491  |  
|Accounts payable                                                                   |  |       |  |   | (1,203  | )
|Accrued severance and relocation costs                                             |  |       |  |   | (1,895  | )
|Accrued exit costs                                                                 |  |       |  |   | (9,794  | )
|Accrued other expenses                                                             |  |       |  |   | (6,084  | )
|Deferred revenue                                                                   |  |       |  |   | (7,159  | )
|Current portion of capital lease obligation                                        |  |       |  |   | (211    | )
|Capital lease obligation, less current portion                                     |  |       |  |   | (89     | )
|                                                                                   |  |       |  |   |         |  
|Total liabilities assumed                                                          |  |       |  |   | (26,435 | )
|                                                                                   |  |       |  |   |         |  
|Net assets acquired                                                                |  |       |  | $ | 29,056  |  
|                                                                                   |  |       |  |   |         |  



Accrued exit costs of
$9.8 million relate to lease obligations for excess office space that the Company has vacated or intends to vacate under the approved facilities exit plan. The total lease commitments include the remaining lease liabilities and brokerage
commissions, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and sublease income, were based on market information and trend analysis as estimated by the Company. It
is reasonably possible that actual results could differ from these estimates in the near term, and such differences would result in adjustments to the purchase price allocation and ultimately, the amount



F - 17



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



allocated to goodwill. Impacted sites include office space located in San Francisco, California; New York, New York; Chicago, Illinois; and Austin, Texas.
The maximum lease commitment of such vacated properties is four years from the acquisition date.



Accrued severance and relocation costs of $1.9 million relate to severance, payroll taxes, outplacement and relocation benefits for certain Epicentric
employees impacted by the approved plan of termination and relocation. Approximately 85 Epicentric employees were severed in the sales, marketing, professional services, engineering and general and administrative departments.



The following table summarizes activity for exit costs, employee severance
and relocation costs (in thousands):



|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  
|------------------------------------------------- |  | --------- | ------ | - | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | ExitCosts |        |   | SeveranceandRelocation |   |        | Total | 
|Initial accrual at December 3, 2002               |  | $         | 9,794  |   |                        | $ | 1,895  |       |  | $ | 11,689 |  
|Cash activity                                     |  |           |       |   |                        |   |       |       |  |   |       |  
|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2002                      |  | $         | 9,794  |   |                        | $ | 1,895  |       |  | $ | 11,689 |  
|Adjustment to accrual                             |  |           | 190    |   |                        |   |       |       |  |   | 190    |  
|Cash activity                                     |  |           | (3,692 | ) |                        |   | (1,823 | )     |  |   | (5,515 | )
|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2003                      |  | $         | 6,292  |   |                        | $ | 72     |       |  | $ | 6,364  |  
|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  
|Less: current portion                             |  |           |        |   |                        |   |        |       |  |   | 1,824  |  
|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  
|Long term exit costs and severance and relocation |  |           |        |   |                        |   |        |       |  | $ | 4,540  |  
|                                                  |  |           |        |   |                        |   |        |       |  |   |        |  



The Company estimates
that the severance and relocation costs will be substantially paid within six months of December 31, 2003.



The following table summarizes costs related to our business combinations (in thousands):



|                                              |  |                         |       |      |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                              |  | Year Ended December 31,
|                                              |  | 2001                    |       | 2002 |   | 2003 
|Purchased in-process research and development |  | $                       |      |      | $ | 800   |  | $ | 1,100
|Cross-training, product integration and other |  |                         | 94    |      |   | 404   |  |   | 490  
|Severance and other employee-related costs    |  |                         |      |      |   |      |  |   | 136  
|Contingent compensation                       |  |                         | 1,825 |      |   | 582   |  |   | 2,532
|                                              |  |                         |       |      |   |       |  |   |      
|                                              |  | $                       | 1,919 |      | $ | 1,786 |  | $ | 4,258
|                                              |  |                         |       |      |   |       |  |   |      



In-process research
and development (IPR&D)



The amounts
allocated to IPR&D were based on discounted cash flow models, as modified to conform to Securities and Exchange Commission guidelines. Specifically, this model employed cash flow projections for revenue based on the projected incremental
increase in revenue that the acquired company expected to receive from the completed IPR&D based on managements estimates and the growth potential of the market. Revenue for these five-year projection periods assumed an annual compound
growth rate of 17.2% and 5.0% for Epicentric and Intraspect, respectively, and was adjusted to reflect the percentage of research and development determined to be complete as of the acquisition date. Cost of revenue, selling, general and
administrative expense, and research and development expense were estimated as a percent of revenue based on each acquired companys historical results and industry averages. The cost to complete the in-process products was removed from the
research and development expense. These estimated operating expenses as well as capital charges and applicable income taxes were deducted to arrive at an estimated after-tax cash flow. The after-tax cash flow projections were discounted using a
risk-adjusted rate of return of 40% and 19%, respectively. Such discount rates were based on each acquired companys weighted average cost of capital of 36%, and 17%, respectively, as adjusted upwards for the additional risk related to the
projects development and success. The Company used external valuation companies to



F - 18



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



value the IPR&D using the above assumptions. The resulting IPR&D was expensed at the time of purchase because technological feasibility had not been
established and no alternative future uses existed.



Acquisition-related and other charges



As part
of the Epicentric acquisition, contingent compensation in the form of cash totaling $0.6 million and $2.5 million was recorded in 2002 and 2003, respectively. The Company expects to incur no additional contingent compensation expense for Epicentric
employees. No contingent expense compensation charges were incurred or expected in conjunction with the Intraspect acquisition. Because contingent consideration is based on defined future employment requirements, it is compensatory in nature and is
not included in the total purchase price, but, instead, is expensed as future employment requirements are satisfied. As part of the Engine 5 acquisition in 2000, contingent compensation in the form of cash and stock totaling $1.8 million, $0, and $0
was recorded in 2001, 2002, and 2003, respectively.



Pro
forma results of operations



The following presents the
unaudited pro forma combined results of operations of the Company with Intraspect for the years ended December 31, 2002 and 2003, after giving effect to certain pro forma adjustments. These unaudited pro forma results are not necessarily indicative
of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2002 or of future results of operations of the consolidated entities (in thousands, except for per share data):



|                     |  |                         |          |   |      |   |         |  
|-------------------- |  | ----------------------- | -------- | - | ---- | - | ------- | -
|                     |  | Year ended December 31, |         
|                     |  | 2002                    |          |   | 2003 |  
|Revenue              |  | $                       | 201,387  |   |      | $ | 166,534 |  
|Loss from operations |  |                         | (297,439 | ) |      |   | (16,574 | )
|Net loss             |  |                         | (307,147 | ) |      |   | (13,650 | )
|Basic loss per share |  | $                       | (1.21    | ) |      | $ | (0.05   | )



The following presents
the unaudited pro forma combined results of operations of the Company with Epicentric for the years ended December 31, 2001 and 2002, after giving effect to certain pro forma adjustments. These unaudited pro forma results are not necessarily
indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2001 or of future results of operations of the consolidated entities (in thousands, except for per share data):



|                     |  |                         |            |   |      |   |          |  
|-------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | -
|                     |  | Year ended December 31, |           
|                     |  | 2001                    |            |   | 2002 |  
|Revenue              |  | $                       | 323,763    |   |      | $ | 189,218  |  
|Loss from operations |  |                         | (1,537,954 | ) |      |   | (272,737 | )
|Net loss             |  |                         | (1,582,304 | ) |      |   | (276,284 | )
|Basic loss per share |  | $                       | (6.54      | ) |      | $ | (1.11    | )



The pro forma amounts
reflected above exclude one-time acquisition charges, including in-process research and development charges of $1.1 million and $0.8 million for the years ended December 31, 2003 and 2002, respectively.



NOTE 4  Intangible Assets



In July 2001, Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets(Statement 142) was issued. Statement 142 requires that ratable amortization of intangible assets with indefinite lives, including goodwill, be replaced with periodic review and analysis for
possible impairment. Intangible assets with definite lives must be amortized over their estimated useful lives. On January 1, 2002, the Company adopted Statement 142. As a result, the Company no longer amortizes goodwill, acquired workforce or its
acquired trademark, thereby eliminating estimated amortization of approximately $70.2 million for the year ended December 31, 2002.



