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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

For the fiscal year ended December 31, 2005

OR



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

Commission File Number: 000-25375



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VIGNETTE CORPORATION

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)

(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
act.    Yes ̈No  x

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 a large accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ̈Accelerated Filer  x    Non-Accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

As of June 30, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $327,698,775.

As of February 28, 2006, 29,743,727 shares of the registrants common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held May 26, 2006 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, 2005

TABLE OF CONTENTS



|          |  |          |  |                                                                                                |  |     
|--------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|          |  |          |  |                                                                                                |  | Page
|Part I.   |  |          |  |                                                                                               
|          |  |          | 
|          |  | Item 1.  |  | Business                                                                                       |  | 3   
|          |  |          | 
|          |  | Item 1A. |  | Risk Factors                                                                                   |  | 12  
|          |  |          | 
|          |  | Item 1B. |  | Unresolved Staff Comments                                                                      |  | 25  
|          |  |          | 
|          |  | Item 2   |  | Properties                                                                                     |  | 25  
|          |  |          | 
|          |  | Item 3.  |  | Legal Proceedings                                                                              |  | 26  
|          |  |          | 
|          |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 27  
|          |  |         
|Part II.  |  |          |  |                                                                                               
|          |  |          | 
|          |  | Item 5.  |  | Market for Registrants Common Stock and Related Stockholder Matters                           |  | 27  
|          |  |          | 
|          |  | Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 28  
|          |  |          | 
|          |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 29  
|          |  |          | 
|          |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 48  
|          |  |          | 
|          |  | Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                       |  | 49  
|          |  |          | 
|          |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 49  
|          |  |          | 
|          |  | Item 9A. |  | Controls and Procedures                                                                        |  | 49  
|          |  |          | 
|          |  | Item 9B. |  | Other Information                                                                              |  | 50  
|          |  |         
|Part III. |  |          |  |                                                                                               
|          |  |          | 
|          |  | Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 50  
|          |  |          | 
|          |  | Item 11. |  | Executive Compensation                                                                         |  | 51  
|          |  |          | 
|          |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 51  
|          |  |          | 
|          |  | Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 52  
|          |  |          | 
|          |  | Item 14. |  | Principal Accountant Fees and Services                                                         |  | 52  
|          |  |         
|Part IV.  |  |          |  |                                                                                               
|          |  |          | 
|          |  | Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 52  
|          |  |          | 
|          |  |          |  | Signatures                                                                                     |  | 55  



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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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, 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

Our History

Vignette was founded in 1995 and for the first several years, 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 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. In
2002, we acquired assets of Revenio, that provided Vignette with dialog, which serves as a script for a compelling, personalized customer experience that unfolds for each individual.

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 and in 2004 we began to see some stabilization in our served
markets, and saw the interest in delivering critical business information via the Web as increasing. In 2005, we saw companies focused on growth and customer service. Companies expanded their focus from managing and leveraging



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Web content to contemplating the capture, management, sharing and delivery of all types of enterprise content including
documents, records, audio, video, e-mail and other forms of information. IDC estimates that the Enterprise Content Management (ECM) market is growing at 14% compound growth rate and will exceed $4.1 billion by 2009. IDC estimates the Portal market
is growing at 14% compound growth rate to $1.8 billion in 2009. IDC also estimates team collaborative applications represent a compound annual growth rate of 8.4%. (IDC Content Management includes content management, electronic records management,
imaging, archiving, document management, digital or media asset management and Web content management).

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 2002, we introduced Vignette V7, the latest iteration of our flagship Web
content management product. Also in December 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 under the
expanded Vignette V7 product family 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 Java 2 Platform Enterprise Edition
(J2EE) standards.

Overview

We believe we are well positioned to help companies integrate the management and delivery of information to drive
revenue growth, operating efficiencies, and improved customer service. Our Web content management, collaboration, document and records management, portal and imaging and workflow technologies give organizations the capability to provide a
personalized Web experience; integrate systems and information from inside and outside the organization; manage the lifecycle of enterprise information; and collaborate by supporting ad-hoc and process-based information sharing. Together, our
products and expertise help companies harness the power of their information and the Web to deliver measurable improvements in business efficiency.

Web content management capabilities can manage how information is stored and can deliver it in the context of how it will be consumed. Collaboration capabilities provide a complete online environment for distributed networks of information
workers while maintaining a group memory of intellectual property and work products. Our records and document capabilities enable capture, processing and archiving of virtually all types of information. Our portal helps organizations create, manage,
personalize and deliver integrated composite applications that create a consistent user interface to Vignette content and document management products and other corporate repositories and applications. Our integration capability allows organizations
to leverage content and processes from virtually any source or enterprise application and deploy objects for use with other applications. Interaction management helps improve communications with customers, prospects, employees and partners through
ongoing dialogs that help respond to changing needs. Our imaging and workflow capabilities scan and index high volumes of images in a centralized or distributed production and automate business processes that move information and content through
business workflows.

To meet the information technology needs of organizations of all sizes, our capabilities are developed using open
technology standards. Our capabilities accelerate the time for organizations to recognize value by reaching new markets more quickly, and delivering software applications faster by using a set of comprehensive application services provided on a
consistent standards-based platform. Our capabilities are adaptable, allowing organizations to configure the business solutions to meet their unique requirements.

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 content management, portal, process, collaboration, integration and analysis applications. Our education,



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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, Deloitte Consulting, BearingPoint, and Tata Consulting Services 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, Hewlett Packard, and Sun
Microsystems.

In 2005, Vignette leveraged its ECM capabilities and added a solution focused on healthcare. The Vignette Healthcare
ProFiciency Patient Record solution applies document management technology to patient records and healthcare administration applications. Clinicians are empowered to electronically access all patient encounter documents with clinical orders and
results through the electronic medical record (EMR) system. Accounting and Billing can expedite claims processing with prescribed workflows. HIPAA regulations are satisfied through extensive security and functional audit trails. The Vignette
Healthcare ProFiciency Patient Record solution helps reduce storage and retrieval costs, increases accessibility to the complete EMR to mitigate medical errors, respect patient privacy, and improve patient service.

Products

Our Web content management, collaboration,
document and records management, imaging and workflow, portal, integration and interaction management products form the complete suite of enterprise content management solutions that enable organizations to rapidly build, manage and deploy
information-based applications. Our solutions help our customers:



| |  |  | Increase their return on investment through the cost benefits of an integrated solution from a single vendor;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Derive value from our unique ability to use and manage information where it is currently stored, regardless of format and repository;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Automate important document-based processes such as claims processing, medical records, and loan origination that drive business efficiencies and deliver measurable returns on
investment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Create an information architecture for compliance initiatives by managing processes, creating organizational visibility, archiving information with appropriate access and creating
and disposing of records.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 combine a comprehensive understanding of content assets across the business with Web applications that actively manage and deliver
the right information and processes to the right person at the right time, regardless of source.

To address the particular requirements of
our customers, we deliver our products in various suites: Vignette ECM Suite and a suite that includes Vignette Portal, Content Management and Collaboration. Additionally, we allow organizations the flexibility to purchase products individually. Our
produce offerings are grouped into seven application services categories: Web content management, collaboration, document and records management, portal, integration, interaction management and imaging and workflow. Organizations may purchase
products individually from these seven categories or pre-bundled into suites that meet their specific needs. Following is a listing of our product offerings.



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Web Content Management includes library services, content type modeling,
workflow, taxonomy, and search.

Vignette Content Managementmanages 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.

Collaborationenhances the capability of sharing knowledge for teams using workspaces.

Vignette Collaboration is an enterprise solution for business users to create workspaces, where teams can share, capture and search
information. Vignette Collaboration 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 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 project collaboration and can capture project assets, expertise and best practices. Using Vignette Project Delivery can help organizations
increase the 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, and productivity of internal teamwork while reducing the
costs of account management.

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.

Vignette Records & Documents is an enterprise document and records management solution that manages fixed assets, automates document based workflows, manages casework through a process, and implements important
archival and disposition of records. Vignette Records & Documents facilitates risk and compliance management, and implements important document management capabilities including metadata search, QBE, indexed full text search,
check in/out and ACL security .

Vignette WebCapture is a secure Web transaction capture and playback risk management
solution that archives transactions on a customers site and creates a permanent record of them for dispute resolution.

Imaging and workflow
allows a user to scan and index high volume imaging and workflow that promotes faster, more cost-efficient processing, access security, as well as personalized delivery of electronic information.

Vignette IDM 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.



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Portal provides both a highly functional portal framework and a user-friendly development environment for
assembling portlets.

Vignette Portal is an adaptable, scalable, open-portal solution that enables organizations to rapidly
build and deliver highly customizable applications for their organization across audiences such as employees, partners and customers. We also offer a variety of additional specialized products to enhance our portal.

 Vignette 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.

Integrationcapabilities provide unique capabilities to connect a broad range of unstructured, semi-structured and structured data (including transactional)
sources.

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. Adapters are plug-ins to Vignette Business Integration Studio that provide prepackaged integration capabilities to common technology applications.

Interaction Management helps improve communications with stakeholders such as customers, prospects, employees and partners. It requires having ongoing dialogs with these stakeholders over a period of time. Ongoing dialogs help you
learn about, adapt to, and respond to stakeholders changing needs and preferences so that you can lead your stakeholders toward a desired outcome.

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.

Open Architecture

We have built an open and
comprehensive platform and provide support for major industry standard platforms, including both Java 2 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 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 Portals own Web delivery framework as well as JavaServer Pages (JSP), ActiveServer Pages (ASP) and XML with style sheets. 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 products and solutions.
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.



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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 portal, content, integration, collaboration, process, 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 enterprise content management
applications designed to meet customers business objectives. VPS generally sells their services under time-and-materials agreements.

Our Customer Care, Maintenance and Support Services organizations are committed to our customers ongoing 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 enterprise content management applications. Our solutions enable organizations to harness the power of information and the Web to deliver measurable
improvements in business efficiency. We will continue to focus on delivering sustained revenue and profitable growth, expanding our customer base of global 2000 organizations, extending our technology leadership through investment in research
and development, expanding our global sales capabilities and building upon our strategic alliances with leading companies.

Strategic Alliances

We establish strategic alliances to assist us in the marketing, selling, distribution, and development of our enterprise content
management applications and solutions. 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 and technical
expertise, and increased channels of distribution in certain vertical industry segments. In addition, our focus on vertical and horizontal solution offerings 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, Deloitte Consulting, BearingPoint, and Tata Consulting Services. We have also established strategic alliances with
technology leaders such as BEA Systems, Hewlett-Packard, 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

The following is a listing of our three most recent acquisitions:

TOWER Technology Pty Limited.Effective March 1, 2004, we acquired TOWER Technology Pty Limited (Tower Technology), a leading
provider of enterprise document and records management solutions. We paid approximately $125.0 million for Tower Technology, consisting of approximately $49.8 million in cash and 27.2 million shares of common stock for all of the issued and
outstanding shares of Tower Technology.



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Intraspect Software, Inc. Effective December 11, 2003, we acquired all of the outstanding
stock of Intraspect Software, Inc. (Intraspect), 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. (Epicentric), 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. In four of our 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 $0.3 million, $7.6 million, and $4.3 million during 2005, 2004, and 2003, respectively.

Customers

As of December 31, 2005, we had
served over 1,700 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 is 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 enterprise content management
solutions; and developers of point solution software that address only certain technology components of the solution set that we provide (e.g., Web content management, collaboration, document and records management, portal, integration, interaction
management and imaging and workflow.

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



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technologies for integration into our product lines, we expect that most enhancements to existing and new products will
be developed internally. We have recently moved to a model where approximately 50 percent of our research and development operations will be maintained in India. There, third-party developers are acting as an extension of our primary development and
information technology operations in Austin, Texas and Sydney, Australia. We expect this model to help us achieve significant efficiencies, including reduced operational costs and permit an around-the-clock development cycle. See Risk Factors
that May Affect Future ResultsRisks Related to Our BusinessOur Business May Become Increasingly Susceptible to Numerous Risks Associated with International Operations.

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 2005, 2004 and 2003 were approximately $33.2 million, $40.2 million, and $39.9 million respectively. We expect that we will continue to commit significant resources to research and
development in the future. Substantially all of our 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 appropriate resources in our research and development efforts, our overall spending has been reduced as
part of our focus on 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.

As a part of Vignettes cost reduction
efforts in research and development, we have shifted an increased percentage of our development efforts offshore to our Global Development Center in Hyderabad, India. Although this center is being structured and operated properly, there are risks
inherent to offshoring, risks inherent to outsourcing, and risks inherent to operating a team and facility in India. See Risk Factors that May Affect Future ResultsRisks Related to our Business We Use a Third-Party Service Provider
in India for a Significant Portion of Our Research and Development Operations and, If We Are Unable to Manage Our Outsourcing Relationship or if We Are Unable to Use Such a Provider, Our Business Could Be Adversely Affected.

Sales and Marketing

We market our products primarily
through our direct sales force as well as through indirect sales channel with systems integrators, value-added resellers and original equipment manufacturers. We generate leads from a variety of sources, including businesses seeking partners to
develop enterprise content management applications. Initial sales activities typically include a demonstration of our product capabilities followed by one or more detailed technical reviews. As of December 31, 2005, the direct sales force
consisted of 187 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,



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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 twelve (12) patents and have a number of patent applications pending in the United States. We have seventeen (17) registered
trademarks in the United States, two (2) pending trademark applications in the United States, seventy-two (72) registered trademarks in foreign countries, and seventeen (17) 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 of any material infringement by our products of 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 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. 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.



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Employees

As of December 31, 2005, we had 738 employees, including 130 in research and development, 227 in sales and marketing, 289 in professional services and customer support, and 92 in finance and administration. Our future success will
depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. From time to time, we also employ independent contractors to support our professional services,
product development, sales, marketing and 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.

ITEM 1A. RISK FACTORS

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.

Various sections of this Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled Risk
Factors and elsewhere in this Form 10-K. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Risks Related to Our Business

We Have Returned to Profitability but May not be Able to Sustain Consistent
Profitability

Although we recorded a profit in fiscal year 2005, we cannot be certain that we will generate sufficient revenues to
maintain profitability. If we do maintain profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. To achieve and sustain profitable operations and positive cash flows, we must
increase our license and support services revenues. If our revenues do not grow at a rate greater than expenses required to fund our continuing operations, we will not be able to maintain the profitability recorded in fiscal year 2005, which could
cause the price of our common stock to decline.

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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | --------------------------------------------------------------------------------------------



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



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



| |  |  | difficulty in developing and maintaining an indirect sales channel.
| | - |  | -------------------------------------------------------------------

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 Revenue For a Particular Period is
Difficult to Forecast, and a Shortfall in Revenue Would Harm Our Operating Results

As a result of the evolving nature of the market in
which we compete, our revenue, license bookings, and earnings are difficult to forecast and are likely to fluctuate from quarter to quarter. We plan our operating expense based on our historical results, and 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 forecasted. Our ability to accurately forecast 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.

We Use a Third-Party Service Provider in India for a Significant Portion of Our
Research and Development Operations and, If We Are Unable to Manage Our Outsourcing Relationship or if We Are Unable to Use Such a Provider, Our Business Could Be Adversely Affected

We are currently using a third-party service provider in India to supply approximately half of our research and development operations. As other software
companies have done and are continuing to do, we may continue to allocate more development and IT resources to Indian third parties, and we may expand our own operational capabilities in India, with the expectation of achieving significant
efficiencies including reduced operational costs and an around-the-clock development cycle. If we are unable to successfully manage our relationship with the third-party service provider, we will not be able to achieve such efficiencies and our
business operations could be harmed.

In addition, although to date, the dispute between India and Pakistan involving the Kashmir region
and the incidents of terrorism in India have not adversely affected our ability to utilize a third-party service provider in India, such disputes and acts of terrorism could potentially affect our ability to obtain research and development
operations from third-party providers. Should we be unable to use a third-party service provider in India for a portion of our research and development in the future, we believe that our business could be adversely affected.



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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;
| | - |  | -----------------------------------------------



| |  |  | seasonality of operations;
| | - |  | --------------------------



| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | the need to localize our products;
| | - |  | ----------------------------------



| |  |  | licenses, tariffs, and other trade barriers;
| | - |  | --------------------------------------------



| |  |  | loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



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



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

The acquisition of
Tower Technology and our recent consolidation of product development facilities to overseas labor markets substantially increase our international operations. Rapid and complete knowledge transfer and successful retention of key personnel is
essential to our plan to consolidate product development facilities and transfer positions to labor markets with lower cost structures.

We
recorded 39% and 38% of our total revenue for the years ended December 31, 2005 and 2004, respectively, 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. Historically, a majority of our international revenues and costs have been denominated in foreign currencies, and we
expect future international revenues and costs will be denominated in foreign currencies. 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.

In the third quarter of 2004, we adopted a foreign exchange policy to reduce our exposure to significant
foreign currency fluctuations. We utilize foreign currency forward contracts to hedge foreign currency-denominated payables and receivables. To date, we have not hedged forecasted transactions or firm commitments denominated in foreign currencies.
Gains and losses on hedging contracts are reflected currently in other income and expense. We typically limit the duration of our foreign currency forward contracts to 90 days. We do not invest in contracts for speculative purposes.

We Must Overcome Significant Challenges in Integrating Businesses Operations and Product Offerings to Realize the Benefits of our Business Combinations

As part of our overall strategy, we have acquired or invested in, complementary companies, products, and technologies. Risks commonly
associated with such transactions 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;
| | - |  | ------------------------------------------------------------



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| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

For such transactions to achieve their anticipated benefits, we must successfully combine and integrate products in a timely manner. Integrating can 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. 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.

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. There can be no assurance
that we will succeed in addressing these risks or any other problems encountered in connection with the acquisition.

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 our product Strategy and Business Combinations.

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.

Our success in these new markets 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
| | - |  | -----------------------------------------------------------------



| |  |  | barriers to entry for the emergence of substitute technologies and products.
| | - |  | ----------------------------------------------------------------------------

If we are unable to succeed in these markets, our business may be harmed and we may be prevented from realizing the anticipated benefits of our business strategy and our acquisitions.

Acquisitions, Including Our Acquisition of Tower TechnologyCould Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value and Adversely Affect Our
Operating Results

The Company will continue to consider strategic acquisitions. 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 completed our
acquisition of Tower Technology in March 2004. Failure to successfully address the risks associated with this acquisition could



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harm our ability to fully integrate and market products based on the acquired technology. We may discover liabilities and
risks associated with this acquisition 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.

The Market Price of Our Common
Stock May Decline as a Result of Future Acquisitions

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



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



| |  |  | 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 acquired companys shareholders; and
| | - |  | ----------------------------------------------------------------------



| |  |  | the potential negative effect of the acquisition on our operating results, including the impact of amortization of intangible assets, other than goodwill, created by the acquisition
and claims that are not covered by the escrow provisions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

Our Ability to Use Net Operating Losses to Offset Future Taxable Income may be Subject to Certain Limitations.

In
general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) to offset future taxable
income. A substantial portion of our existing NOLs and tax credits relate to companies that we have acquired and may be subject to limitations arising from ownership changes prior to, or in connection with, their acquisition by
us. Furthermore, our ability to utilize NOLs and tax credits of companies that we may acquire in the future may be subject to limitations. Our existing NOLs and tax credits may be subject to limitations arising from previous ownership
changes, and future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code, potentially further limiting our ability to utilize our NOLs
and tax credits. For these reasons, we may not be able to utilize a material portion of the NOLs and tax credits disclosed in our financial statements to offset future income. This may result in a substantial increase to income tax expense
in future periods.



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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.

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. 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.



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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
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.



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Historically, services costs related to professional services have frequently 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 demands 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 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 technical, sales, managerial, and executive personnel throughout all areas of our business. If we lose one or more of our key employees, our business,
operating results and financial condition could be materially adversely affected. As we transition to an offshore research and development operations model, it is particularly important that our intellectual property is protected and retained during
this transfer. In addition, our future success will depend largely on our ability to continue to attract and retain highly skilled personnel. In particular, hiring and retaining qualified engineers, skilled solutions providers, and qualified sales
representatives is critical to our future. Like other software companies, we face competition for qualified personnel. If we are unable to continue to attract and retain skilled and experienced personnel, our growth may be limited.

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



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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 are 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.

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;
| | - |  | -----------------------------------------------------------



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| |  |  | 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-hundredth of a share of Series A Junior Participating Preferred Stock, par $0.01 per share, at a price of $300.00 per one one-hundredth, 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.

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.

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

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. However, new accounting rules will require the Company to record an expense for our stock-based compensation plans using the fair value method beginning in
fiscal 2006. If we had accounted for stock-based compensation plans using the fair value method, our income per share for the year ended December 31, 2005 would have been decreased by $0.23 per diluted share of common stock based on the
pro-forma calculations as provided in the footnotes to our financial statements.



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In October 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards123R, Share-Based Payment (Statement 123R),which is a proposed amendment to Statement of Financial Accounting Standards 123,Accounting for Stock-Based Compensation, (Statement 123). Generally,
the approach under Statement 123R will require companies to recognize the fair value of share-based payments to employees, including grants of employee stock options and the right to purchase shares under an employee stock purchase plan.We
are required to adopt Statement 123R in the first quarter of fiscal 2006. The pro forma disclosures previously permitted under Statement 123 will no longer be an alternative to financial statement recognition. See Note 2 in the Notes to our
Consolidated Financial Statements for the pro forma net income/(loss) and net income/(loss) per share amounts, for fiscal 2003 through fiscal 2005, as if we had used a fair-value-based method similar to the methods required under Statement 123R to
measure compensation expense for employee stock incentive awards.

Statement 123R permits adoption using one of two methods:
(1) a modified prospective method in which compensation cost is recognized beginning on the effective date based on the requirements of Statement 123R for all share-based payments granted after the effective date and based on
Statement 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date or (2) a modified retrospective method which includes the requirements of the modified prospective method,
but also permits entities to restate all periods presented or prior interim periods of the year of adoption based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures. We plan to adopt SFAS 123R using
the modified prospective method, under which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the
previous requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.

The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of SFAS 123R. Compensation expense calculated under SFAS 123R may differ from amounts
currently disclosed within our footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors.
Upon adoption of SFAS 123R, we plan to use the Black-Scholes model to value the compensation expense associated with employee stock options and stock purchases under our employee stock purchase plan. We are currently evaluating the potential impact
of this standard on our financial position, results of operations, and cash flows. We expect this standard to have a significant impact on the consolidated statements of operations.

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.

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.



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Risks Related to the Software Industry

Our Business is Sensitive to the Overall Economic Environment; a 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. A 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 Enterprise Content Management 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 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.



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Risks Related to the Securities Markets

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;
| | - |  | -----------------------------------------------



| |  |  | large percentage of stock held by a few large shareholders; 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
increase in the near future, it is possible that 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.

If Our Internal Controls Over Financial Reporting Do Not Comply With the Requirements of the Sarbanes-Oxley Act, Our Business and Stock Price Could Be
Adversely Affected

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls
over financial reporting as of the end of each year beginning in 2004, and to include a



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management report assessing the effectiveness of our internal controls over financial reporting in all annual reports
beginning with this Report. Section 404 also requires our independent registered public accounting firm to attest to, and report on, managements assessment of our internal controls over financial reporting.

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, involving the company have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can
also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future
events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial
reporting was effective as of December 31, 2005, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal
controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may
experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

Our Business is Subject to Changing
Regulation of Corporate Governance and Public Disclosure That Has Increased Both Our Costs and the Risk of Noncompliance

Because our
common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded.
These entities, including the Public Company Accounting Oversight Board, the Securities Exchange Commission and NASDAQ, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response
to recent laws enacted by Congress, most notably the Sarbanes-Oxley Act. Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors audit of that assessment has required, and continues to require, the commitment of significant financial and managerial resources.

Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new
guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

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, 2005, we leased direct office space in: Austin, Texas; Brisbane, California; New York City, New York; Boston, Massachusetts; Chicago,
Illinois; Sydney, Australia; Slough and Maidenhead, United Kingdom; and Madrid, Spain. Such leases have remaining terms of up to six years. All offices listed above support sales and services activity, and we have research and development activity
in our Austin, Texas and Sydney, Australia offices.



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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, 2005, we leased office space
in 16 countries outside of the United States.

Throughout 2005 and 2004, we consolidated our leased office portfolio. Some of the resulting
excess lease space expired in 2005, 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; New York City, New York;
and Boston, Massachusetts 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; Chicago, Illinois;
Boston, Massachusetts, New York City, New York; and Slough, United Kingdom for the respective remaining lease terms.

ITEM 3. LEGAL PROCEEDINGS

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 plaintiff 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 seeks damages in an unspecified amount.

The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. 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. On February 19, 2003, the Court denied a motion to dismiss the complaint against the
Company. On October 13, 2004, the Court certified a class in six of the other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases.
Plaintiffs have not yet moved to certify a class in the Companys case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the individual defendants, the
plaintiff class and the vast majority of the other issuer defendants. Among other provisions, the settlement 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. The settlement agreement also provides a guaranteed recovery of $1 billion
to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent



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that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the
issuers settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to
plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation
to plaintiffs from its insurance carriers. Its carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the
settlement will involve any payment by the Company. Even if material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Companys insurance carriers should arise, the Companys maximum
financial obligation to plaintiffs pursuant to the settlement agreement is less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its
opinion. Those modifications have been made. There is no assurance that the Court will grant final approval of the settlement. The Company can not predict whether or when a settlement will occur or be finalized. If the settlement is not approved,
the Company is unable 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. The Company believes that this lawsuit is without merit and would continue
to defend itself vigorously if the settlement is not approved.

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 AND ISSUER PURCHASE OF EQUITY SECURITIES

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. All closing sale prices per share have been restated for the
one-for-ten reverse stock split of the Company that became effective on June 10, 2005.



|                              |  |      |       |     |   |      
|----------------------------- |  | ---- | ----- | --- | - | -----
|                              |  | High |       | Low
|Year Ended December 31, 2005: |  |      |       |     |   |      
|Fourth Quarter                |  | $    | 18.29 |     | $ | 14.36
|Third Quarter                 |  |      | 16.09 |     |   | 11.30
|Second Quarter                |  |      | 13.20 |     |   | 10.80
|First Quarter                 |  |      | 13.70 |     |   | 11.60
|Year Ended December 31, 2004: |  |      |       |     |   |      
|Fourth Quarter                |  | $    | 15.30 |     | $ | 10.20
|Third Quarter                 |  |      | 15.60 |     |   | 11.00
|Second Quarter                |  |      | 22.40 |     |   | 14.60
|First Quarter                 |  |      | 28.90 |     |   | 20.40



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At February 28, 2006, there were approximately 499 holders of record and 60,000 total shareholders
of our common stock and the closing price of our common stock was $16.10 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.