F - 19



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



As required by Statement 142, prior period results are not restated; however, the following presents
the Companys reported net loss and loss per share, as adjusted for the exclusion of goodwill, workforce and trademark amortization (in thousands, except per share information):



|                                                                       |  |                         |            |   |      |   |          |      |  |   |       |  
|---------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ----- | -
|                                                                       |  | Year ended December 31, |           
|                                                                       |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Net loss:                                                              |  |                         |            |   |      |   |          |      |  |   |       |  
|As reported                                                            |  | $                       | (1,527,639 | ) |      | $ | (252,813 | )    |  | $ | (33   | )
|Add: amortization expense - goodwill, acquired workforce and trademark |  |                         | 490,339    |   |      |   |         |      |  |   |      |  
|                                                                       |  |                         |            |   |      |   |          |      |  |   |       |  
|Adjusted net loss                                                      |  | $                       | (1,037,300 | ) |      | $ | (252,813 | )    |  | $ | (33   | )
|                                                                       |  |                         |            |   |      |   |          |      |  |   |       |  
|Basic net loss per common share:                                       |  |                         |            |   |      |   |          |      |  |   |       |  
|As reported                                                            |  | $                       | (6.32      | ) |      | $ | (1.01    | )    |  | $ | (0.00 | )
|Add: amortization expense - goodwill, acquired workforce and trademark |  |                         | 2.03       |   |      |   |         |      |  |   |      |  
|                                                                       |  |                         |            |   |      |   |          |      |  |   |       |  
|Adjusted net loss per share  basic                                    |  | $                       | (4.29      | ) |      | $ | (1.01    | )    |  | $ | (0.00 | )
|                                                                       |  |                         |            |   |      |   |          |      |  |   |       |  



Intangible assets
with indefinite lives



The changes in the carrying amount
of intangible assets with indefinite lives, net of accumulated amortization and impairment charges, for the year ended December 31, 2003, are as follows (in thousands):



|                                                                                       |  |          |          |   |           |   |      |  
|-------------------------------------------------------------------------------------- |  | -------- | -------- | - | --------- | - | ---- | -
|                                                                                       |  | Goodwill |          |   | Trademark |  
|Balance at December 31, 2001                                                           |  | $        | 144,420  |   |           | $ | 301  |  
|Reclassification of acquiree workforce, net of accumulated amortization and impairment |  |          | 2,409    |   |           |   |     |  
|Purchase price adjustments                                                             |  |          | 139      |   |           |   |     |  
|Impairment                                                                             |  |          | (146,968 | ) |           |   | (301 | )
|Acquisition                                                                            |  |          | 32,993   |   |           |   |     |  
|                                                                                       |  |          |          |   |           |   |      |  
|Balance at December 31, 2002                                                           |  | $        | 32,993   |   |           |   |     |  
|Purchase price adjustments                                                             |  |          | (1,982   | ) |           |   |     |  
|Impairment                                                                             |  |          |         |   |           |   |     |  
|Acquisition                                                                            |  |          | 15,958   |   |           |   |     |  
|                                                                                       |  |          |          |   |           |   |      |  
|Balance at December 31, 2003                                                           |  | $        | 46,969   |   |           |   |     |  
|                                                                                       |  |          |          |   |           |   |      |  



Workforce no longer
meets the definition of a separately-identified intangible asset under the provisions of Statement of Financial Accounting Standards No. 141, Business Combinations. As such, the Company reclassified acquired workforce of $2.4 million to
goodwill in 2002.



Goodwill from acquisition in 2003 pertains
to the Intraspect business combination completed in December 2003. Goodwill from acquisition in 2002 pertains to the Epicentric business combination completed in December 2002.



Purchase price adjustments in 2003 are primarily attributable to successful collection of doubtful accounts receivable
inherited from Epicentric.



Due to changes in product offerings
in 2002, the Company impaired the carrying value of the DataSage trademark. These changes altered the packaging and marketing of certain technology, rendering the related trademark obsolete. An impairment charge of $0.3 was recorded in 2002 as an
Impairment of intangible assets, a component of operating expenses on the Consolidated Statements of Operations.



F - 20



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Goodwill impairment tests



In accordance with Financial Accounting Standards Statement 142 (Statement 142), the Company performs an annual
impairment test of goodwill. The Company evaluates goodwill at the enterprise level as of October 1 each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As required by Statement 142, the
impairment test is accomplished using a two-stepped approach. The first step screens for impairment and, when impairment is indicated, a second step is employed to measure the impairment. Using data as of October 1, 2003, the Company passed the
first step. The Company also reviewed other factors to determine the likelihood of impairment. Based on these findings, the remaining net goodwill balance of $47.0 million is not considered impaired at December 31, 2003.



The Company completed its 2002 annual assessment of goodwill as outlined by
Statement 142, and recorded a $147.0 million non-cash impairment charge. The impairment was recorded in light of sustained negative industry and economic trends impacting current operations, the significant decline in the Companys stock price
for a sustained period of time and the Companys market capitalization relative to its net book value. The impaired goodwill was originally recorded in connection with the Companys four business combinations effected during fiscal 1999
and 2000. Such acquisitions were completed during a period when stock valuations for software companies were generally at much higher levels.



The value determined in Step 1 of the assessment, which involves comparing the fair value to the carrying value of the reporting unit, indicated a
goodwill impairment. The Company estimated its fair value based on its market capitalization, as complemented by a discounted cash flow analysis. The Company measured the impairment loss by completing Step 2 during the fourth quarter of 2002. Step 2
involved determining the enterprises implied fair value of goodwill. The carrying amount of the enterprises goodwill was greater than the implied fair value of its goodwill, resulting in full impairment of Companys remaining
goodwill that was recorded in connection with its 1999 and 2000 business combinations. The Company reported the charge as Impairment of intangible assets, a component of operating expenses on the Consolidated Statements of Operations.



Intangible assets with definite lives



Following is a summary of the Companys intangible assets that are
subject to amortization (in thousands):



|                                     |  |                         |        |                                      |   |         |                   |  |                     |        |                                      |   |        |                   |   |         |   |  |   |       
|------------------------------------ |  | ----------------------- | ------ | ------------------------------------ | - | ------- | ----------------- |  | ------------------- | ------ | ------------------------------------ | - | ------ | ----------------- | - | ------- | - |  | - | ------
|                                     |  | Year ended December 31,
|                                     |  | 2003                    |        | 2002                                
|                                     |  | GrossCarryingAmount     |        | AccumulatedAmortizationandImpairment |   |         | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortizationandImpairment |   |        | NetCarryingAmount
|Intellectual property purchases:     |  |                         |        |                                      |   |         |                   |  |                     |        |                                      |   |        |                   |   |         |   |  |   |       
|Capitalized research and development |  | $                       | 700    |                                      | $ | (583    | )                 |  | $                   | 117    |                                      | $ | 700    |                   | $ | (116    | ) |  | $ | 584   
|Business combinations:               |  |                         |        |                                      |   |         |                   |  |                     |        |                                      |   |        |                   |   |         |   |  |   |       
|Technology                           |  |                         | 47,000 |                                      |   | (39,818 | )                 |  |                     | 7,182  |                                      |   | 42,500 |                   |   | (36,200 | ) |  |   | 6,300 
|Non-compete contracts                |  |                         | 800    |                                      |   | (433    | )                 |  |                     | 367    |                                      |   | 800    |                   |   | (33     | ) |  |   | 767   
|Customer relationships               |  |                         | 5,200  |                                      |   | (1,511  | )                 |  |                     | 3,689  |                                      |   | 4,100  |                   |   | (114    | ) |  |   | 3,986 
|Balance at December 31, 2003         |  | $                       | 53,700 |                                      | $ | (42,345 | )                 |  |                     | 11,355 |                                      | $ | 48,100 |                   | $ | (36,463 | ) |  | $ | 11,637
|                                     |  |                         |        |                                      |   |         |                   |  |                     |        |                                      |   |        |                   |   |         |   |  |   |       



The net carrying
amount of intangible assets acquired in business combinations relates primarily to the Epicentric and Intraspect purchases, effective December 3, 2002 and December 11, 2003, respectively. The net carrying amount of the capitalized research and
development intangible asset represents a small intellectual property purchase during 2002.



Total amortization expense for the years ended December 31, 2003, 2002 and 2001 was $5.4 million, $16.4 million, and $500.6 million, respectively. Of these amounts, $2.0 million, $16.1 million, and



F - 21



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



$500.0 million was recorded as Amortization of intangible assets in operating expenses, respectively, and the remaining $3.4 million, $0.3
million and $0.6 million, respectively, was recorded as a cost of revenue. Estimated annual amortization expense for fiscal years 2004, 2005 and 2006 is $7.0 million, $8.2 million and $2.9 million, respectively, and $0, thereafter.