ITEM 6. SELECTED FINANCIAL DATA

The following selected 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, 2005, 2004 ,and 2003 and the consolidated balance sheet data at December 31, 2005 and 2004 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, 2002 and 2001 and the consolidated balance sheet data at December 31, 2003, 2002, and 2001 are derived from
audited consolidated financial statements not included in this Annual Report on Form 10-K.



|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|------------------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | -------- | - | ------- | -------- |  | - | -------- | - |  | ---- | -------- | - |  | - | ---------- | -
|                                                                                     |  | Year ended December 31,               |        
|                                                                                     |  | 2005                                  |         |   | 2004 (4) |   |         | 2003 (3) |  |   | 2002 (2) |   |  | 2001 |         
|                                                                                     |  | (in thousands, except per share data) |        
|Consolidated Statements of Operations Data:                                          |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Revenue:                                                                             |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Product license                                                                      |  | $                                     | 70,316  |   |          | $ | 63,152  |          |  | $ | 60,986   |   |  | $    | 62,418   |   |  | $ | 154,381    |  
|Services                                                                             |  |                                       | 120,359 |   |          |   | 114,775 |          |  |   | 97,328   |   |  |      | 92,720   |   |  |   | 142,369    |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Total revenue                                                                        |  |                                       | 190,675 |   |          |   | 177,927 |          |  |   | 158,314  |   |  |      | 155,138  |   |  |   | 296,750    |  
|Cost of revenue:                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Product license                                                                      |  |                                       | 2,911   |   |          |   | 5,036   |          |  |   | 2,844    |   |  |      | 2,388    |   |  |   | 5,243      |  
|Amortization of acquired technology                                                  |  |                                       | 6,267   |   |          |   | 10,115  |          |  |   | 3,450    |   |  |      | 267      |   |  |   |           |  
|Services (1)                                                                         |  |                                       | 55,427  |   |          |   | 53,281  |          |  |   | 39,531   |   |  |      | 43,674   |   |  |   | 78,299     |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Total cost of revenue                                                                |  |                                       | 64,605  |   |          |   | 68,432  |          |  |   | 45,825   |   |  |      | 46,329   |   |  |   | 83,542     |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Gross profit                                                                         |  |                                       | 126,070 |   |          |   | 109,495 |          |  |   | 112,489  |   |  |      | 108,809  |   |  |   | 213,208    |  
|Operating expenses:                                                                  |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Research and development (1)                                                         |  |                                       | 33,200  |   |          |   | 40,211  |          |  |   | 39,923   |   |  |      | 51,334   |   |  |   | 64,850     |  
|Sales and marketing (1)                                                              |  |                                       | 67,956  |   |          |   | 74,489  |          |  |   | 68,160   |   |  |      | 84,775   |   |  |   | 178,282    |  
|General and administrative (1)                                                       |  |                                       | 19,593  |   |          |   | 17,972  |          |  |   | 15,727   |   |  |      | 21,344   |   |  |   | 29,907     |  
|Purchased in-process research and development, acquisition-related and other charges |  |                                       | 270     |   |          |   | 7,609   |          |  |   | 4,258    |   |  |      | 1,786    |   |  |   | 1,919      |  
|Impairment of intangible assets                                                      |  |                                       |        |   |          |   |        |          |  |   |         |   |  |      | 147,269  |   |  |   | 799,169    |  
|Business restructuring charges (gain)                                                |  |                                       | (2,899  | ) |          |   | 18,083  |          |  |   | (14,687  | ) |  |      | 35,822   |   |  |   | 120,935    |  
|Amortization of deferred stock compensation                                          |  |                                       | 834     |   |          |   | 480     |          |  |   | 1,107    |   |  |      | 1,396    |   |  |   | 8,734      |  
|Amortization of intangible assets                                                    |  |                                       | 5,003   |   |          |   | 4,919   |          |  |   | 1,965    |   |  |      | 16,060   |   |  |   | 500,045    |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Total operating expenses                                                             |  |                                       | 123,957 |   |          |   | 163,763 |          |  |   | 116,453  |   |  |      | 359,786  |   |  |   | 1,703,841  |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Income (loss) from operations                                                        |  |                                       | 2,113   |   |          |   | (54,268 | )        |  |   | (3,964   | ) |  |      | (250,977 | ) |  |   | (1,490,633 | )
|Other income (expense), net                                                          |  |                                       | 20,710  |   |          |   | 2,895   |          |  |   | 5,068    |   |  |      | (517     | ) |  |   | (35,275    | )
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Income (loss) before income taxes                                                    |  |                                       | 22,823  |   |          |   | (51,373 | )        |  |   | 1,104    |   |  |      | (251,494 | ) |  |   | (1,525,908 | )
|Provision for income taxes                                                           |  |                                       | 2,429   |   |          |   | 1,482   |          |  |   | 1,137    |   |  |      | 1,319    |   |  |   | 1,731      |  
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Net income (loss)                                                                    |  | $                                     | 20,394  |   |          | $ | (52,855 | )        |  | $ | (33      | ) |  | $    | (252,813 | ) |  | $ | (1,527,639 | )
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Basic net income (loss) per share                                                    |  | $                                     | 0.70    |   |          | $ | (1.86   | )        |  | $ | (0.00    | ) |  | $    | (10.14   | ) |  | $ | (63.19     | )
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Diluted net income (loss) per share                                                  |  | $                                     | 0.68    |   |          | $ | (1.86   | )        |  | $ | (0.00    | ) |  | $    | (10.14   | ) |  | $ | (63.19     | )
|                                                                                     |  |                                       |         |   |          |   |         |          |  |   |          |   |  |      |          |   |  |   |            |  
|Shares used in computing basic net loss per share (5)                                |  |                                       | 29,181  |   |          |   | 28,381  |          |  |   | 25,310   |   |  |      | 24,921   |   |  |   | 24,176     |  
|Shares used in computing diluted net loss per share (5)                              |  |                                       | 29,807  |   |          |   | 28,381  |          |  |   | 25,310   |   |  |      | 24,921   |   |  |   | 24,176     |  



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



|                                                                   |  |                         |         |          |   |         |          |  |          |         |      |   |         |  |   |        
|------------------------------------------------------------------ |  | ----------------------- | ------- | -------- | - | ------- | -------- |  | -------- | ------- | ---- | - | ------- |  | - | -------
|                                                                   |  | Year ended December 31,
|                                                                   |  | 2005                    |         | 2004 (4) |   |         | 2003 (3) |  | 2002 (2) |         | 2001
|Cost of revenue  services                                         |  | $                       |        |          | $ |        |          |  | $        |        |      | $ | 170     |  | $ | 1,965  
|Research and development                                           |  |                         | 12      |          |   | (71     | )        |  |          | 324     |      |   | 441     |  |   | 2,446  
|Sales and marketing                                                |  |                         | 124     |          |   | (48     | )        |  |          | 69      |      |   | 416     |  |   | 3,066  
|General and administrative                                         |  |                         | 698     |          |   | 599     |          |  |          | 714     |      |   | 369     |  |   | 1,257  
|                                                                   |  |                         |         |          |   |         |          |  |          |         |      |   |         |  |   |        
|                                                                   |  | $                       | 834     |          | $ | 480     |          |  | $        | 1,107   |      | $ | 1,396   |  | $ | 8,734  
|                                                                   |  |                         |         |          |   |         |          |  |          |         |      |   |         |  |   |        
|                                                                   | 
|                                                                   |  | As of December 31,     
|                                                                   |  | 2005                    |         | 2004     |   |         | 2003 (3) |  | 2002 (2) |         | 2001
|                                                                   |  | (in thousands)         
|Consolidated Balance Sheet Data:                                   |  |                         |        
|Cash, cash equivalents and short-term investments                  |  | $                       | 197,057 |          | $ | 164,363 |          |  | $        | 239,513 |      | $ | 307,754 |  | $ | 391,632
|Working capital                                                    |  |                         | 165,319 |          |   | 126,406 |          |  |          | 205,749 |      |   | 214,625 |  |   | 311,921
|Total assets                                                       |  |                         | 417,161 |          |   | 405,456 |          |  |          | 366,116 |      |   | 424,612 |  |   | 663,026
|Long-term debt and capital lease obligations, less current portion |  |                         |        |          |   |        |          |  |          | 10      |      |   | 53      |  |   | 240    
|Total stockholders equity                                         |  |                         | 330,109 |          |   | 306,818 |          |  |          | 281,346 |      |   | 265,852 |  |   | 510,301

---

|(2) | Reflects the acquisition of Epicentric on December 3, 2002.
|--- | -----------------------------------------------------------

|(3) | Reflects the acquisition of Intraspect on December 10, 2003.
|--- | ------------------------------------------------------------

|(4) | Reflects the acquisition of Tower Technology on March 1, 2004.
|--- | --------------------------------------------------------------

|(5) | Reflects one-for-ten reverse stock split
|--- | ----------------------------------------

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, collaboration, interaction management and imaging and workflow 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.



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Our solutions and products enable customers to successfully and rapidly address pervasive business
problems and achieve measurable increases in business efficiency.

We offer the following solutions:

Our Web content management, collaboration, document and records management, imaging and workflow, integration and interaction management products form the
complete suite of enterprise content management to manage the entire information value chain. To address the particular size and requirements of our customers, we deliver an enterprise content management suite as well as deliver our products in
various combinations. Additionally, we allow organizations the flexibility to purchase products individually.

Vignette Enterprise Content Management
Suite helps organizations control, manage and share information, optimize business process, integrate with enterprise applications, eliminate redundancy, mitigate risk for compliance and enhance delivery of content to individuals and channels.
The enterprise content management suite includes content management, portal, integration, collaboration and records and document management.

Web Content Management includes library services, content type modeling, workflow, taxonomy, and search.

Vignette Content Managementmanages 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.

Collaborationenhances the capability of
sharing knowledge for teams using workspaces.

Vignette Collaboration is an enterprise solution for business users to
create workspaces, where teams can share, capture and search information. Vignette Collaboration 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 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 project collaboration and can capture project assets, expertise and best
practices. Using Vignette Project Delivery can help organizations increase the 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, and productivity of internal teamwork while reducing the costs of account management.

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.



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Vignette Records & Documents is an enterprise document and records management
solution that manages fixed assets, automates document based workflows, manages casework through a process, and implements important archival and disposition of records. Vignette Records & Documents facilitates risk and compliance
management, and implements important document management capabilities including metadata search, QBE, indexed full text search, check in/out and ACL security .

Vignette WebCapture is a secure Web transaction capture and playback risk management solution that archives transactions on a customers site and creates a permanent record of them for dispute
resolution.

Imaging and workflow scan and index high volume imaging and workflow that promotes faster, more cost-efficient processing, access and
secure, personalized delivery of electronic information.

Vignette IDM 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.

Portal provides both a highly functional portal framework and a user-friendly development environment for assembling portlets.

Vignette Portal is an adaptable, scalable, open solution that enables organizations to rapidly build and deliver highly
customizable applications for their organization across audiences such as employees, partners and customers. We also offer a variety of additional specialized products to enhance our application portal.

Vignette 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.

Integrationcapabilities provide unique capabilities to connect a broad range of unstructured, semi-structured and structured data (including transactional)
sources.

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. Adapters are plug-ins to Vignette Business Integration Studio that provide prepackaged integration capabilities to common technology applications.

Interaction Management helps improve communications with stakeholders such as customers, prospects, employees and partners. It requires having ongoing dialogs with these stakeholders over a period of time. Ongoing dialogs help you
learn about, adapt to, and respond to stakeholders changing needs and preferences so that you can lead your stakeholders toward a desired outcome.

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.



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Our solutions and products are supported by our professional services organization, Vignette Professional
Services (VPS). VPS offers pre-packaged and custom services, using documented best practices, to help organizations define their online business objectives and deploy their applications. Our education, consulting and customer care teams
give customers the benefit of our experience with thousands of customer implementations. We partner with a number of leading consulting firms and system integrators such as Accenture, Bearing Point, Deloitte Consulting, and Tata Consulting Services
to implement our software for their clients. In many cases, we work in blended teams to 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, Hewlett Packard and Sun Microsystems.

We recently expanded our product and services distribution
channel via a new relationship with Access Distribution. Through this relationship, Access Distribution will make Vignettes portal and collaboration solutions available through its reseller network.

Reconciliation of Non-GAAP Financial Measures

This
section includes certain performance measures that may be considered non-GAAP financial measures under SEC rules and regulations. Management believes that these financial measures provide investors and analysts useful additional insight
into our Companys financial position and performance. Management also uses these financial measures to evaluate the Companys performance and to make certain decisions relating to the optimal allocation of our resources.

Non-GAAP financial measures should not be considered substitutes for performance measures presented in our consolidated financial statements in
accordance with GAAP. In addition, we caution that the methodologies for the calculation of non-GAAP financial measures may vary from company to company and, therefore, non-GAAP financial measures we present may not be comparable to similarly-named
non-GAAP financial measures reported by other companies.

The tables below reconcile (in thousands) the following financial measures
included, in this section that may be considered non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP: adjusted operating income and adjusted net income.



|                                                                                     |  |                         |        |   |                            |   |         |      |  |   |       |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | -------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ------- | -
|                                                                                     |  | Year ended December 31, |        |   | Quarter ended December 31, |  
|                                                                                     |  | 2005                    |        |   | 2004                       |   |         | 2005 |  |   | 2004  |  
|GAAP operating income/(loss)                                                         |  | $                       | 2,113  |   |                            | $ | (54,268 | )    |  | $ | 1,695 |   |  | $ | (11,911 | )
|Less: Amortization of acquired technology                                            |  |                         | 6,267  |   |                            |   | 10,115  |      |  |   | 1,254 |   |  |   | 2,538   |  
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 270    |   |                            |   | 7,609   |      |  |   |      |   |  |   | 442     |  
|Business restructuring (benefit) charges                                             |  |                         | (2,899 | ) |                            |   | 18,083  |      |  |   | (10   | ) |  |   | 9,384   |  
|Amortization of deferred stock compensation                                          |  |                         | 834    |   |                            |   | 480     |      |  |   | 267   |   |  |   | 98      |  
|Amortization of intangible assets                                                    |  |                         | 5,003  |   |                            |   | 4,919   |      |  |   | 1,166 |   |  |   | 1,346   |  
|                                                                                     |  |                         |        |   |                            |   |         |      |  |   |       |   |  |   |         |  
|Adjusted operating income/(loss)                                                     |  | $                       | 11,588 |   |                            | $ | (13,062 | )    |  | $ | 4,372 |   |  | $ | 1,897   |  



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|                                                                                     |  |                         |        |   |                            |   |         |      |  |   |       |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | -------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ------- | -
|                                                                                     |  | Year ended December 31, |        |   | Quarter ended December 31, |  
|                                                                                     |  | 2005                    |        |   | 2004                       |   |         | 2005 |  |   | 2004  |  
|GAAP net income/(loss)                                                               |  | $                       | 20,394 |   |                            | $ | (52,855 | )    |  | $ | 2,895 |   |  | $ | (11,933 | )
|Less: Realized gains of certain equity investments                                   |  |                         | 15,264 |   |                            |   |        |      |  |   |      |   |  |   |        |  
|Plus: Write downs of certain equity investments                                      |  |                         |       |   |                            |   | 206     |      |  |   |      |   |  |   | 206     |  
|Amortization of acquired technology                                                  |  |                         | 6,267  |   |                            |   | 10,115  |      |  |   | 1,254 |   |  |   | 2,538   |  
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 270    |   |                            |   | 7,609   |      |  |   |      |   |  |   | 442     |  
|Business restructuring (benefits) charges                                            |  |                         | (2,899 | ) |                            |   | 18,083  |      |  |   | (10   | ) |  |   | 9,384   |  
|Amortization of deferred stock compensation                                          |  |                         | 834    |   |                            |   | 480     |      |  |   | 267   |   |  |   | 98      |  
|Amortization of intangible assets                                                    |  |                         | 5,003  |   |                            |   | 4,919   |      |  |   | 1,166 |   |  |   | 1,346   |  
|                                                                                     |  |                         |        |   |                            |   |         |      |  |   |       |   |  |   |         |  
|Adjusted net income                                                                  |  | $                       | 14,605 |   |                            | $ | (11,443 | )    |  | $ | 5,572 |   |  | $ | 2,081   |  

2005 Highlights

Operating Results

The Company posted an operating income for fiscal year 2005 of $2 million compared to an operating
loss of $54.3 million for fiscal year 2004. Net income for fiscal year 2005 was $20.4 million compared to a net loss in fiscal year 2004 of $52.9 million. Total revenue for fiscal year 2005 was $190.7 million or an increase of 7% over the fiscal
year 2004 revenue of $177.9 million. In addition, the Company increased liquidity with an increase in cash, cash equivalents, and short term investments of $32.7 million to a total of $197.1 million at December 31, 2005 versus $164.4 million at
December 31, 2004. The Company continues to carry no long term debt.

The improved performance in fiscal 2005 as compared to fiscal
2004 was the result of many factors. We grew our software license and services revenue during 2005 while continuing to focus on cost control and efficiency in our business. During the year, we reduced both our total costs of revenue and our
operating expenses. The largest contributor in the decrease in operating expenses was a reduction in costs as a result of the business restructuring that occurred in fiscal 2004 The Company also exited most of its portfolio of equity investments
resulting in gains of approximately $15.3.

License revenues of $70.3 million in fiscal 2005 and $20.1 million in the fourth quarter of
2005 were up 11% and 4%, respectively, as compared to 2004. Maintenance revenues of $75.1 million in fiscal 2005 and $18.6 million in the fourth quarter of 2005 were up 4% for the year and down 3% for the fourth quarter as compared to 2004.
Professional services revenues of $45.3 million in fiscal 2005 and $12.2 million in the fourth quarter of 2005 were up 6% and 18% as compared to 2004. International revenue comprised 39% and 38% of total revenue for the year and quarter ended
December 31, 2005, respectively. No single customer accounted for more than 10% of our annual or quarterly revenues.

The gross profit
margin in fiscal 2005 increased five points to 66% versus 61% in fiscal 2004. The costs of revenue associated with product licenses decreased by $2.1 million to $2.9 million from $5 million. On a percentage



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basis product license direct costs were 2% of total revenues in fiscal 2005 versus 3% of total revenues in fiscal 2004
led to an improvement in the gross profit margin of 1 point. This was primarily due to a reduction in the costs of embedded technology. The amortization of acquired technology decreased to $6.3 million in fiscal 2005 versus $10.1 million in fiscal
2004. On a percentage basis amortization of acquired technology was 3% of total revenue in fiscal 2005 versus 6% of total revenue in fiscal 2004. The decrease in the amortization of acquired technology lead to an improvement of 3% in the gross
profit margin. The decrease in the amortization of acquired technology is related to the normal run out of costs associated with recent acquisitions. The costs of professional services increased to $55.4 million from $53.3 million. As a percent of
total revenue the costs of services was 29% of total revenue in fiscal 2005 versus 30% of total revenue in fiscal 2004 which lead to an improvement in the gross profit margin of 1%. The increase in absolute dollars related to the cost of services is
due to the increased sales volume of services to $120.3 million in fiscal 2005 from $114.8 million in fiscal 2004.

Total expenses,
including both cost of revenue and operating expenses, for fiscal 2005 and for the fourth quarter of 2005 were $188.6 million and $49.2 million, respectively, and included $9.5 million and $2.7 million, respectively, for the following (benefits)
charges: business restructuring benefits, acquisition-related charges, amortization of acquired technology and intangibles and the amortization of deferred stock compensation. Most of these (benefits) charges relate to our previous acquisitions. The
business restructuring benefits of $2.9 million are primarily the result of the sublease of idle facilities. The remaining expenses of $179.1 million for fiscal 2005 and $46.5 million for the fourth quarter of 2005 were down 6% and 1% as compared to
2004 due to lower costs of revenue as discussed above and lower operating expenses as a result of the business restructuring that occurred in 2004.

In the fourth quarter of 2005, the Company had operating income of $1.7 million as compared to an operating loss of $11.9 million for the fourth quarter of 2004. The increase was largely due to a decrease in the restructuring charges. The
decrease is a result of lower than expected costs particularly reduced facilities charges as the Company has been successful in subleasing excess space and certain leases expired. The Company recorded a small restructuring benefit in the fourth
quarter of ten thousand dollars versus restructuring charges of $9.4 million for the same quarter in 2004.

The combination of revenue
growth and our continued cost control efforts yielded non-GAAP profit from operations of $4.4 million during the fourth quarter of 2005, excluding the $2.7 million in charges described above. This compares to a profit of $1.9 million during the
fourth quarter of 2004. The Company reported increases in fiscal 2005 versus fiscal 2004 on a GAAP basis in total revenue, gross profit margin, income from operations, other income, and net income. The increase in sales combined with lower operating
costs plus gains on the sale of equity investments allowed the Company to produce net income of $20.4 million in fiscal 2005 as compared to a net loss of $52.8 million during fiscal 2004. Excluding a net charge of $9.5 million as described above and
gains for the sale of certain equity investments totaling $15.3 million, non-GAAP net income for fiscal 2005 was $14.6 million. This compares to non-GAAP net loss of $11.4 million in fiscal 2004.

In 2005 the Company continued to execute the restructuring plan put in place in 2001 and expanded in fiscal years 2002, 2003, and 2004. That included the
expiration or sublease of office space no longer used by the Company. The Company realized restructuring benefits in 2005 of $2.9 million due primarily to the sublease of these idle facilities. The Company continued to offshore operations to control
costs and improve efficiency. Headcount was 738 employees at December 31, 2005 as compared to 730 employees at December 31, 2004. These and other actions have contributed to an increase in operating income on a GAAP basis of $2.1 million
for fiscal year 2005 versus an operating loss of $54.2 million for fiscal 2004.

Our total cash, cash equivalents, and short-term
investments balance totaled approximately $197.1 million as of December 31, 2005, and increased approximately $32.7 million from December 31, 2004, due to the improved operating results and the gains on the sale of certain equity
investments.

Outlook

Our objective is to maintain and extend our leadership position as a global provider of enterprise content management applications and products that help organizations leverage their content to create new opportunities, expand profits and
realize greater savings and efficiencies. We will continue to focus on delivering sustained revenue and profitable growth, expanding our customer base of global 2000



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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.

We will seek to improve sales force and channel productivity. We will strive to encourage cross-functional team selling through enhanced team realignment
around customer accounts and regions, and meet market-specific needs for designated solution areas through specialized teams with subject-matter expertise in areas such as healthcare, imaging and workflow, next generation web presence and
collaborative records and document management. We will continue to focus on the indirect channel as a means to better distribute and expose our software and solutions to the marketplace. We will also continue to focus on realizing efficiencies and
cost-savings across our business.

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, the overall level of information technology spending, the uncertainties and challenges of offshore outsourcing 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. See
Risk Factors that May Affect Future Results for more information.

Reverse Stock Split

On June 10, 2005, the one-for-ten reverse stock split of the common stock (the Reverse Stock Split) of the Company became effective. The Reverse Stock
Split was approved by the Companys stockholders on May 27, 2005 at the Companys annual meeting. The Company filed the certificate of Amendment to the Companys Amended and Restated Certificate of Incorporation to affect the
Reverse Stock Split. All per share data and per share amounts have been retroactively restated for the Reverse Stock Split.

Option Exchange Offer

On September 28, 2004, we granted 200 thousand stock options on a post split basis to employees who elected to
participate in our stock option exchange program, a program designed to retain employees and to provide them with an incentive for maximizing stockholder value. Under the option exchange program, a total of 510 thousand stock options on a post
split basis, which were previously granted to the participating employees, were canceled on March 25, 2004, the Cancellation Date. For employees who were not designated with Vice President level titles on the Cancellation Date, the exercise
price of these new options was $12.70 on a post split basis, which was the fair market value of the Companys common stock on the grant date. For employees who were designated with Vice President level titles on the exchange programs
Cancellation Date, the exercise price of these new options was $22.00, which was the fair market value of the Companys common stock on the exchange programs Cancellation Date. The exchange program was organized to comply with FASB
Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, and did not result in any additional compensation charges or variable plan accounting. The Companys senior executive officers and Board of
Directors were not eligible to participate in this program.

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 generally accepted accounting principles 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



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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;
| | - |  | -----------------------------------------------



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



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

Revenue recognition.Revenue consists of product license and services fees. Product license fee income is earned through licensing the 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.

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 arrangement exists, delivery of the product has occurred, 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 of the product, we evaluate whether delivery has occurred upon shipment of software or upon completion of
services and if the customer payment is probable of collection. This evaluation is made based on various factors such as the nature of the services work, order type (e.g. initial vs. follow-on), customers payment history, etc. In the instances
where delivery is deemed not to have occurred upon shipment based on the aforementioned factors, license revenue is taken when we have no significant remaining obligations with regard to the implementation.

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 as they
are not essential to the functionality of our products.



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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.

Business restructuring. We vacated excess leased facilities as a
result of the restructuring plan we initiated in 2001 and subsequently expanded in 2002, 2003 and 2004. 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 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. There was no impairment charge related to goodwill
or other intangible assets in 2005, 2004, or 2003.

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, |  
|                                                                                     |  | 2005                    |   |  | 2004 |    |  | 2003  |   
|Revenue:                                                                             |  |                         |   |  |      |    |  |       |   
|Product license                                                                      |  | 37                      | % |  | 35   | %  |  | 39    | % 
|Services                                                                             |  | 63                      |   |  | 65   |    |  | 61    |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Total revenue                                                                        |  | 100                     |   |  | 100  |    |  | 100   |   
|Cost of revenue:                                                                     |  |                         |   |  |      |    |  |       |   
|Product license                                                                      |  | 2                       |   |  | 3    |    |  | 2     |   
|Amortization of acquired technology                                                  |  | 3                       |   |  | 6    |    |  | 2     |   
|Services                                                                             |  | 29                      |   |  | 30   |    |  | 25    |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Total cost of revenue                                                                |  | 34                      |   |  | 39   |    |  | 29    |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Gross profit                                                                         |  | 66                      |   |  | 61   |    |  | 71    |   
|Operating expenses:                                                                  |  |                         |   |  |      |    |  |       |   
|Research and development                                                             |  | 17                      |   |  | 23   |    |  | 25    |   
|Sales and marketing                                                                  |  | 36                      |   |  | 42   |    |  | 43    |   
|General and administrative                                                           |  | 10                      |   |  | 10   |    |  | 10    |   
|Purchased in-process research and development, acquisition-related and other charges |  |                        |   |  | 4    |    |  | 3     |   
|Business restructuring (benefits) charges                                            |  | (2                      | ) |  | 10   |    |  | (9    | ) 
|Amortization of deferred stock compensation                                          |  | 1                       |   |  |     |    |  | 1     |   
|Amortization of intangible assets                                                    |  | 3                       |   |  | 3    |    |  | 1     |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Total operating expenses                                                             |  | 65                      |   |  | 92   |    |  | 74    |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Income ( loss ) from operations                                                      |  | 1                       |   |  | (31  | )  |  | (3    | ) 
|Other income (expense), net                                                          |  | 11                      |   |  | 2    |    |  | 3     |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Income ( loss ) before income taxes                                                  |  | 12                      |   |  | (29  | )  |  | (  ) |   
|Provision for income taxes                                                           |  | 1                       |   |  | 1    |    |  |      |   
|                                                                                     |  |                         |   |  |      |    |  |       |   
|Net income ( loss)                                                                   |  | 11                      | % |  | (30  | )% |  | (0    | )%
|                                                                                     |  |                         |   |  |      |    |  |       |   



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Comparison of fiscal years ended December 31, 2005, 2004 and 2003 (in thousands, unless otherwise noted)

Revenue



|                        |  |                         |         |                     |   |         |                     |   |         |  |    |   |  |    |  
|----------------------- |  | ----------------------- | ------- | ------------------- | - | ------- | ------------------- | - | ------- |  | -- | - |  | -- | -
|                        |  | Year Ended December 31, |         | 2005Comparedto 2004 |   |         | 2004Comparedto 2003 |  
|                        |  | 2005                    |         | 2004                |   | 2003    |                     |  
|Product license         |  | $                       | 70,316  |                     | $ | 63,152  |                     | $ | 60,986  |  | 11 | % |  | 4  | %
|Maintenance and support |  |                         | 75,077  |                     |   | 72,164  |                     |   | 61,186  |  | 4  |   |  | 18 |  
|Professional services   |  |                         | 45,282  |                     |   | 42,611  |                     |   | 36,142  |  | 6  |   |  | 18 |  
|                        |  |                         |         |                     |   |         |                     |   |         |  |    |   |  |    |  
|Total services revenue  |  |                         | 120,359 |                     |   | 114,775 |                     |   | 97,328  |  | 5  |   |  | 18 |  
|                        |  |                         |         |                     |   |         |                     |   |         |  |    |   |  |    |  
|Total revenue           |  | $                       | 190,675 |                     | $ | 177,927 |                     | $ | 158,314 |  | 7  | % |  | 12 | %
|                        |  |                         |         |                     |   |         |                     |   |         |  |    |   |  |    |  

Total revenue increased 7% in 2005 and 12% in 2004. The increase in revenue in 2005 is due to
several factors. The Company continues to make strides in product integration and stability. This includes the expansion and ongoing integration of products through our Tower technology acquisition in the first quarter of 2004 which added software
and services capabilities and an increase in revenues. The Company also continued to simplify and amplify the message that the Company provides solutions for customers. Lastly, there was renewed interest in Enterprise Content management software
during fiscal year 2005. The increase in revenue for 2004 was due to sales associated with the collaboration and document management products acquired in December 2003 and March 2004, respectively, as partially offset by the continued weakness in
the software industry and the ramp-up time required to successfully integrate our recently acquired companies. .