NOTE 5  Stockholders Equity



Preferred stock



As of December 31, 2003 and 2002, there were 30,000,000 shares authorized to
be designated as preferred stock, none of which were outstanding at December 31, 2003 or 2002.



Shareholder rights plan



In April 2002, the Board adopted a shareholder rights plan (the Plan). The Plan was not adopted in response to any attempt to acquire the Company, nor was the Company aware of any such efforts at the time of adoption. The Plan
was designed to enable the Companys stockholders to realize the full value of their investment by providing for fair and equal treatment of all stockholders in the event that an unsolicited attempt is made to acquire the company. Adoption of
the Plan was intended to guard shareholders against abusive and coercive takeover tactics.



Under the Plan, stockholders on May 6, 2002 received one right to purchase a one one-thousandth of a share of Series A Junior Participating Preferred Stock, par $0.01 per share, at a price of $30.00 per one
one-thousandth, subject to adjustment. The rights were issued as a non-taxable dividend and will expire 10 years from the date of the adoption of the Plan, unless earlier redeemed or exchanged. The rights are not immediately exercisable; however,
they will become exercisable upon the earlier to occur of (i) the close of business on the tenth day after a public announcement that a person or group has acquired beneficial ownership of 15 percent or more of the Companys outstanding common
stock or (ii) the close of business on the tenth day (or such later date as may be determined by the Board of Directors prior to such time as any person becomes an acquiring person) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer that would result in the beneficial ownership by a person or group of 15 percent or more of the Companys outstanding common stock. If a person or group acquires 15 percent or more of the Companys
common stock, then all rights holders except the acquirer will be entitled to acquire the Companys common stock at a significant discount. The intended effect will be to discourage acquisitions of 15 percent or more of the Companys
common stock without negotiation with the Board of Directors.



Common stock



The Company authorized the
issuance of 500,000,000 shares of $0.01 par value common stock. A portion of the shares issued are restricted and are subject to forfeiture, until the respective vesting requirement is achieved, which is generally four years from grant or issuance.
As of December 31, 2003, 768,534 shares were subject to forfeiture.



As of December 31, 2003, the Company reserved shares of its common stock for the following purposes:



|                                      |  |           
|------------------------------------- |  | ----------
|Employee stock purchase plan          |  | 13,891,547
|Stock options available for grant     |  | 43,804,328
|Exercise of outstanding stock options |  | 40,813,839
|                                      |  |           
|                                      |  | 98,509,714
|                                      |  |           



Stock plans



The Company has established five stock plans: (i) the
1995 Stock Option/Stock Issuance Plan (the 1995 Plan); (ii) the 1999 Equity Incentive Plan (the 1999 Plan); (iii) the 1999 Supplemental Stock Option Plan (the 1999 Supplemental Plan); (iv) the 1999 Non-Employee
Directors Option Plan (the Directors



F - 22



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Plan) and (v) the Employee Stock Purchase Plan (the ESPP). Of these plans, the 1995 Plan, the 1999 Plan, the Directors Plan and the
ESPP have been approved by the Companys shareholders. The 1999 Supplemental Plan did not require approval by the Companys shareholders.



Under the 1995 Plan, certain employees, members of the Board and independent advisors were granted options to purchase shares of the Companys common
stock and were issued shares of the Companys common stock. Options are immediately exercisable. Upon certain events, the Company has repurchase rights for unvested shares equal to the original exercise price. At December 31, 2003, no shares
were subject to repurchase. The Company also has the right of first refusal for any proposed disposition of shares issued under the 1995 Plan. The stock options and the related exercised stock will generally vest over a four-year cumulative period.
The term of each option is no more than ten years from the date of grant. Stock issuance may be for purchase or as a bonus for services rendered to the Company. Options outstanding at the time of the Companys initial public offering were
assumed under the Companys 1999 Plan. Options may not be granted from the 1995 Plan subsequent to the Companys initial public offering, therefore, no shares were available for future grant under the 1995 Plan at December 31, 2003.
Options that expire under the 1995 Plan will be available for future grants under the 1999 Plan.



Under the 1999 Plan, employees, non-employee members of the Board and consultants may be granted options to purchase shares of common stock, stock
appreciation rights, restricted shares and stock units. Options are exercisable in accordance with each stock option agreement. The term of each option is no more than ten years from the date of grant. Each fiscal year, commencing with the year 2000
and ending with the year 2002, the aggregate number of shares authorized under the 1999 Plan automatically increased by the lesser of (i) 5% of the total number of shares of the common stock then outstanding or (ii) 11,804,820 shares. At December
31, 2003, there were 72,393,870 shares authorized for issuance, including shares assumed from the 1995 Plan, of which 27,066,631 were available for future grant.



Under the 1999 Supplemental Plan, employees, non-employee members of the Board and consultants may be granted non-qualified
options to purchase shares of common stock. The term and vesting periods are equivalent to those under the 1999 Plan. At December 31, 2003, there were 33,000,000 shares authorized for issuance of which 15,595,197 were available for future grant.



Under the Directors Plan, non-employee members of the
Board may be granted non-qualified options to purchase shares of common stock. Vesting occurs over a four-year cumulative period. The term of each option is no more than ten years from the date of grant. At December 31, 2003, there were 1,500,000
shares authorized for issuance of which 1,142,500 were available for future grant.



In addition to the aforementioned plans, the Company assumed several plans through its business combinations. These assumed plans have not been approved by the Companys shareholders; however, upon assumption,
these plans terminated and no further options may be granted. Options previously granted under these plans that have not yet expired or otherwise become unexercisable continue to be administered under the governing plan, and any portions that expire
or become unexercisable for any reason shall be cancelled and be unavailable for future issuance. The Company also grants options to certain of its officers upon their employment. Such options are issued as inducement grants pursuant to NASD Rule
4350(i).



F - 23



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The following table summarizes stock option activity and related information through December 31,
2003 follows:



|                                   |  |                         |   |      |                              |       |         |             |   |                              |   |         |  |             |                              |  |   |     
|---------------------------------- |  | ----------------------- | - | ---- | ---------------------------- | ----- | ------- | ----------- | - | ---------------------------- | - | ------- |  | ----------- | ---------------------------- |  | - | ----
|                                   |  | Year Ended December 31,
|                                   |  | 2001                    |   | 2002 |                              | 2003 
|                                   |  | Options                 |   |      | Weightedaverageexerciseprice |       | Options |             |   | Weightedaverageexerciseprice |   | Options |  |             | Weightedaverageexerciseprice
|Outstanding at beginning of period |  | 63,594,736              |   |      | $                            | 24.71 |         | 47,148,500  |   |                              | $ | 7.80    |  | 46,041,561  |                              |  | $ | 5.20
|Granted                            |  | 32,058,576              |   |      |                              | 5.65  |         | 17,567,558  |   |                              |   | 1.53    |  | 8,556,585   |                              |  |   | 2.01
|Exercised                          |  | (6,953,197              | ) |      |                              | 1.10  |         | (2,653,595  | ) |                              |   | 0.89    |  | (2,833,676  | )                            |  |   | 0.85
|Canceled                           |  | (41,551,615             | ) |      |                              | 32.91 |         | (16,020,902 | ) |                              |   | 9.54    |  | (10,950,631 | )                            |  |   | 6.29
|                                   |  |                         |   |      |                              |       |         |             |   |                              |   |         |  |             |                              |  |   |     
|Outstanding at end of period       |  | 47,148,500              |   |      |                              | 7.80  |         | 46,041,561  |   |                              |   | 5.20    |  | 40,813,839  |                              |  |   | 4.54
|                                   |  |                         |   |      |                              |       |         |             |   |                              |   |         |  |             |                              |  |   |     
|Options exercisable at period end  |  | 17,241,339              |   |      |                              | 6.28  |         | 18,867,571  |   |                              |   | 6.86    |  | 21,230,035  |                              |  |   | 6.23
|                                   |  |                         |   |      |                              |       |         |             |   |                              |   |         |  |             |                              |  |   |     
|Options available for grant        |  | 31,219,648              |   |      |                              |       |         | 40,043,563  |   |                              |   |         |  | 43,804,328  |                              |  |   |     
|                                   |  |                         |   |      |                              |       |         |             |   |                              |   |         |  |             |                              |  |   |     