Product
license. Product license revenue increased 11% in 2005 and 4% in 2004. The increase in 2005 can be attributed to an improving market for enterprise content software, the continued integration of the products discussed below, and a focused
marketing and sales strategy on industry segments such as healthcare. The increase in 2004 can be attributed primarily to sales of collaboration and document management products acquired in our December 2003 and March 2004 acquisitions,
respectively.

Services. Services revenue increased 5% in 2005 and 18% in 2004. The increase in professional services
in 2005 is due to the larger install base of Vignettes software products and professional services sold in conjunction with new product licenses. The increase in maintenance and support as well as professional services revenue in 2004 is
primarily attributable to the acquisitions of Intraspect and Tower Technology.

During 2005, 2004 and 2003, no single customer accounted
for more than 10% of our total revenues. International revenue was $74.6 million, $68.2 million and $41.8 million, or 39%, 38%, and 26% of total revenues, in 2005, 2004, and 2003, respectively.



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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.

Gross profit amounts and
percentages are as follows:



|                                    |  |                         |         |   |                     |   |         |                     |  |   |         |   |  |    |   |  |     |   
|----------------------------------- |  | ----------------------- | ------- | - | ------------------- | - | ------- | ------------------- |  | - | ------- | - |  | -- | - |  | --- | --
|                                    |  | Year ended December 31, |         |   | 2005Comparedto 2004 |   |         | 2004Comparedto 2003 | 
|                                    |  | 2005                    |         |   | 2004                |   |         | 2003                |  |   |        
|Product license                     |  | $                       | 67,405  |   |                     | $ | 58,116  |                     |  | $ | 58,142  |   |  | 16 | % |  |    | % 
|Amortization of acquired technology |  |                         | (6,267  | ) |                     |   | (10,115 | )                   |  |   | (3,450  | ) |  | 38 |   |  | 193 |   
|                                    |  |                         |         |   |                    
|Maintenance and support             |  |                         | 61,707  |   |                     |   | 58,381  |                     |  |   | 53,421  |   |  | 6  |   |  | 9   |   
|Professional services               |  |                         | 3,225   |   |                     |   | 3,113   |                     |  |   | 4,376   |   |  | 4  |   |  | (29 | ) 
|                                    |  |                         |         |   |                     |   |         |                     |  |   |         |   |  |    |   |  |     |   
|Total services                      |  |                         | 64,932  |   |                     |   | 61,494  |                     |  |   | 57,797  |   |  | 6  |   |  | 6   |   
|                                    |  |                         |         |   |                     |   |         |                     |  |   |         |   |  |    |   |  |     |   
|Total gross profit                  |  | $                       | 126,070 |   |                     | $ | 109,495 |                     |  | $ | 112,489 |   |  | 15 | % |  | (3  | )%
|                                    |  |                         |         |   |                     |   |         |                     |  |   |         |   |  |    |   |  |     |   

As a percent of sales, gross profit represented 66%, 61%, and 71% in 2005, 2004 and 2003,
respectively. The improvement in 2005 is due to improved margins on product licenses and lower amortization charges of acquired technology. The improvement in the gross profit margin for product license increased in concert with the growth in
revenue and by the lower costs of imbedded software. The decline in the amortization of acquired technology in 2005 is due to the normal run out of those amortized costs. The decline in gross profit in 2004 compared to 2003 is primarily due to the
amortization of acquired technology related to our Intraspect and Tower Technology acquisitions, the lower mix of license revenue as well as higher costs of supporting our expanded product offerings.

Operating expenses



|                                                                                     |  |                         |         |   |                     |   |         |                     |   |         |   |  |      |    |  |     |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ------------------- | - | ------- | ------------------- | - | ------- | - |  | ---- | -- |  | --- | -
|                                                                                     |  | Year Ended December 31, |         |   | 2005Comparedto 2004 |   |         | 2004Comparedto 2003 |  
|                                                                                     |  | 2005                    |         |   | 2004                |   | 2003    |                     |   |        
|Research and development                                                             |  | $                       | 33,200  |   |                     | $ | 40,211  |                     | $ | 39,923  |   |  | (17  | )% |  | 1   | %
|Sales and marketing                                                                  |  |                         | 67,956  |   |                     |   | 74,489  |                     |   | 68,160  |   |  | (9   | )  |  | 9   |  
|General and administrative                                                           |  |                         | 19,593  |   |                     |   | 17,972  |                     |   | 15,727  |   |  | 9    |    |  | 14  |  
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 270     |   |                     |   | 7,609   |                     |   | 4,258   |   |  | (96  | )  |  | 79  |  
|Business restructuring (benefits) charges                                            |  |                         | (2,899  | ) |                     |   | 18,083  |                     |   | (14,687 | ) |  | (116 | )  |  | 223 |  
|Amortization of deferred stock compensation                                          |  |                         | 834     |   |                     |   | 480     |                     |   | 1,107   |   |  | 74   |    |  | (57 | )
|Amortization of intangible assets                                                    |  |                         | 5,003   |   |                     |   | 4,919   |                     |   | 1,965   |   |  | 2    |    |  | 150 |  
|                                                                                     |  |                         |         |   |                     |   |         |                     |   |         |   |  |      |    |  |     |  
|Total operating expenses                                                             |  | $                       | 123,957 |   |                     | $ | 163,763 |                     | $ | 116,453 |   |  | (24  | )% |  | 41  | %
|                                                                                     |  |                         |         |   |                     |   |         |                     |   |         |   |  |      |    |  |     |  

Research and development.Research and development expenses consist primarily
of personnel costs to support product development. Research and development expenses decreased 17% in 2005 and increased 1% in 2004. The year over year decrease in 2005 is due primarily to our restructuring efforts via reduced engineering headcount
in the first half of 2005, lower facilities expenses and other cost saving measures such as the consolidation of product development facilities and the transition of these activities to an offshore operations model. The year-over-year increase in
2004 in absolute dollars relates to the timing of research and development efforts and the ramp-up of certain offshore development activities, partially offset by other cost savings.



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The Company did not capitalize any software development costs in accordance with Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, for fiscal years 2005, 2004, and 2003, respectively.The Company did capitalize costs that related to software
developed by third a party that was not acquired in a business combination prior to 2003. Those costs are amortized using the straight-line method over the estimated useful life, generally 18 months. Amortization expense was $0.0 million, $0.1
million, and $0.5 million in 2005, 2004 and 2003, respectively, and is included in Cost of revenue  product license on the Consolidated Statements of Operations.

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 9% in 2005 and increased 9% in 2004. The decrease in 2005 is attributable to reduced
bad debt charges and lower marketing and headcount costs. The increase in absolute dollars in 2004 compared to 2003 is attributable to increased commission expense and other variable costs resulting from higher product sales in 2004 as well as bad
debt charges incurred primarily during the first quarter of 2004. The increase was partially offset by lower marketing costs.

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 increased 9% in 2005 and 14% in 2004. The increase in absolute dollars for 2005 and 2004 is attributable to the increased costs of meeting regulatory reporting requirements.

Purchased in-process research and development, acquisition-related and other charges.

During fiscal 2005 the Company recognized expense associated with business combinations. The Company made a series of complimentary businesses
acquisitions in the three years ended December 31, 2004. The following table summarizes costs related to our business combinations (in thousands) for the most recent three years:



|                                              |  |                         |     |      |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | --- | ---- | - | ----- |  | - | -----
|                                              |  | Year Ended December 31,
|                                              |  | 2005                    |     | 2004 |   | 2003 
|Purchased in-process research and development |  | $                       |    |      | $ | 4,800 |  | $ | 1,100
|Cross-training, product integration and other |  |                         | 270 |      |   | 1,345 |  |   | 490  
|Severance and other employee-related costs    |  |                         |    |      |   | 807   |  |   | 136  
|Contingent compensation                       |  |                         |    |      |   | 657   |  |   | 2,532
|                                              |  |                         |     |      |   |       |  |   |      
|                                              |  | $                       | 270 |      | $ | 7,609 |  | $ | 4,258
|                                              |  |                         |     |      |   |       |  |   |      

Included in the acquired net assets of Tower Technology 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, 2005
|Tower Technology (2004) |  | Tower IDM 20.0Collaborative document management
functionality with process automation solutions and decentralization of configuration. |  | $                   | 4,800 |                                     | Application from this project is now fully integrated into our products.
|                        |  |                                                                                                                                          | 
|                        |  | Tower Seraph 4.4provides document review
workflows, case management and Section 508 compliance                                         |  |                     |       |                                     |                                                                         

The amounts allocated to IPR&D were based on discounted cash flow models that 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 a compound



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annual growth rate of 17.5%, 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 the acquired companys historical results and industry
averages. 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 20% to 22%. These discount rates were based on the acquired companys weighted average cost of capital of 20%, 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. The application of the purchased IPR&D has now been incorporated into the Companys product set.

Impairment of intangible assets.We use a two-step approach to assess our goodwill annually, or more frequently, if events or
changes in circumstances indicate that goodwill might be impaired. In step 1 of the assessment the Company compares the fair value of the reporting unit to the carrying value of the reporting unit to determine if an impairment of goodwill is
indicated. The estimated fair value is based on market capitalization, as complemented by a discounted cash flow analysis. If no impairment is indicated in Step 1 no additional analysis is performed. Should an impairment be indicated the Company
would measure the loss in Step 2 by comparing the enterprises implied fair value of goodwill to the carrying amount of goodwill to determine the amount of impairment loss to be recorded.

We also review 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.

Based on the methods described above there were no impairment charges related to goodwill or other intangible assets in 2005, 2004, or 2003.

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, 2003, and 2004, 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, 2005 are as follows (in thousands):



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|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -------------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | 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  |  
|Effect of expanded restructuring plan             |  |                           | 12,421  |   |                  |   | 2,331   |                                  |  |   | 4,085   |   |  |   | 18,837  |  
|Adjustment to accrual                             |  |                           | (780    | ) |                  |   |        |                                  |  |   | (83     | ) |  |   | (863    | )
|Cash activity                                     |  |                           | (8,584  | ) |                  |   |        |                                  |  |   | (3,404  | ) |  |   | (11,988 | )
|Non-cash activity                                 |  |                           | (869    | ) |                  |   | (2,331  | )                                |  |   | (8      | ) |  |   | (3,208  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2004                      |  |                           | 14,713  |   |                  |   |        |                                  |  |   | 962     |   |  |   | 15,675  |  
|Adjustment to accrual                             |  |                           | (1,676  | ) |                  |   |        |                                  |  |   | (123    | ) |  |   | (1,799  | )
|Cash activity                                     |  |                           | (6,358  | ) |                  |   |        |                                  |  |   | (709    | ) |  |   | (7,067  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2005                      |  | $                         | 6,679   |   |                  | $ |        |                                  |  | $ | 130     |   |  | $ | 6,809   |  
|Less: current portion                             |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   | (2,901  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Accrued restructuring costs, less current portion |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  | $ | 3,908   |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  

Remaining cash expenditures resulting from the restructuring are estimated to be $6.8 million and
relate primarily to facility lease commitments, of which the remaining maximum lease commitment extends out to 2011. 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. These are managements best estimates based on currently available information and are subject to 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. The Company continues to actively pursue mitigation strategies to dispose of all excess office space through
subleasing and/or early termination negotiations where possible. The total lease commitments include the estimated lease buyout fees, or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to,
brokerage commissions, legal fees, repairs, restoration costs, and sublease incentives, 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 and by the needs of the
business. 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



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might deviate from the assumptions used to calculate the Companys accrual for facility lease commitments. The
accrual adjustments recorded during fiscal 2005 relate primarily to such differences, namely the buyout fees and sublease income of certain vacated properties were more favorable than we had anticipated. Facility lease commitments relate to the
Companys departure from certain office space in Austin, Texas; Brisbane and San Francisco, California; New York City, New York; Waltham and Boston, Massachusetts; Chicago, Illinois; Slough, United Kingdom; and Madrid, Spain. The maximum lease
commitment of such vacated properties extends through December 2011.

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 1,675 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.

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. 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,
|                           |  | 2005                    |     | 2004 |   |     | 2003
|Research and development   |  |                         | 12  |      |   | (71 | )    |  |   | 324  
|Sales and marketing        |  |                         | 124 |      |   | (48 | )    |  |   | 69   
|General and administrative |  |                         | 698 |      |   | 599 |      |  |   | 714  
|                           |  |                         |     |      |   |     |      |  |   |      
|                           |  | $                       | 834 |      | $ | 480 |      |  | $ | 1,107
|                           |  |                         |     |      |   |     |      |  |   |      

Amortization of intangible assets. Intangible amortization expense decreased
2% in 2005 as compared to 2004 and increased 150% in 2004 compared to 2003. The decrease in 2005 compared to 2004 relates to the decline in amortization expense for assets assumed from the Intraspect and Tower Technology acquisitions as the
remaining unamortized cost continues to decline. The increase in amortization expense in 2004 compared to 2003 is related to those same assets as Tower Technology was acquired on March 1, 2004 and Intraspect on December 10, 2003.
Therefore, fiscal year 2004 bore a greater portion of the amortization expense due to the timing of the acquisitions. Amortization expense for these assets is recorded ratably over the estimated useful lives of the intangible assets, which range
from two to six years

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, |        | 2005Comparedto 2004 |   |       | 2004Comparedto 2003 |  
|                                   |  | 2005                    |        | 2004                |   | 2003  |                     |  
|Interest income and other, net     |  | $                       | 5,419  |                     | $ | 2,895 |                     | $ | 5,068 |  | 87  | % |  | (43 | )%
|Gain on Sale of equity investments |  | $                       | 15,264 |                     | $ |      |                     | $ |      |  | 100 | % |  |    |   



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Other income and expense, net increased in 2005 due to higher cash and short term investment balances and
increasing yields on invested funds. The gain on the sale of equity investments was due to the sale of equity securities in privately held technology companies. The largest of which was a sale of Shopzilla for approximately $600 million to EW
Scripps Company. The Company owned approximately 2% of Shopzilla and recognized a gain of approximately $13.0 million. The Company had no carrying cost in the asset at the time of the sale due to previous impairment charges.