The following table
summarizes options outstanding and exercisable as of December 31, 2003:



|                         |  |                  |  |                                                     |  |                               |       |                  |            |                                  |   |      
|------------------------ |  | ---------------- |  | --------------------------------------------------- |  | ----------------------------- | ----- | ---------------- | ---------- | -------------------------------- | - | -----
|                         |  | Outstanding      |  | Exercisable                                        
|Range of Exercise Prices |  | Number ofOptions |  | Weighted-AverageRemainingContractualLife (in years) |  | Weighted-AverageExercisePrice |       | Number ofOptions |            | Weighted- Average Exercise Price
|$ 0.01 - $ 0.75          |  | 3,076,355        |  | 4.2                                                 |  | $                             | 0.18  |                  | 3,076,343  |                                  | $ | 0.18 
|$ 0.76 - $ 1.50          |  | 12,674,479       |  | 6.1                                                 |  |                               | 1.06  |                  | 4,354,158  |                                  |   | 1.07 
|$ 1.51 - $ 3.00          |  | 7,369,738        |  | 7.2                                                 |  |                               | 2.38  |                  | 1,442,557  |                                  |   | 2.68 
|$ 3.01 - $ 5.00          |  | 7,260,961        |  | 5.4                                                 |  |                               | 3.90  |                  | 4,540,651  |                                  |   | 3.89 
|$ 5.01 - $ 7.50          |  | 6,131,445        |  | 5.2                                                 |  |                               | 5.92  |                  | 3,906,475  |                                  |   | 5.95 
|$ 7.51 - $15.00          |  | 2,607,496        |  | 3.7                                                 |  |                               | 10.33 |                  | 2,355,395  |                                  |   | 10.60
|$15.01 - $25.00          |  | 493,003          |  | 3.0                                                 |  |                               | 17.73 |                  | 454,963    |                                  |   | 17.65
|$25.01 - $99.00          |  | 1,200,362        |  | 4.6                                                 |  |                               | 44.67 |                  | 1,099,493  |                                  |   | 44.77
|                         |  |                  |  |                                                     |  |                               |       |                  |            |                                  |   |      
|                         |  | 40,813,839       |  | 5.7                                                 |  | $                             | 4.54  |                  | 21,230,035 |                                  | $ | 6.23 
|                         |  |                  |  |                                                     |  |                               |       |                  |            |                                  |   |      



Under the ESPP, as
amended, the Company has reserved 21,572,856 shares of common stock for issuance to participating employees. Under the terms of the ESPP, there are two, six-month offerings per year. Employees may direct the Company to withhold up to 15% of their
salary to purchase the Companys common stock. An employee may purchase a maximum of 2,000 shares per six-month offering period. Each fiscal year, commencing with the year 2000 and ending with the year 2002, the number of shares under the ESPP
automatically increased by the lesser of (i) 2% of the total number of shares of common stock then outstanding or (ii) 4,500,000 shares. As of December 31, 2003, 7,681,309 shares were issued under the ESPP. This plan has 13,891,547 shares available
for future issuance.



F - 24



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Fair value disclosures



Pro forma information regarding net loss and net loss per share is required by Statement 123, and has been determined as if
the Company had accounted for its employee stock plans under the fair value method of Statement 123. Fair value was estimated using the Black-Scholes option-pricing model, with the following assumptions:



|                                                              |  |                        |      |   |                             |   |      |      |  |   |      |   |  |     |  
|------------------------------------------------------------- |  | ---------------------- | ---- | - | --------------------------- | - | ---- | ---- |  | - | ---- | - |  | --- | -
|                                                              |  | Employee Stock Options |      |   | Employee StockPurchase Plan |  
|                                                              |  | 2001                   |      |   | 2002                        |   |      | 2003 |  |   | 2003 |  
|Risk-free interest rate                                       |  |                        | 3.8  | % |                             |   | 2.9  | %    |  |   | 2.0  | % |  | 1.1 | %
|Weighted-average expected life of the options (years)         |  |                        | 3.0  |   |                             |   | 2.5  |      |  |   | 2.5  |   |  | 0.5 |  
|Dividend rate                                                 |  |                        | 0.0  | % |                             |   | 0.0  | %    |  |   | 0.0  | % |  | 0.0 | %
|Assumed volatility                                            |  |                        | 1.3  |   |                             |   | 1.3  |      |  |   | 1.2  |   |  | 1.2 |  
|Weighted-average fair value of options granted                |  |                        |      |   |                             |   |      |      |  |   |      |   |  |     |  
|Exercise price equal to fair value of stock on date of grant  |  | $                      | 4.29 |   |                             | $ | 1.44 |      |  | $ | 1.49 |   |  |     |  
|Exercise price less than fair value of stock on date of grant |  | $                      |     |   |                             | $ | 2.05 |      |  | $ |     |   |  |     |  



For purposes of pro
forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting period and stock purchased under the ESPP is amortized over the six-month purchase period. The impact of the pro forma results that
follow may not be representative of compensation expense in future years when the effect of the amortization of multiple awards may be reflected in the amounts. The Companys pro forma information follows (in thousands, except per share data):



|                                           |  |                         |            |   |      |   |          |      |  |   |         |  
|------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                           |  | Year ended December 31, |           
|                                           |  | 2001                    |            |   | 2002 |   |          | 2003 | 
|Pro forma stock-based compensation expense |  | $                       | 89,283     |   |      | $ | 97,674   |      |  | $ | 43,158  |  
|Pro forma net loss                         |  | $                       | (1,616,922 | ) |      | $ | (350,487 | )    |  | $ | (43,191 | )
|Pro forma basic net loss per share         |  | $                       | (6.69      | ) |      | $ | (1.41    | )    |  | $ | (0.17   | )



Employee option
exchange program



In February 2001, the Company issued
approximately 2.4 million restricted shares to certain employees who elected to participate in the Companys stock option exchange program, a program designed to retain employees and to provide them with an incentive for maximizing stockholder
value. Subsequent to February 2001, approximately 0.6 million restricted shares were forfeited by certain employees who did not fulfill related vesting requirements. As a result of this program, deferred compensation of $14.9 million was recorded
for the market value of the restricted shares issued as of the grant. Such amount was amortized to expense over the one-year vesting period, commencing at the date of issue, and was fully amortized as of February 2002. The weighted-average fair
value per share of restricted stock granted in relation to this program was $6.38.



Also under the same option exchange program, the Company canceled approximately 19.2 million stock options previously granted to participating employees in exchange for approximately 7.7 million new options which were
granted in August 2001. The exercise price of these new options was equal to the fair value of the Companys common stock on the grant date. The program did not result in any additional compensation charges or variable plan accounting. The
Companys officers and Board of Directors were not eligible to participate in this program.



Deferred stock compensation



In 2001, 2002 and 2003, the Company recorded total deferred stock compensation of $15.6 million, $2.2 million and $1.0 million, respectively. In 2001,
this amount related primarily to the restricted common stock issued pursuant to the employee option exchange program. In 2002, the amount related in part to the issuance of 1.1 million shares of restricted common stock to various employees.
Additionally, 1.0 million



F - 25



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



options were issued to employees participating in a voluntary salary exchange program. These options were granted at an exercise price that was less than the
then fair value on the date of grant, $2.80 and $3.39, respectively. In 2003, the amount primarily related to restricted stock issued to our Chief Executive Officer in November 2003. These amounts are being amortized over the vesting periods of the
applicable restricted shares and options, resulting in amortization expense of $1.4 million and $1.1 million for the years ended December 31, 2002 and 2003, respectively.



Share repurchase program



The Board of Directors has approved two stock repurchase programs. Each program was approved with an expiration date of six months after the effective
date. In general, repurchases may be made in the open market, through block trades or otherwise and repurchased shares may be used for general corporate purposes, including issuance under the Companys stock plans. During 2001, the Company
repurchased 1.4 million shares of its common stock for an aggregate cost of $5.5 million. During 2002, the Company repurchased 0.2 million shares of its common stock for an aggregate cost of $0.2 million. All such repurchases were conducted through
open market transactions. In 2003, the Company repurchased 0.2 million shares of its common stock for an aggregate cost of $0.4 million.



NOTE 6  Business Restructuring



During fiscal year 2001, the Companys management approved a restructuring plan to reduce headcount and infrastructure and to consolidate operations.
The Company expanded the restructuring plan during 2002 and 2003. Components of business restructuring charges and the remaining restructuring accruals as of December 31, 2003 are as follows (in thousands):



|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -------------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Facility LeaseCommitments |         |   | AssetImpairments |   |         | EmployeeSeparationand OtherCosts |  |   | Total   |  
|Balance at December 31, 2000                      |  | $                         |        |   |                  | $ |        |                                  |  | $ |        |   |  | $ |        |  
|Total restructuring charge                        |  |                           | 55,150  |   |                  |   | 33,683  |                                  |  |   | 32,102  |   |  |   | 120,935 |  
|Cash activity                                     |  |                           | (12,397 | ) |                  |   | (878    | )                                |  |   | (22,773 | ) |  |   | (36,048 | )
|Non-cash activity                                 |  |                           | (292    | ) |                  |   | (32,805 | )                                |  |   | (1,918  | ) |  |   | (35,015 | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                      |  |                           | 42,461  |   |                  |   |        |                                  |  |   | 7,411   |   |  |   | 49,872  |  
|Effect of expanded restructuring plan             |  |                           | 6,518   |   |                  |   | 8,730   |                                  |  |   | 11,118  |   |  |   | 26,366  |  
|Adjustment to accrual                             |  |                           | 9,538   |   |                  |   | 463     |                                  |  |   | (545    | ) |  |   | 9,456   |  
|Cash activity                                     |  |                           | (21,959 | ) |                  |   |        |                                  |  |   | (11,342 | ) |  |   | (33,301 | )
|Non-cash activity                                 |  |                           |        |   |                  |   | (9,193  | )                                |  |   | (36     | ) |  |   | (9,229  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                      |  |                           | 36,558  |   |                  |   |        |                                  |  |   | 6,606   |   |  |   | 43,164  |  
|Effect of expanded restructuring plan             |  |                           | 9       |   |                  |   |        |                                  |  |   | 2,076   |   |  |   | 2,085   |  
|Adjustment to accrual                             |  |                           | (13,422 | ) |                  |   |        |                                  |  |   | (3,349  | ) |  |   | (16,771 | )
|Cash activity                                     |  |                           | (10,620 | ) |                  |   |        |                                  |  |   | (4,961  | ) |  |   | (15,581 | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                      |  |                           | 12,525  |   |                  |   |        |                                  |  |   | 372     |   |  |   | 12,897  |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Less: current portion                             |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   | (5,509  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Accrued restructuring costs, less current portion |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  | $ | 7,388   |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  



During 2003, the
Company adjusted its existing restructuring accruals, resulting in net a restructuring gain of $14.7 million. A substantial portion of this income was the result of non-recurring charges related to changes in real estate restructuring assumptions.
Specifically, during the fourth quarter the Company reevaluated its office space portfolio and decided to vacate its Austin, Texas headquarters and relocate to nearby office space that had previously been identified as restructuring space. This
relocation resulted in a net benefit of approximately $14.0 million in the fourth quarter of 2003 based on the application of EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity



F - 26



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



(including Certain Costs Incurred in a Restructuring.) In the first quarter of 2004, the Company moved out of its existing headquarters and relocated
to the nearby office space that now serves as its headquarters. As such, the Company expects to record a restructuring charge of approximately $7.1 million in the first quarter of 2004 pursuant to FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.



Including the
aforementioned $7.1 million charge, remaining cash expenditures resulting from the restructuring are estimated to be $20.0 million and relate primarily to facility lease commitments, of which the remaining maximum lease commitment is eight years. We
have substantially implemented our restructuring efforts initiated in conjunction with this restructuring plan; however, there can be no assurance that the estimated costs of our restructuring efforts will not change.



Consolidation of excess facilities



Facility lease commitments relate to lease obligations for excess office
space that the Company has vacated as a result of the restructuring plan. Total lease commitments include the remaining lease liabilities and brokerage commissions, offset by estimated sublease income. The estimated costs of vacating these leased
facilities, including estimated costs to sublease and any resulting sublease income, were based on market information and trend analysis as estimated by the Company. The Company continually assesses its real estate portfolio and may vacate and/or
occupy other leased space as dictated by its analysis. It is reasonably possible that actual results could continue to differ from these estimates in the near term, and such differences could be material to the financial statements. In particular,
actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the Companys accrual for facility lease commitments. Facility lease commitments relate to the Companys
departure from certain office space in Austin and Houston, Texas; Redwood City, Los Angeles and San Ramon, California; Boston, Waltham, Reading and Cambridge, Massachusetts; New York, New York; Maidenhead, United Kingdom; Paris, France; Hamburg,
Germany; Madrid, Spain; Sydney and Melbourne, Australia; Bangalore and Guragon, India; Hong Kong, China; and Singapore. The maximum lease commitment of such vacated properties is eight years from December 31, 2003.



Asset impairments



Asset impairments relate to the impairment of certain fixed assets, prepaid
royalties and intangible assets. These fixed assets were impaired as a result of the Companys decision to vacate certain office space and align its infrastructure with current and projected headcount.



Employee separation and other costs



Employee separation and other costs include severance, related taxes,
outplacement and other restructuring charges. As a result of the restructuring activities, the Company severed approximately 1,525 employees. Employee groups impacted by the restructuring efforts include personnel in positions throughout the sales,
marketing, professional services, engineering and general and administrative functions in all geographies. During 2003, the Company favorably resolved certain employee matters that related to the Company-initiated reduction in force. This resolution
resulted in a $3.3 million decrease in the employee separation and other costs accrual.



NOTE 7  Lease Commitments



The Company
has financed the acquisition of certain computers and equipment through capital lease transactions that are accounted for as financings. Included in property and equipment at December 31, 2002 and 2003 are the following assets held under capital
leases (in thousands):



|                              |  |              |     |   |      |   |      |  
|----------------------------- |  | ------------ | --- | - | ---- | - | ---- | -
|                              |  | December 31, |    
|                              |  | 2002         |     |   | 2003 |  
|Property and equipment        |  | $            | 401 |   |      | $ | 373  |  
|Less accumulated depreciation |  |              | (89 | ) |      |   | (296 | )
|                              |  |              |     |   |      |   |      |  
|                              |  | $            | 312 |   |      | $ | 77   |  
|                              |  |              |     |   |      |   |      |  



F - 27



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The Company leases its office facilities and office equipment under various operating and capital
lease agreements having expiration dates through 2011. Rent expense for the years ended December 31, 2001, 2002 and 2003 was $15.7 million, $6.9 million, and $5.7 million, respectively. At December 31, 2003, estimated future rents receivable from
signed sublease agreements is $7.7 million through 2010. Future minimum payments as of December 31, 2003 under these leases, including operating lease commitments for all vacated properties, are as follows (in thousands):



|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|------------------------------------------------------------------------------ |  | --------------- | ------ | --------------- | - | ------------- |  | - | -- | -
|                                                                               |  | OperatingLeases |        | Sublease Income |   | CapitalLeases | 
|2004                                                                           |  | $               | 15,711 |                 | $ | 2,431         |  | $ | 68 |  
|2005                                                                           |  |                 | 13,245 |                 |   | 2,083         |  |   | 11 |  
|2006                                                                           |  |                 | 6,963  |                 |   | 1,006         |  |   |   |  
|2007                                                                           |  |                 | 4,197  |                 |   | 712           |  |   |   |  
|2008                                                                           |  |                 | 3,476  |                 |   | 678           |  |   |   |  
|Thereafter                                                                     |  |                 | 7,645  |                 |   | 793           |  |   |   |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Total minimum lease payments                                                   |  | $               | 51,237 |                 |   |              |  |   | 79 |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Total minimum sublease rentals                                                 |  |                 |        |                 | $ | 7,703         |  |   |   |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Amounts representing interest                                                  |  |                 |        |                 |   |               |  |   | (2 | )
|                                                                               |  |                 |        |                 |   |               |  |   |    |  
|Present value of net minimum lease payments (including current portion of $68) |  |                 |        |                 |   |               |  | $ | 77 |  
|                                                                               |  |                 |        |                 |   |               |  |   |    |  