The decrease in 2004 compared to 2003 is primarily due to lower cash balances available for investment, a decrease in interest rates earned on those cash
balances, and foreign exchange gains recognized in 2003 but minimized in 2004 with the implementation of a hedge program.

In the third
quarter of 2004, we adopted a foreign exchange policy to reduce our exposure to significant foreign currency fluctuations. We utilize foreign currency forward contracts to hedge certain foreign currency-denominated payables and receivables.

At December 31, 2005, our unrestricted, long-term investments totaled $1.3 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, |       | 2005Comparedto 2004 |   |       | 2004Comparedto 2003 |  
|                           |  | 2005                    |       | 2004                |   | 2003  |                     |  
|Provision for income taxes |  | $                       | 2,429 |                     | $ | 1,482 |                     | $ | 1,137 |  | 64 | % |  | 30 | %

We have provided a full valuation allowance on our net deferred tax assets, which includes net
operating loss, net foreign 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-36 to F-37 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.

We base our forecast for expenses in part on future (as opposed to historical) revenue projections due to the continued changes in our business. 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.

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;
| | - |  | -------------------------------------------------



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| |  |  | 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; 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.

Net Operating Losses and Tax Credit Carryforwards

As
of December 31, 2005, the Company had federal net operating loss, capital loss and research credit carryforwards of approximately $767.3 million, $39.9 million and $11.8 million, respectively. The net operating loss, capital loss, and research
credit carryforwards will expire in varying amounts, between 2006 and 2026, if not utilized. The Company also had a foreign net operating loss carryover of approximately $6.9 million. The foreign net operating loss carryover is not subject to
expiration.

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, 2005 approximately $157.9 million of the net operating loss, $5.0 million of the net foreign operating loss, and $1.8 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 $609.4 million, capital loss carryforward of $39.9 million, and research credit carryover
of $10.0 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.

We have provided a full valuation allowance on our net deferred tax assets, which
include net operating losses carried forward, 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, 2005, the valuation allowance includes approximately $26.4 million
related to the acquisition of Epicentric, Intraspect and Tower Technology 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. In both years ended December 31, 2005 and 2004 the company recognized approximately $0.3 million of acquired deferred tax assets as a reduction to goodwill. Approximately $150.0 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.



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Liquidity and Capital Resources

The following table presents selected financial statistics and information, (dollars in thousands):



|                          |  |              |         |      |   |         |  |   |        
|------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                          |  | December 31,
|                          |  | 2005         |         | 2004 |   | 2003   
|Cash and cash equivalents |  | $            | 124,104 |      | $ | 63,781  |  | $ | 39,639 
|                          |  |              |        
|Short-term investments    |  | $            | 72,953  |      | $ | 100,582 |  | $ | 199,874
|Working capital           |  | $            | 165,319 |      |   | 126,406 |  | $ | 205,749
|Current ratio             |  |              | 3.1:1   |      |   | 2.5:1   |  |   | 3.9:1  
|Days of sales outstanding |  |              | 69      |      |   | 77      |  |   | 70     

At December 31, 2005, we had $197.1 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 provided by (used in) operating activities was $16.7 million, $(31.5) million, and $(43.4) million, in 2005, 2004 and 2003, respectively. The
increase in 2005 is related to the improved operating performance of the Company. The operating cash outflows in 2004 and 2003 were due to net losses as well as changes in working capital, namely restructuring and exit cash outflows.

Net cash provided by investing activities was $ 42 million, 51.5 million, and 4.9 million, in 2005, 2004 and 2003, respectively. The
increase in investing cash inflows in 2005 was due to the sale of certain equity investments and the maturities of short term investments. The increase in investing cash inflows in 2004 was due primarily to the maturity of our investments in
marketable and auction rate securities, offset by purchase consideration for our acquisition of Tower Technology. The increase in investing cash inflows in 2003 was due primarily to the maturity of our investments in short-term marketable and
auction rate securities, partially offset by purchase consideration for our acquisitions of Epicentric and Intraspect.

Net cash provided
by financing activities was $2.8 million, $3.2 million, and $2.9 million in 2005, 2004 and 2003, respectively. Our financing activities consisted primarily of employee stock option exercises and purchases of employee stock purchase plan shares.

Our long-term investments are classified as available-for-sale and consist of limited partnership interests in a technology incubator,
cash collateral pledged for certain lease obligations, and tax obligations. At December 31, 2005 and 2004, long-term investments totaled $8.3 million and $12.4 million, respectively.

At December 31, 2005 and 2004, we had pledged $6.9 million and $9.8 million, respectively, as cash collateral for certain of our lease obligations
and tax 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 increase in the near future. We expect to fund our operations, capital expenditures and investments from internally generated funds. 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 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.



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Future minimum payments as of December 31, 2005 under our lease obligations, including operating
lease commitments for all vacated properties, are as follows (in thousands):



|                               |  |                 |        |                 |   |      
|------------------------------ |  | --------------- | ------ | --------------- | - | -----
|                               |  | OperatingLeases |        | Sublease Income
|2006                           |  | $               | 7,629  |                 | $ | 1,190
|2006                           |  |                 | 5,304  |                 |   | 1,337
|2007                           |  |                 | 4,267  |                 |   | 1,199
|2008                           |  |                 | 3,640  |                 |   | 1,027
|2010                           |  |                 | 2,920  |                 |   | 576  
|Thereafter                     |  |                 | 2,476  |                 |   | 416  
|                               |  |                 |        |                 |   |      
|Total minimum lease payments   |  | $               | 26,236 |                 |   |      
|                               |  |                 |        |                 |   |      
|Total minimum sublease rentals |  |                 |        |                 | $ | 5,745
|                               |  |                 |        |                 |   |      

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

Recent Accounting Pronouncements

In
December 2004, FASB issued a Statement, Share-Based Payment, an amendment of FASB Statements Nos. 123 (SFAS 123R) that addresses the accounting for share-based payment transactions in which a Company receives employee services
in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability
to account for share-based compensation transactions using the intrinsic method that the Company currently uses and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the
consolidated statements of operations. The effective date of the new standard is for fiscal years beginning after June 15, 2005, which for the Company will be the first quarter of fiscal 2006.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 regarding the Staffs interpretation of SFAS 123R. This interpretation
provides the Staffs views regarding interactions between SFAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to
assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB 107 in connection with our adoption of SFAS 123R.

We plan to adopt SFAS 123R using the modified prospective method, under which compensation cost is recognized beginning with the effective date
(a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the previous requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R
that remain unvested on the effective date.

The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed
upon the adoption of SFAS 123R. Compensation expense calculated under SFAS 123R may differ from amounts currently disclosed within our footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the
terms of such options, the treatment of tax benefits and changes in interest rates or other factors. Upon adoption of SFAS 123R, we plan to use the Black-Scholes model to value the compensation expense associated with employee stock options and
stock purchases under our employee stock purchase plan. We are currently evaluating the potential impact of this standard on our financial position, results of operations, and cash flows. We expect this standard to have a significant impact on the
consolidated statements of operations. The current expected range of expense for the first quarter of 2006 is $750 thousand to $1 million. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as cash flow from financing activities rather than as cash flow from operations as required under SFAS 123. The Company is currently evaluating the impact of SFAS 123R in relation to the statements of cash flows relative to any excess tax
benefits that may be generated.



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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 result, our financial results could be affected by changes in foreign
currency exchange rates. In the third quarter of 2004, we adopted a foreign exchange policy to reduce our exposure to significant foreign currency fluctuations. We utilize foreign currency forward contracts to hedge foreign currency-denominated
payables and receivables. To date, we have not hedged forecasted transactions or firm commitments denominated in foreign currencies. Gains and losses on hedging contracts are reflected currently in other income and expense. We typically limit the
duration of our foreign currency forward contracts to 90 days. We do not invest in contracts for speculative purposes. Our foreign exchange exposures are monitored regularly to ensure the overall effectiveness of our foreign currency hedge
positions.

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. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in
interest rates would have a significant impact on our interest income. 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, 2005, our cash and cash equivalents consisted primarily of commercial paper.

Long-term investments. We invest in emerging technology companies considered strategic to our software business. At
December 31, 2005, long-term investments consisted of 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. The Company classifies long term investments and records any unrealized gain or loss. During 2005 the Company liquidated its
investment of common stock held in publicly traded technology companies and recognized a gain of approximately $15.3 million. As of December 31, 2005 the company did not recognize any unrealized gain or loss on the remaining long term
investment as described above.

In addition to strategic investments, we held $6.9 million and $9.8 million in restricted investments at
December 31, 2005 and December 31, 2004, respectively. At December 31, 2005, 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 and a tax obligation. These investments will remain restricted to the extent that the security requirements exist. All restricted
investments mature beginning in 2006 through 2010 and the average yield of these investments is approximately 2.98%.



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ITEM 8. 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 Registered Public Accounting Firm, 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

On
December 1, 2005, Vignette Corporation (the Company) sent out a request for proposal to five registered public accounting firms inviting them to compete for the assignment to provide the Company with audit-related services beginning
in fiscal year 2006. The Companys current auditor, Ernst & Young, received the request for proposal and was invited to compete for the assignment in 2006. On December 20, 2005, Ernst & Young notified the Company that
Ernst & Young had decided to decline the opportunity to compete and would not submit a response to Vignettes request for proposal for audit services. As such, Ernst & Young (E&Y) has notified the Company that
it intends to decline to stand for re-election as the Companys independent registered public accounting firm and will cease to serve as such after the completion of the current audit for the fiscal year ended December 31, 2005 effective
with the Companys filing of this Form 10K for 2005.

The reports of E&Y on the Companys financial statements for the fiscal
years ended December 31, 2004 and December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Companys two most recent fiscal years ended December 31, 2004 and December 31, 2003, and through December 20, 2005, there
were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to E&Ys satisfaction, would have caused E&Y to
make reference thereto in its reports on the Companys financial statements for such years.

During the Companys two most recent
fiscal years ended December 31, 2004 and December 31, 2003, and through December 20, 2005, there were no reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).

On February 7, 2006, the Audit Committee of the Board of Directors of Vignette Corporation (the Company) approved the engagement of
Grant Thornton LLP as the Companys independent registered public accounting firm. The Company has not consulted with Grant Thornton LLP during the last two fiscal years ended December 31, 2005 and 2004 or during any subsequent interim
period preceding this Current Report on: the application of accounting principles to a specified transaction, either completed or proposed; the type of audit opinion that might be rendered on the Companys consolidated financial statements; or
any matter that was either the subject of a disagreement, as that term is described in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is described in Item 304(a)(1)(v) of
Regulation S-K.

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 our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, the disclosure
controls and procedures were



49



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##### Table of Contents

effective to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the Securities Exchange Commissions rules and forms.

Managements Report On Internal Control Over Financial Reporting

Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore even those systems determined to be effective can only provide reasonable
assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls become inadequate
because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed
the effectiveness of the Companys internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on its assessment, management concluded that, as of December 31, 2005, the Companys internal control over financial reporting was effective to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, has been audited by
Ernst &Young LLP, an independent registered public accounting firm. This report appears on page F-2 in our Consolidated Financial Statements.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal
controls over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None

The Company entered into offer letter agreements with the following executives: a) Brett Bachman, Senior Vice President Products and Strategy, on June 9, 2005; b) David Crean, Vice President Healthcare Solutions Unit, on September 20, 2005;
c) Gayle Wiley, Senior Vice President Global Human Resources, on September 28, 2005; and Lawrence Warnock, Vice President Marketing, on October 17, 2005. The offer letter agreements are attached as exhibits to this Form 10K.

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 26, 2006. We anticipate filing the Proxy Statement within 120 days of the end of our fiscal year ended December 31, 2005.



50



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##### Table of Contents

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.

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 below presents the following information as of December 31, 2005: (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)     |  | 1,545,480                                                                                | (3) |  | $                                                                          | 23.10 | (3) |                                                                                                                                       | 4,126,093 | (4)
|Equity compensation plans not approved by security holders (2) |  | 1,597,835                                                                                |     |  | $                                                                          | 28.71 |     |                                                                                                                                       | 1,874,199 |    
|                                                               |  |                                                                                          |     |  |                                                                            |       |     |                                                                                                                                       |           |    
|Total (5)                                                      |  | 3,143,315                                                                                |     |  | $                                                                          | 25.95 |     |                                                                                                                                       | 6,000,292 |    
|                                                               |  |                                                                                          |     |  |                                                                            |       |     |                                                                                                                                       |           |    

---

|(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) 1,180,482, 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) 450,000 shares.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 1,197,835 shares of the Companys common stock were issuable upon exercise of outstanding options at December 31, 2005. The weighted average exercise price of those outstanding options
was $23.57 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, 2005, a total of 400,000 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
$44.08 per share. In addition to the individual terms summarized in items (a) and (b) 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.



51



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##### Table of Contents

(a) On April 6, 2001, the Company granted Thomas E. Hogan, President, Chief Executive Officer and
Director, 345,000 stock options at an exercise price of $38.80. These options expire on April 6, 2009 and become exercisable as follows: 86,500 options become exercisable at a rate of 25% per quarter over one year beginning April 6,
2001; and 258,750 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, 2005, 345,000 stock options under this grant remain outstanding.