NOTE 8  Legal Matters



Securities class action



On October 26, 2001, a class action lawsuit was filed against the Company
and certain of its current and former officers and directors in the United States District Court for the Southern District of New York in an action captioned Leon Leybovich v. Vignette Corporation, et al., seeking unspecified damages on behalf of a
purported class that purchased Vignette common stock between February 18, 1999 and December 6, 2000. Also named as defendants were four underwriters involved in the Companys initial public offering of Vignette stock in February 1999 and the
Companys secondary public offering of Vignette stock in December 1999  Morgan Stanley Dean Witter, Inc., Hambrecht & Quist, LLC, Dain Rauscher Wessels and U.S. Bancorp Piper Jaffray, Inc. A Consolidated Amended Complaint, which is
now the operative complaint, was filed on April 19, 2002. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
based on, among other things, claims that the four underwriters awarded material portions of the shares in the Companys initial and secondary public offerings to certain customers in exchange for excessive commissions. The complaint also
asserts that the underwriters engaged in tie-in arrangements whereby certain customers were allocated shares of Company stock sold in its initial and secondary public offerings in exchange for an agreement to purchase additional shares
in the aftermarket at pre-determined prices. With respect to the Company, the complaint alleges that the Company and its officers and directors failed to disclose the existence of these purported excessive commissions and tie-in arrangements in the
prospectus and registration statement for the Companys initial public offering and the prospectus and registration statement for the Companys secondary public offering. The action is being coordinated with approximately 300 other nearly
identical actions filed against other companies. On July 15, 2002, the Company moved to dismiss all claims against it. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of
Dismissal filed by the plaintiffs and the Individual Defendants. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19,
2003, the Court denied the motion to dismiss the complaint against the Company. The Company has approved a Memorandum of Understanding (MOU) and related agreements that set forth the terms of a settlement between the Company, the
plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement contemplated by the MOU provides for a release of the Company and the individual defendants for the conduct alleged in the
action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. It is anticipated that any
potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will



F - 28



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement
agreement and its approval by the Court. The Company cannot opine as to whether or when a settlement will occur or be finalized and is unable at this time to determine whether the outcome of the litigation will have a material impact on its results
of operations or financial condition in any future period.



Litigation and other claims



The Company is
also subject to various legal proceedings and claims arising in the ordinary course of business. The Companys management does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material
adverse effect on the Companys financial condition, results of operations or cash flows.



NOTE 9  Income Taxes



As of December 31, 2003, the Company had federal net operating loss, capital loss and research credit carryforwards of approximately $712.0 million, $25.4 million and 11.3 million, respectively. The net operating loss, capital loss and
research credit carryforwards will expire in varying amounts, between 2004 and 2024, if not utilized.



The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating loss, capital loss and research credit carryforwards in
the event of an ownership change of a corporation. At December 31, 2003 approximately $160.5 million of the net operating loss and $2.9 million of the research credit carryover were incurred by companies we acquired and will be subject
to an annual limitation. In addition, the remaining net operating loss of $551.5 million, capital loss carryforward of $25.4 million and research credit carryover of $8.4 million may be subject to this limitation. These restrictions may severely
limit the benefit of these tax attributes in future periods. As a result, substantial amounts of the Companys net operating loss, capital loss and research credit carryforwards may expire prior to utilization.



Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred taxes as of December 31, 2002 and 2003 are as follows (in
thousands):



|                                                |  |              |          |   |      |   |          |  
|----------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                |  | December 31, |         
|                                                |  | 2002         |          |   | 2003 |  
|Deferred tax liabilities:                       |  |              |          |   |      |   |          |  
|Intangible assets                               |  | $            | (4,459   | ) |      | $ | (4,159   | )
|Other                                           |  |              | (632     | ) |      |   | (943     | )
|                                                |  |              |          |   |      |   |          |  
|                                                |  |              | (5,091   | ) |      |   | (5,102   | )
|Deferred tax assets:                            |  |              |          |   |      |   |          |  
|Depreciable assets                              |  |              | 4,434    |   |      |   | 4,913    |  
|Equity investments                              |  |              | 21,485   |   |      |   | 12,008   |  
|Capitalized development costs                   |  |              |         |   |      |   | 30,546   |  
|Deferred revenue                                |  |              | 2,420    |   |      |   | 793      |  
|Tax carryforwards                               |  |              | 279,542  |   |      |   | 284,292  |  
|Accrued liabilities and other                   |  |              | 25,281   |   |      |   | 9,811    |  
|                                                |  |              |          |   |      |   |          |  
|                                                |  |              | 333,162  |   |      |   | 342,363  |  
|                                                |  |              |          |   |      |   |          |  
|Net deferred tax assets                         |  |              | 328,071  |   |      |   | 337,261  |  
|Valuation allowance for net deferred tax assets |  |              | (328,071 | ) |      |   | (337,261 | )
|                                                |  |              |          |   |      |   |          |  
|Net deferred taxes                              |  | $            |         |   |      | $ |         |  
|                                                |  |              |          |   |      |   |          |  



The Company has
established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of deferred tax assets based on the Companys lack of earnings history. As of December 31, 2003, the valuation allowance
includes approximately $22.1 million related to the acquisition of Epicentric and Intraspect net deferred tax assets. The initial recognition of these acquired



F - 29



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



deferred tax asset items will first reduce goodwill, then other non-current intangible assets of the acquired entity. Approximately $145.2 million of the
valuation allowance relates to tax benefits for stock option deductions included in the net operating loss carryforward, substantially all of which when realized, will be allocated directly to contributed capital to the extent the benefits exceed
amounts attributable to deferred compensation expense.



Undistributed earnings of the Companys foreign subsidiaries were immaterial as of December 31, 2002 and 2003. Those earnings are considered to be permanently reinvested and, accordingly, no provision for U.S. federal or state income
taxes has been provided thereon.



The Companys provision
for income taxes for 2001, 2002 and 2003 consists primarily of foreign income taxes and withholdings on income generated in foreign countries. The provision for income taxes differs from the expected tax benefit amount computed by applying the
statutory federal income tax rate of 34% to income before income taxes as a result of the following:



|                                     |  |                         |    |  |       |    |  |        |  
|------------------------------------ |  | ----------------------- | -- |  | ----- | -- |  | ------ | -
|                                     |  | Year ended December 31, |   
|                                     |  | 2001                    |    |  | 2002  |    |  | 2003   |  
|Federal statutory rate               |  | (34.0                   | )% |  | (34.0 | )% |  | 34.0   | %
|State taxes, net of federal benefit  |  | (0.4                    | )  |  | (1.1  | )  |  | 8.9    |  
|Non-deductible goodwill amortization |  | 28.7                    |    |  | 19.8  |    |  |       |  
|In-process research and development  |  |                        |    |  | 0.1   |    |  | 33.9   |  
|Stock compensation                   |  | 0.2                     |    |  | 0.2   |    |  | 34.1   |  
|Foreign taxes at different rates     |  | 0.1                     |    |  | 0.8   |    |  | 94.7   |  
|Change in valuation allowance        |  | 5.4                     |    |  | 14.0  |    |  | (212.5 | )
|Non-deductible expenses & other      |  | 0.1                     |    |  | 0.7   |    |  | 109.9  |  
|                                     |  |                         |    |  |       |    |  |        |  
|                                     |  | 0.1                     | %  |  | 0.5   | %  |  | 103.0  | %
|                                     |  |                         |    |  |       |    |  |        |  



NOTE 10  Related Party
Transactions



The Company entered into loan agreements
with certain of its employees. Receivables from employees totaled $0.9 million and $0.3 million at December 31, 2002 and 2003, respectively. The Company holds a Promissory Note from a non-officer employee. The principal sum of $0.3 million was used
for personal purposes. The loan was due and payable on June 30, 2003. The loan is now in default and a letter agreement was signed on December 4, 2003 wherein the employee reaffirmed his intent to pay the amount in full as soon as possible. The loan
is currently being repaid via the employees garnished wages, including bonuses. The loan note is secured by a first priority mortgage on such employees real estate and bears interest at 8% per annum, compounded quarterly. At both
December 31, 2002 and 2003, the principal outstanding was $0.3 million, plus accrued interest to date. An employee receivable is reported as a current asset in the line item Prepaid expenses and other unless collection is expected to be
outside of one year from the balance sheet date; in which case, it is reported in the line item Other assets. At both December 31, 2002 and 2003, $0 employee receivables were classified as other assets. At December 31, 2003 there were no
other related party balances.



F - 30



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



NOTE 11  Segments of Business and Geographic Area Information



The Company considers its business activities to constitute a single
segment. A summary of the Companys operations by geographic area follows (in thousands):



|                     |  |                         |         |                 |   |         |  |   |        
|-------------------- |  | ----------------------- | ------- | --------------- | - | ------- |  | - | -------
|                     |  | Year ended December 31,
|                     |  | 2001                    |         | 2002            |   | 2003   
|Revenue:             |  |                         |         |                 |   |         |  |   |        
|Americas:            |  |                         |         |                 |   |         |  |   |        
|United States        |  | $                       | 190,613 |                 | $ | 104,863 |  | $ | 116,564
|Other                |  |                         | 1,330   |                 |   | 2,411   |  |   | 2,257  
|                     |  |                         |         |                 |   |         |  |   |        
|Total Americas       |  |                         | 191,943 |                 |   | 107,274 |  |   | 118,821
|Europe               |  |                         | 93,797  |                 |   | 41,977  |  |   | 35,278 
|Asia Pacific         |  |                         | 11,010  |                 |   | 5,887   |  |   | 4,215  
|                     |  |                         |         |                 |   |         |  |   |        
|Total                |  | $                       | 296,750 |                 | $ | 155,138 |  | $ | 158,314
|                     |  |                         |         |                 |   |         |  |   |        
|                     |  |                        
|                     |  |                         |         | At December 31,
|                     |  |                         |         | 2002            |   | 2003   
|Identifiable assets: |  |                         |         |                 |   |         |  |   |        
|Americas:            |  |                         |         |                 |   |         |  |   |        
|United States        |  |                         |         |                 | $ | 392,808 |  | $ | 332,816
|Other                |  |                         |         |                 |   | 2,491   |  |   | 3,340  
|                     |  |                         |         |                 |   |         |  |   |        
|Total Americas       |  |                         |         |                 |   | 395,299 |  |   | 336,156
|Europe               |  |                         |         |                 |   | 26,291  |  |   | 25,578 
|Asia Pacific         |  |                         |         |                 |   | 3,022   |  |   | 4,382  
|                     |  |                         |         |                 |   |         |  |   |        
|Total                |  |                         |         |                 | $ | 424,612 |  | $ | 366,116
|                     |  |                         |         |                 |   |         |  |   |        



NOTE 12  Subsequent Events



Acquisition of Tower Technology



On March 1, 2004 the Company acquired all issued and outstanding shares of
Tower Technology Pty Limited, (Tower Technology), a privately held Australian company and leading provider of enterprise document and records management solutions in exchange for approximately $125 million consisting of cash and
approximately 29.8 million shares of Vignette common stock. Because the date of acquisition was subsequent to December 31, 2003, the Companys consolidated financial statements do not include Tower Technologys financial position or
results of operations. Prior to the merger, Tower Technologys fiscal year ended on June 30. The following table summarizes certain financial data of Tower Technology (in thousands of dollars):



|                       |  |                            |        |                  |   |        |  
|---------------------- |  | -------------------------- | ------ | ---------------- | - | ------ | -
|                       |  | Fiscal Year Ended June 30, |       
|                       |  | 2003(Unaudited)            |        | 2002 (Unaudited) |  
|Current Assets         |  | $                          | 14,458 |                  | $ | 14,793 |  
|Noncurrent assets      |  |                            | 5,862  |                  |   | 5,119  |  
|Current liabilities    |  |                            | 10,460 |                  |   | 16,032 |  
|Noncurrent liabilities |  |                            | 3,295  |                  |   | 1,435  |  
|Gross revenue          |  |                            | 39,552 |                  |   | 36,481 |  
|Gross profit           |  |                            | 20,724 |                  |   | 18,753 |  
|Income from operations |  |                            | 885    |                  |   | (3,555 | )



F - 31



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Offer to Exchange Certain Outstanding Options for New Options



On February 12, 2004 the Company offered eligible employees the right to
exchange certain outstanding options for new ones. The decline in the market value of the Companys shares since 2000 has caused the Companys stock price to fall substantially below the strike price of many employee stock options granted
in recent years. This voluntary exchange program was designed to retain the Companys employees and provide them with a long-term incentive to maximize stockholder value. The offer period is expected to end on March 24, 2004. The exercise price
of new options to be granted will depend on the closing price of the Companys common stock on the grant date and the total number of options issued will range from 20% to 100% of the total options canceled based on a predetermined formula. The
program has been organized to comply with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, and is not expected to result in any additional compensation charges or variable plan accounting.



F - 32



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Supplemental Financial Information (Unaudited)



The following tables set forth certain unaudited consolidated statements of operations data, both in absolute dollars and as
a percentage of total revenue, for each of our last eight quarters. This data has been derived from unaudited condensed consolidated financial statements that have been prepared on the same basis as the annual audited consolidated financial
statements and, in our opinion, include all normal recurring adjustments necessary for a fair presentation of such information. These unaudited quarterly results should be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-K. The consolidated results of operations for any quarter are not necessarily indicative of the results for any future period.



|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------------------------- | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | ------------- | -------- | - | ------------ | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                                     |  | Three Months Ended                                |        
|                                                                                     |  | March 31,2002                                     |         |   | June 30,2002 |   |         | Sept. 30,2002 |  |   | Dec. 31,2002 |   |  | March 31,2003 |          |   | June 30,2003 |   |        | Sept. 30,2003 |  |   | Dec. 31,2003 |  
|                                                                                     |  | (in thousands, except share data and percentages) |        
|Revenue:                                                                             |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Product license                                                                      |  | $                                                 | 20,491  |   |              | $ | 12,610  |               |  | $ | 11,354       |   |  | $             | 17,963   |   |              | $ | 16,451 |               |  | $ | 14,950       |   |  | $ | 13,405 |   |  | $ | 16,180  |  
|Services                                                                             |  |                                                   | 25,888  |   |              |   | 23,039  |               |  |   | 21,362       |   |  |               | 22,431   |   |              |   | 24,345 |               |  |   | 25,368       |   |  |   | 24,602 |   |  |   | 23,013  |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Total revenue                                                                        |  |                                                   | 46,379  |   |              |   | 35,649  |               |  |   | 32,716       |   |  |               | 40,394   |   |              |   | 40,796 |               |  |   | 40,318       |   |  |   | 38,007 |   |  |   | 39,193  |  
|Cost of revenue:                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Product license                                                                      |  |                                                   | 826     |   |              |   | 486     |               |  |   | 394          |   |  |               | 682      |   |              |   | 553    |               |  |   | 527          |   |  |   | 886    |   |  |   | 878     |  
|Amortization of acquired technology                                                  |  |                                                   |        |   |              |   |        |               |  |   |             |   |  |               | 267      |   |              |   | 800    |               |  |   | 800          |   |  |   | 800    |   |  |   | 1,050   |  
|Services                                                                             |  |                                                   | 13,082  |   |              |   | 10,945  |               |  |   | 9,701        |   |  |               | 9,946    |   |              |   | 10,465 |               |  |   | 9,943        |   |  |   | 9,558  |   |  |   | 9,565   |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Total cost of revenue                                                                |  |                                                   | 13,908  |   |              |   | 11,431  |               |  |   | 10,095       |   |  |               | 10,895   |   |              |   | 11,818 |               |  |   | 11,270       |   |  |   | 11,244 |   |  |   | 11,493  |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Gross profit                                                                         |  |                                                   | 32,471  |   |              |   | 24,218  |               |  |   | 22,621       |   |  |               | 29,499   |   |              |   | 28,978 |               |  |   | 29,048       |   |  |   | 26,763 |   |  |   | 27,700  |  
|Operating expenses:                                                                  |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Research and development                                                             |  |                                                   | 13,949  |   |              |   | 12,951  |               |  |   | 11,757       |   |  |               | 12,677   |   |              |   | 12,109 |               |  |   | 10,559       |   |  |   | 8,783  |   |  |   | 8,472   |  
|Sales and marketing                                                                  |  |                                                   | 28,989  |   |              |   | 18,787  |               |  |   | 16,681       |   |  |               | 20,318   |   |              |   | 18,228 |               |  |   | 16,292       |   |  |   | 16,607 |   |  |   | 17,033  |  
|General and administrative                                                           |  |                                                   | 6,627   |   |              |   | 5,234   |               |  |   | 5,107        |   |  |               | 4,376    |   |              |   | 4,801  |               |  |   | 3,643        |   |  |   | 4,104  |   |  |   | 3,179   |  
|Purchased in-process research and development, acquisition-related and other charges |  |                                                   |        |   |              |   |        |               |  |   |             |   |  |               | 1,786    |   |              |   | 1,143  |               |  |   | 1,128        |   |  |   |       |   |  |   | 1,987   |  
|Impairment of intangible assets                                                      |  |                                                   |        |   |              |   |        |               |  |   |             |   |  |               | 147,269  |   |              |   |       |               |  |   |             |   |  |   |       |   |  |   |        |  
|Business restructuring charges                                                       |  |                                                   | 13,808  |   |              |   |        |               |  |   | 18,064       |   |  |               | 3,950    |   |              |   | (1     | )             |  |   | (1,388       | ) |  |   | (623   | ) |  |   | (12,675 | )
|Amortization of deferred stock Compensation                                          |  |                                                   | 709     |   |              |   | 364     |               |  |   | 137          |   |  |               | 186      |   |              |   | 377    |               |  |   | 237          |   |  |   | 178    |   |  |   | 315     |  
|Amortization of intangible assets                                                    |  |                                                   | 7,633   |   |              |   | 7,612   |               |  |   | 334          |   |  |               | 481      |   |              |   | 609    |               |  |   | 442          |   |  |   | 442    |   |  |   | 472     |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Total operating expenses                                                             |  |                                                   | 71,715  |   |              |   | 44,948  |               |  |   | 52,080       |   |  |               | 191,043  |   |              |   | 37,266 |               |  |   | 30,913       |   |  |   | 29,491 |   |  |   | 18,783  |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Income (loss) from Operations                                                        |  |                                                   | (39,244 | ) |              |   | (20,730 | )             |  |   | (29,459      | ) |  |               | (161,544 | ) |              |   | (8,288 | )             |  |   | (1,865       | ) |  |   | (2,728 | ) |  |   | 8,917   |  
|Other income (expense), net                                                          |  |                                                   | 1,687   |   |              |   | 1,051   |               |  |   | (4,676       | ) |  |               | 1,421    |   |              |   | 1,035  |               |  |   | 1,276        |   |  |   | 1,085  |   |  |   | 1,672   |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Income (loss) before income taxes                                                    |  |                                                   | (37,557 | ) |              |   | (19,679 | )             |  |   | (34,135      | ) |  |               | (160,123 | ) |              |   | (7,253 | )             |  |   | (589         | ) |  |   | (1,643 | ) |  |   | 10,589  |  
|Provision for income taxes                                                           |  |                                                   | 390     |   |              |   | 232     |               |  |   | 70           |   |  |               | 627      |   |              |   | 294    |               |  |   | 278          |   |  |   | 278    |   |  |   | 287     |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Net loss                                                                             |  | $                                                 | (37,947 | ) |              | $ | (19,911 | )             |  | $ | (34,205      | ) |  | $             | (160,750 | ) |              | $ | (7,547 | )             |  | $ | (867         | ) |  | $ | (1,921 | ) |  | $ | 10,302  |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  
|Basic and diluted net income (loss) per share (1)                                    |  | $                                                 | (0.15   | ) |              | $ | (0.08   | )             |  | $ | (0.14        | ) |  | $             | (0.64    | ) |              | $ | (0.03  | )             |  | $ | (0.00        | ) |  | $ | (0.01  | ) |  | $ | 0.04    |  
|                                                                                     |  |                                                   |         |   |              |   |         |               |  |   |              |   |  |               |          |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |         |  