(b) On January 22, 2001, the Company granted Bryce M. Johnson, Senior Vice President, General Counsel and Secretary, 55,000 stock
options at an exercise price of $77.50 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, 2005, 55,000 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, 2005, there were 1,179,519 shares available for future issuance under the ESPP.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Excludes information for options assumed by the Company in business combinations. As of December 31, 2005, a total of 3,208 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 $37.66 per share. Upon assumption by the Company, no additional options may be granted under
these plans.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The following executive officers have entered into individual Rule 10b5-1 trading plans pursuant to which stock of the Company will be sold for their account from time to time in
accordance with the provisions of the plans without any further action or involvement by the officers: Charles Sansbury, Bryce M. Johnson, Conleth OConnell, Leo Brunnick, Brett Bachman.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 AND FINANCIAL STATEMENT SCHEDULES



|(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.



52



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##### Table of Contents

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

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



|(b) | 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                                                                                                                                         
|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.                                                      
|               | 
|3.5**          |  | Certificate of Amendment to the Companys Amended and Restated Certificate of Incorporation                                                         
|               | 
|4.1            |  | Reference is made to Exhibits 3.1, 3.2. and 3.3                                                                                                     
|               | 
|4.2           |  | Specimen common stock certificate.                                                                                                                  
|               | 
|4.3        |  | 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^          |  | 1999 Supplemental Stock Option Plan.                                                                                                                
|               | 
|10.5          |  | Prism Development and Marketing Agreement dated July 19, 1996 between the Registrant and CNET, Inc.                                               
|               | 
|10.6          |  | Letter Amendment to Prism Development and Marketing Agreement between the Registrant and CNET, Inc. dated August 15, 1998 and attachments thereto.
|               | 
|10.7         |  | Lease Agreement dated March 3, 2000 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                                       
|               | 
|10.8         |  | First Amendment to Lease Agreement dated September 1, 2000 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                
|               | 
|10.9         |  | Sublease dated September 26, 2000 among the Registrant, Aptis, Inc. and Billing Concepts Corp.                                                      
|               | 
|10.10^         |  | Stock Option Agreement  Jon. O. Niess.                                                                                                             
|               | 
|10.11^         |  | Stock Option Agreement I  Thomas E. Hogan.                                                                                                         
|               | 
|10.12^         |  | Stock Option Agreement II  Thomas E. Hogan.                                                                                                        
|               | 
|10.13^         |  | Stock Option Agreement  Bryce M. Johnson.                                                                                                          
|               | 
|10.14^^        |  | Share Sale Agreement dated January 16, 2004 between the Registrant and Tower Technology Pty Limited.                                                
|               | 
|10.15^^^       |  | Notice of Stock Option Grant and Stock Option Agreement  1999 Supplemental Stock Option Plan                                                       
|               | 
|10.16^^^       |  | 1999 Non-Employee Director Option Plan.                                                                                                             
|               | 
|10.17^^^       |  | Notice of Stock Option Grant and Stock Option Agreement  1999 Non-Employee Director Automatic Option Plan.                                         
|               | 
|10.18^^^       |  | Notice of Stock Option Grant and Stock Option Agreement  1999 Equity Incentive Plan.                                                               
|               | 
|10.19^^^       |  | Lease Agreement dated January 31, 2002 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                                    
|               | 
|10.20^^^       |  | First Amendment to Lease Agreement dated November 12, 2001 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                
|               | 
|10.21^^^       |  | Second Amendment to Lease Agreement dated July 22, 2003 between the Registrant and Prentiss Properties Acquisition Partners, L.P.                   



53



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##### Table of Contents

|         |  |                                                                                                                                   
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|10.22^^^ |  | Notice of Restricted Stock Award and Restricted Stock Agreement  1999 Equity Incentive Plan.                                     
|         | 
|10.23    |  | Amended and restated Master Services Agreement with Virtusa Corporation                                                           
|         | 
|10.24    |  | The amended Vignette Corporation Employee Stock Purchase Plan                                                                     
|         | 
|10.25    |  | The amended Vignette Corporation International Employee Stock Purchase Plan                                                       
|         | 
|10.26    |  | Michael A. Aviles Stock Option Agreement                                                                                          
|         | 
|10.27    |  | Michael A. Aviles Restricted Stock Agreement                                                                                      
|         | 
|10.28    |  | Offer Letter Agreement with Michael A. Aviles                                                                                     
|         | 
|10.29    |  | Separation Agreement with Michael A. Aviles                                                                                       
|         | 
|10.30    |  | Notice of Restricted Stock Award and Restricted Stock Agreement for Board of Director members under the 1999 Equity Incentive Plan
|         | 
|10.31    |  | Notice of Stock Option Grant and Option Agreement for Board of Director members under the 1999 Equity Incentive Plan              
|         | 
|10.32    |  | Offer Letter Agreement with Brett Bachman                                                                                         
|         | 
|10.33    |  | Offer Letter Agreement with David Crean                                                                                           
|         | 
|10.34    |  | Offer Letter Agreement with Gayle Wiley                                                                                           
|         | 
|10.35    |  | Offer Letter Agreement with Lawrence Warnock                                                                                      
|         | 
|16.1 *** |  | Letter from Ernst & Young LLP to the Securities and Exchange Commission concerning change in certifying accountant                
|         | 
|21.1     |  | Subsidiaries List.                                                                                                                
|         | 
|23.1     |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                      
|         | 
|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 definitive Proxy Statement for Special Meeting of Stockholders, dated February 17, 2000.
|- | -----------------------------------------------------------------------------------------------------------------------------------

|^ | Incorporated by reference to the Companys Form 10-K filed on March 28, 2003 (File No. 000-25375).
|- | --------------------------------------------------------------------------------------------------

|^^ | Incorporated by reference to the Companys Form 8-K filed on March 5, 2004 (File No. 000-25375).
|-- | ------------------------------------------------------------------------------------------------

|^^^ | Incorporated by reference to the Companys Form 10K filed on March 15, 2005 (File No. 000-25375)
|--- | ------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the Companys Form 8K filed on June 10, 2005 (File No. 00025375)
|-- | ---------------------------------------------------------------------------------------------

|*** | Incorporated by reference to the Companys Form 8K filed on December 27, 2005 (File No. 00025375)
|--- | -------------------------------------------------------------------------------------------------



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##### Table of Contents

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/ Charles W. SansburyCharles W. SansburyChief Financial Officer


Dated: March 15, 2006

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/ Michael A. Aviles Michael A. Aviles |  | President, Chief Executive Officer and Director |  | March 15, 2006
|                                        |  |                                                
|/s/ Charles W. Sansbury                 |  | Chief Financial Officer                         |  | March 15, 2006
|Charles W. Sansbury                     |  |                                                 |  |               
|                                        |  |                                                
|/s/ Jan H. Lindelow                     |  | Chairman of the Board of Directors              |  | March 15, 2006
|Jan H. Lindelow                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Henry T. DeNero                     |  | Director                                        |  | March 15, 2006
|Henry T. DeNero                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Kathleen Earley                     |  | Director                                        |  | March 15, 2006
|Kathleen Earley                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Joseph M. Grant                     |  | Director                                        |  | March 15, 2006
|Joseph M. Grant                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Jeffrey S. Hawn                     |  | Director                                        |  | March 15, 2006
|Jeffrey S. Hawn                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Thomas E. Hogan                     |  | Director                                        |  | March 15, 2006
|Thomas E. Hogan                         |  |                                                 |  |               
|                                        |  |                                                
|/s/ Michael D. Lambert                  |  | Director                                        |  | March 15, 2006
|Michael D. Lambert                      |  |                                                 |  |               



55



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##### Table of Contents

VIGNETTE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |      
|--------------------------------------------------------------------------------------------------------------- |  | -----
|                                                                                                                |  | Page 
|Reports of Independent Registered Public Accounting Firm                                                        |  | F  2
|                                                                                                                | 
|Consolidated Balance Sheets at December 31, 2005 and 2004                                                       |  | F  4
|                                                                                                                | 
|Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                      |  | F  5
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2005, 2004 and 2003 |  | F  6
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                      |  | F  8
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F  9



F - 1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders of Vignette Corporation

We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that
Vignette Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Vignette Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, managements assessment that Vignette Corporation maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Vignette Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vignette Corporation as of December 31, 2005 and December 31, 2004, and the related consolidated statements of operation,
changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2005 of Vignette Corporation and our report dated March 9, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Austin, Texas

March 9, 2006



F - 2



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Vignette Corporation

We have audited the accompanying consolidated balance sheets of Vignette Corporation
(the Company) as of December 31, 2005 and 2004, 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, 2005.
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 the standards of the Public Company Accounting Oversight Board (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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Vignette Corporations internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Austin, Texas

March 9, 2006



F - 3



---

##### Table of Contents

VIGNETTE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                               |  | December 31, |           
|                                                                                                                                                                                                                                                               |  | 2005         |            |   | 2004 |  
|ASSETS                                                                                                                                                                                                                                                         |  |              |            |   |      |   |            |  
|Current assets:                                                                                                                                                                                                                                                |  |              |            |   |      |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                                                      |  | $            | 124,104    |   |      | $ | 63,781     |  
|Short-term investments                                                                                                                                                                                                                                         |  |              | 72,953     |   |      |   | 100,582    |  
|Accounts receivable, net of allowance of $1,383 and $4,454 as of December 31, 2005 and 2004, respectively                                                                                                                                                      |  |              | 38,610     |   |      |   | 41,569     |  
|Prepaid expenses and other                                                                                                                                                                                                                                     |  |              | 7,828      |   |      |   | 5,424      |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                                                                           |  |              | 243,495    |   |      |   | 211,356    |  
|                                                                                                                                                                                                                                                               |  |             
|Property and equipment:                                                                                                                                                                                                                                        |  |              |            |   |      |   |            |  
|Equipment                                                                                                                                                                                                                                                      |  |              | 1,362      |   |      |   | 1,517      |  
|Computers and purchased software                                                                                                                                                                                                                               |  |              | 34,090     |   |      |   | 32,727     |  
|Furniture and fixtures                                                                                                                                                                                                                                         |  |              | 2,725      |   |      |   | 2,805      |  
|Leasehold improvements                                                                                                                                                                                                                                         |  |              | 8,199      |   |      |   | 7,845      |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                                                                               |  |              | 46,376     |   |      |   | 44,894     |  
|Accumulated depreciation                                                                                                                                                                                                                                       |  |              | (38,185    | ) |      |   | (35,130    | )
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|                                                                                                                                                                                                                                                               |  |              | 8,191      |   |      |   | 9,764      |  
|                                                                                                                                                                                                                                                               |  |             
|Investments                                                                                                                                                                                                                                                    |  |              | 8,288      |   |      |   | 12,400     |  
|Goodwill                                                                                                                                                                                                                                                       |  |              | 120,110    |   |      |   | 123,912    |  
|Technology, net of accumulated amortization and impairment charges of $56,198 and $49,931, respectively                                                                                                                                                        |  |              | 20,903     |   |      |   | 27,170     |  
|Other intangible assets, net of accumulated amortization and impairment charges of $11,867 and $6,864 as of December 31, 2005 and 2004,
respectively                                                                                                           |  |              | 13,733     |   |      |   | 18,736     |  
|Other assets                                                                                                                                                                                                                                                   |  |              | 2,441      |   |      |   | 2,118      |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total assets                                                                                                                                                                                                                                                   |  | $            | 417,161    |   |      | $ | 405,456    |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Current liabilities:                                                                                                                                                                                                                                           |  |              |            |   |      |   |            |  
|Accounts payable                                                                                                                                                                                                                                               |  | $            | 3,910      |   |      | $ | 2,355      |  
|Accrued employee liabilities                                                                                                                                                                                                                                   |  |              | 14,638     |   |      |   | 13,916     |  
|Accrued restructuring charges                                                                                                                                                                                                                                  |  |              | 2,901      |   |      |   | 7,846      |  
|Accrued exit and severance costs                                                                                                                                                                                                                               |  |              | 1,119      |   |      |   | 3,761      |  
|Accrued income taxes                                                                                                                                                                                                                                           |  |              | 5,597      |   |      |   | 4,356      |  
|Accrued other charges                                                                                                                                                                                                                                          |  |              | 13,189     |   |      |   | 14,277     |  
|Deferred revenue                                                                                                                                                                                                                                               |  |              | 34,306     |   |      |   | 33,444     |  
|Other current liabilities                                                                                                                                                                                                                                      |  |              | 2,516      |   |      |   | 4,995      |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                                                                                      |  |              | 78,176     |   |      |   | 84,950     |  
|Accrued restructuring charges, less current portion                                                                                                                                                                                                            |  |              | 3,908      |   |      |   | 7,829      |  
|Accrued exit and severance costs, less current portion                                                                                                                                                                                                         |  |              | 415        |   |      |   | 2,503      |  
|Deferred revenue, less current portion                                                                                                                                                                                                                         |  |              | 4,553      |   |      |   | 3,356      |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                                                                              |  |              | 87,052     |   |      |   | 98,638     |  
|Stockholders equity:                                                                                                                                                                                                                                          |  |              |            |   |      |   |            |  
|Common stock  $0.01 par value; 500,000,000 shares authorized; 29,546,137 and 28,982,756 shares issued and outstanding December 31,
2005 and 2004, respectively (net of treasury shares of 212,767 and 211,543 as of December 31, 2005 and 2004, respectively) |  |              | 296        |   |      |   | 290        |  
|Additional paid-in capital                                                                                                                                                                                                                                     |  |              | 2,753,937  |   |      |   | 2,750,376  |  
|Deferred stock compensation                                                                                                                                                                                                                                    |  |              | (380       | ) |      |   | (491       | )
|Accumulated other comprehensive income                                                                                                                                                                                                                         |  |              | 1,204      |   |      |   | 1,985      |  
|Accumulated deficit                                                                                                                                                                                                                                            |  |              | (2,424,948 | ) |      |   | (2,445,342 | )
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total stockholders equity                                                                                                                                                                                                                                     |  |              | 330,109    |   |      |   | 306,818    |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                     |  | $            | 417,161    |   |      | $ | 405,456    |  
|                                                                                                                                                                                                                                                               |  |              |            |   |      |   |            |  