---

|(1) | Basic and diluted net income (loss) per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly loss per common share information may
not equal the annual loss per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 33



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##### Table of Contents

##### Index to Financial Statements

VIGNETTE CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|------------------------------------------------------------------------------------ |  | ------------------ | -- |  | ------------ | -- |  | ------------- | -- |  | ------------ | -- |  | ------------- | -- |  | ------------ | -- |  | ------------- | -- |  | ------------ | -
|                                                                                     |  | Three Months Ended |   
|                                                                                     |  | March 31,2002      |    |  | June 30,2002 |    |  | Sept. 30,2002 |    |  | Dec. 31,2002 |    |  | March 31,2003 |    |  | June 30,2003 |    |  | Sept. 30,2003 |    |  | Dec. 31,2003 |  
|As a Percentage of Total Revenue:                                                    |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Revenue:                                                                             |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Product license                                                                      |  | 44                 | %  |  | 35           | %  |  | 35            | %  |  | 44           | %  |  | 40            | %  |  | 37           | %  |  | 35            | %  |  | 41           | %
|Services                                                                             |  | 56                 |    |  | 65           |    |  | 65            |    |  | 56           |    |  | 60            |    |  | 63           |    |  | 65            |    |  | 59           |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Total revenue                                                                        |  | 100                |    |  | 100          |    |  | 100           |    |  | 100          |    |  | 100           |    |  | 100          |    |  | 100           |    |  | 100          |  
|Cost of revenue:                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Product license                                                                      |  | 2                  |    |  | 1            |    |  | 1             |    |  | 2            |    |  | 1             |    |  | 1            |    |  | 2             |    |  | 2            |  
|Amortization of acquired technology                                                  |  |                   |    |  |             |    |  |              |    |  | 1            |    |  | 2             |    |  | 2            |    |  | 2             |    |  | 3            |  
|Services                                                                             |  | 28                 |    |  | 31           |    |  | 30            |    |  | 24           |    |  | 26            |    |  | 25           |    |  | 25            |    |  | 24           |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Total cost of revenue                                                                |  | 30                 |    |  | 32           |    |  | 31            |    |  | 27           |    |  | 29            |    |  | 28           |    |  | 29            |    |  | 29           |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Gross profit                                                                         |  | 70                 |    |  | 68           |    |  | 69            |    |  | 73           |    |  | 71            |    |  | 72           |    |  | 71            |    |  | 71           |  
|Operating expenses:                                                                  |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Research and development                                                             |  | 30                 |    |  | 36           |    |  | 36            |    |  | 31           |    |  | 30            |    |  | 26           |    |  | 23            |    |  | 22           |  
|Sales and marketing                                                                  |  | 63                 |    |  | 53           |    |  | 51            |    |  | 50           |    |  | 45            |    |  | 40           |    |  | 44            |    |  | 43           |  
|General and administrative                                                           |  | 14                 |    |  | 15           |    |  | 16            |    |  | 11           |    |  | 12            |    |  | 9            |    |  | 11            |    |  | 8            |  
|Purchased in-process research and development, acquisition-related and other charges |  |                   |    |  |             |    |  |              |    |  | 4            |    |  | 3             |    |  | 3            |    |  | 0             |    |  | 5            |  
|Impairment of intangible assets                                                      |  |                   |    |  |             |    |  |              |    |  | 365          |    |  |              |    |  |             |    |  |              |    |  |             |  
|Business restructuring charges                                                       |  | 30                 |    |  |             |    |  | 54            |    |  | 10           |    |  |              |    |  | (3           | )  |  | (2            | )  |  | (32          | )
|Amortization of deferred stock compensation                                          |  | 2                  |    |  | 1            |    |  | 1             |    |  | 1            |    |  | 1             |    |  | 1            |    |  |              |    |  | 1            |  
|Amortization of intangible assets                                                    |  | 16                 |    |  | 21           |    |  | 1             |    |  | 1            |    |  | 1             |    |  | 1            |    |  | 1             |    |  | 1            |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Total operating expenses                                                             |  | 155                |    |  | 126          |    |  | 159           |    |  | 473          |    |  | 92            |    |  | 77           |    |  | 77            |    |  | 48           |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Income (loss) from operations                                                        |  | (85                | )  |  | (58          | )  |  | (90           | )  |  | (400         | )  |  | (20           | )  |  | (5           | )  |  | (6            | )  |  | 23           |  
|Other income (expense), net                                                          |  | 4                  |    |  | 3            |    |  | (14           | )  |  | 4            |    |  | 3             |    |  | 3            |    |  | 3             |    |  | 4            |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Income (loss) before income taxes                                                    |  | (81                | )  |  | (55          | )  |  | (104          | )  |  | (396         | )  |  | (17           | )  |  | (2           | )  |  | (3            | )  |  | 27           |  
|Provision for income taxes                                                           |  | 1                  |    |  | 1            |    |  | 1             |    |  | 2            |    |  | 1             |    |  | 1            |    |  | 1             |    |  | 1            |  
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  
|Net income (loss)                                                                    |  | (82                | )% |  | (56          | )% |  | (105          | )% |  | (398         | )% |  | (18           | )% |  | (3           | )% |  | (4            | )% |  | 26           | %
|                                                                                     |  |                    |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |    |  |               |    |  |              |  



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