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



F - 4



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##### Table of Contents

VIGNETTE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                     |  | Year Ended December 31, |        
|                                                                                     |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|Revenue:                                                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Product license                                                                      |  | $                       | 70,316  |   |      | $ | 63,152  |      |  | $ | 60,986  |  
|Services                                                                             |  |                         | 120,359 |   |      |   | 114,775 |      |  |   | 97,328  |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Total revenue                                                                        |  |                         | 190,675 |   |      |   | 177,927 |      |  |   | 158,314 |  
|Cost of revenue:                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Product license                                                                      |  |                         | 2,911   |   |      |   | 5,036   |      |  |   | 2,844   |  
|Amortization of acquired technology                                                  |  |                         | 6,267   |   |      |   | 10,115  |      |  |   | 3,450   |  
|Services (1)                                                                         |  |                         | 55,427  |   |      |   | 53,281  |      |  |   | 39,531  |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Total cost of revenue                                                                |  |                         | 64,605  |   |      |   | 68,432  |      |  |   | 45,825  |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Gross profit                                                                         |  |                         | 126,070 |   |      |   | 109,495 |      |  |   | 112,489 |  
|                                                                                     |  |                         |        
|Operating expenses:                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Research and development (1)                                                         |  |                         | 33,200  |   |      |   | 40,211  |      |  |   | 39,923  |  
|Sales and marketing (1)                                                              |  |                         | 67,956  |   |      |   | 74,489  |      |  |   | 68,160  |  
|General and administrative (1)                                                       |  |                         | 19,593  |   |      |   | 17,972  |      |  |   | 15,727  |  
|Purchased in-process research and development, acquisition-related and other charges |  |                         | 270     |   |      |   | 7,609   |      |  |   | 4,258   |  
|Business restructuring (benefit) charges                                             |  |                         | (2,899  | ) |      |   | 18,083  |      |  |   | (14,687 | )
|Amortization of deferred stock compensation                                          |  |                         | 834     |   |      |   | 480     |      |  |   | 1,107   |  
|Amortization of intangible assets                                                    |  |                         | 5,003   |   |      |   | 4,919   |      |  |   | 1,965   |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                             |  |                         | 123,957 |   |      |   | 163,763 |      |  |   | 116,453 |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from operations                                                        |  |                         | 2,113   |   |      |   | (54,268 | )    |  |   | (3,964  | )
|                                                                                     |  |                         |        
|Other income (expense):                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest income                                                                      |  |                         | 5,944   |   |      |   | 3,158   |      |  |   | 3,747   |  
|Interest expense                                                                     |  |                         | (137    | ) |      |   | (118    | )    |  |   | (29     | )
|Other                                                                                |  |                         | (361    | ) |      |   | (145    | )    |  |   | 1,350   |  
|Gain on sale of equity investments                                                   |  |                         | 15,264  |   |      |   |        |      |  |   |        |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Total other income (expense), net                                                    |  |                         | 20,710  |   |      |   | 2,895   |      |  |   | 5,068   |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before income taxes                                                    |  |                         | 22,823  |   |      |   | (51,373 | )    |  |   | 1,104   |  
|Provision for income taxes                                                           |  |                         | (2,429  | ) |      |   | (1,482  | )    |  |   | (1,137  | )
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                    |  | $                       | 20,394  |   |      | $ | (52,855 | )    |  | $ | (33     | )
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic net income (loss) per share                                                    |  | $                       | 0.70    |   |      | $ | (1.86   | )    |  | $ | (0.00   | )
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Diluted net income (loss) per share                                                  |  | $                       | 0.68    |   |      | $ | (1.86   | )    |  | $ | (0.00   | )
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Shares used in computing basic net income (loss) per share                           |  |                         | 29,181  |   |      |   | 28,381  |      |  |   | 25,310  |  
|Shares used in computing diluted net income (loss) per share                         |  |                         | 29,807  |   |      |   | 28,381  |      |  |   | 25,310  |  
|                                                                                     | 
|                                                                                     |  | Year Ended December 31, |        
|                                                                                     |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|(1)    Excludes amortization of deferred stock compensation as follows:              |  |                         |         |   |      |   |         |      |  |   |         |  
|Research and development                                                             |  | $                       | 12      |   |      | $ | (71     | )    |  | $ | 324     |  
|Sales and marketing                                                                  |  |                         | 124     |   |      |   | (48     | )    |  |   | 69      |  
|General and administrative                                                           |  |                         | 698     |   |      |   | 599     |      |  |   | 714     |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                     |  | $                       | 834     |   |      | $ | 480     |      |  | $ | 1,107   |  
|                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  

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



F - 5



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##### Table of Contents

VIGNETTE CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                                                                    |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | --------------- | - | ------------------------ | -------- | --- | ------------------------------------------- | - | --------- | -------------------------- |  | - | --------------------------------------------- | - | ------------------- | - | ------ | -------------------------- |  | - | ----- |  | - | ---------- | - |  | - | ------- | -
|                                                                                                    |  | Common Stock    |   | AdditionalPaid-inCapital |          |     | Notes Receivablefor Purchase ofCommon Stock |   |           | Deferred StockCompensation |  |   | Accumulated Other Comprehensive Income (Loss) |   | Accumulated Deficit |   |        | Total Stockholders Equity | 
|                                                                                                    |  | Number ofShares |   |                          | ParValue |     |                                             |   |           |                            | 
|Balance at December 31, 2002                                                                        |  | 25,184,237      |   |                          | $        | 252 |                                             | $ | 2,659,280 |                            |  | $ | (32                                           | ) |                     | $ | (1,367 | )                          |  | $ | 170   |  | $ | (2,392,451 | ) |  | $ | 265,852 |  
|Issuance of common stock in purchase of business                                                    |  | 417,256         |   |                          |          | 4   |                                             |   | 10,628    |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 10,632  |  
|Issuance of common stock pursuant to employee stock purchase plan                                   |  | 103,896         |   |                          |          | 1   |                                             |   | 1,271     |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 1,272   |  
|Stock options exercised                                                                             |  | 283,368         |   |                          |          | 3   |                                             |   | 2,409     |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 2,412   |  
|Repurchase of common stock                                                                          |  | (17,676         | ) |                          |          |    |                                             |   | (423      | )                          |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | (423    | )
|Deferred stock compensation related to stock option and restricted stock grants                     |  | 43,103          |   |                          |          |    |                                             |   | 1,030     |                            |  |   |                                              |   |                     |   | (1,030 | )                          |  |   |      |  |   |           |   |  |   |        |  
|Forfeiture of stock options                                                                         |  |                |   |                          |          |    |                                             |   | (30       | )                          |  |   |                                               |   |                     |   | 30     |                            |  |   |      |  |   |           |   |  |   |        |  
|Amortization of deferred stock compensation                                                         |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   | 1,107  |                            |  |   |      |  |   |           |   |  |   | 1,107   |  
|Other                                                                                               |  | (8,845          | ) |                          |          |    |                                             |   | (32       | )                          |  |   | 32                                            |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   |        |  
|Comprehensive loss:                                                                                 |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|Net loss                                                                                            |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   | (33        | ) |  |   | (33     | )
|Unrealized Investment gains                                                                         |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 166   |  |   |           |   |  |   | 166     |  
|Foreign currency translation adjustment, cumulative translation gain of $723 at December 31, 2003   |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 361   |  |   |           |   |  |   | 361     |  
|                                                                                                    |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|Total comprehensive income                                                                          |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   | 494     |  
|                                                                                                    |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|Balance at December 31, 2003                                                                        |  | 26,005,339      |   |                          |          | 260 |                                             |   | 2,674,133 |                            |  |   |                                              |   |                     |   | (1,260 | )                          |  |   | 697   |  |   | (2,392,484 | ) |  |   | 281,346 |  
|Issuance of common stock in purchase of business                                                    |  | 2,715,152       |   |                          |          | 27  |                                             |   | 73,273    |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 73,300  |  
|Issuance of common stock pursuant to employee stock purchase plan                                   |  | 120,735         |   |                          |          | 1   |                                             |   | 1,497     |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 1,498   |  
|Stock options exercised                                                                             |  | 175,155         |   |                          |          | 2   |                                             |   | 1,807     |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | 1,809   |  
|Forfeiture of restricted stock grants                                                               |  | (30,625         | ) |                          |          |    |                                             |   | (232      | )                          |  |   |                                              |   |                     |   | 371    |                            |  |   |      |  |   |           |   |  |   | 139     |  
|Deferred stock compensation related to stock option and restricted stock grants                     |  |                |   |                          |          |    |                                             |   | 87        |                            |  |   |                                              |   |                     |   | (82    | )                          |  |   |      |  |   |           |   |  |   | 5       |  
|Repurchase of restricted stock                                                                      |  | (3,000          | ) |                          |          |    |                                             |   | (189      | )                          |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   |           |   |  |   | (189    | )
|Amortization of deferred stock compensation                                                         |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   | 480    |                            |  |   |      |  |   |           |   |  |   | 480     |  
|Other                                                                                               |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   | (3         | ) |  |   | (3      | )
|Comprehensive loss:                                                                                 |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|Net loss                                                                                            |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   |      |  |   | (52,855    | ) |  |   | (52,855 | )
|Unrealized Investment gains                                                                         |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 1,002 |  |   |           |   |  |   | 1,002   |  
|Foreign currency translation adjustment, cumulative translation gain of $1,009 at December 31, 2004 |  |                |   |                          |          |    |                                             |   |          |                            |  |   |                                              |   |                     |   |       |                            |  |   | 286   |  |   |           |   |  |   | 286     |  
|                                                                                                    |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   |         |  
|Total comprehensive loss                                                                            |  |                 |   |                          |          |     |                                             |   |           |                            |  |   |                                               |   |                     |   |        |                            |  |   |       |  |   |            |   |  |   | (51,567 | )

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



F - 6



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##### Table of Contents

|                                                                                                    |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | --------------- | - | ------------------------ | --------- | --- | ------------------------------------------ | - | -------------------------- | - |  | --------------------------------------------- | - |  | ------------------- | ---- | - | -------------------------- | - | ----- | - |  | - | ---------- | - |  | - | ------- | -
|                                                                                                    |  | Common Stock    |   | AdditionalPaid-inCapital |           |     | NotesReceivable forPurchase ofCommon Stock |   | Deferred StockCompensation |   |  | Accumulated Other Comprehensive Income (Loss) |   |  | Accumulated Deficit |      |   | Total Stockholders Equity |  
|                                                                                                    |  | Number ofShares |   |                          | Par Value |     |                                            |   |                            |   | 
|Balance at December 31, 2004                                                                        |  | 28,982,756      |   |                          | $         | 290 |                                            | $ | 2,750,376                  |   |  | $                                             |  |  | $                   | (491 | ) |                            | $ | 1,985 |   |  | $ | (2,445,342 | ) |  | $ | 306,818 |  
|Issuance of common stock pursuant to employee stock purchase plan                                   |  | 88,900          |   |                          |           | 1   |                                            |   | 986                        |   |  |                                               |  |  |                     |     |   |                            |   |      |   |  |   |           |   |  |   | 987     |  
|Stock options exercised                                                                             |  | 416,437         |   |                          |           | 4   |                                            |   | 1,851                      |   |  |                                               |  |  |                     |     |   |                            |   |      |   |  |   |           |   |  |   | 1,855   |  
|Forfeiture of restricted stock grants                                                               |  | (2,500          | ) |                          |           |    |                                            |   | (34                        | ) |  |                                               |  |  |                     | 34   |   |                            |   |      |   |  |   |           |   |  |   |        |  
|Deferred stock compensation related to stock option and restricted stock grants                     |  | 60,544          |   |                          |           | 1   |                                            |   | 758                        |   |  |                                               |  |  |                     | (757 | ) |                            |   |      |   |  |   |           |   |  |   | 2       |  
|Amortization of deferred stock compensation                                                         |  |                |   |                          |           |    |                                            |   |                           |   |  |                                               |  |  |                     | 834  |   |                            |   |      |   |  |   |           |   |  |   | 834     |  
|Comprehensive loss:                                                                                 |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   |         |  
|Net income                                                                                          |  |                |   |                          |           |    |                                            |   |                           |   |  |                                               |  |  |                     |     |   |                            |   |      |   |  |   | 20,394     |   |  |   | 20,394  |  
|Realized investment gains                                                                           |  |                |   |                          |           |    |                                            |   |                           |   |  |                                               |  |  |                     |     |   |                            |   | (992  | ) |  |   |           |   |  |   | (992    | )
|Foreign currency translation adjustment, cumulative translation gain of $1,220 at December 31, 2005 |  |                |   |                          |           |    |                                            |   |                           |   |  |                                               |  |  |                     |     |   |                            |   | 211   |   |  |   |           |   |  |   | 211     |  
|                                                                                                    |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   |         |  
|Total comprehensive income                                                                          |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   | 19,613  |  
|                                                                                                    |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   |         |  
|Balance at December 31, 2005                                                                        |  | 29,546,137      |   |                          | $         | 296 |                                            | $ | 2,753,937                  |   |  | $                                             |  |  | $                   | (380 | ) |                            | $ | 1,204 |   |  | $ | (2,424,948 | ) |  | $ | 330,109 |  
|                                                                                                    |  |                 |   |                          |           |     |                                            |   |                            |   |  |                                               |   |  |                     |      |   |                            |   |       |   |  |   |            |   |  |   |         |  

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



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##### Table of Contents

VIGNETTE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                               |  | Year Ended December 31, |        
|                                                                                               |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|Operating activities:                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                              |  | $                       | 20,394  |   |      | $ | (52,855 | )    |  | $ | (33     | )
|Adjustment to reconcile net loss to cash used in operating activities:                         |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                                   |  |                         | 5,654   |   |      |   | 9,065   |      |  |   | 14,626  |  
|Amortization                                                                                   |  |                         | 11,270  |   |      |   | 15,150  |      |  |   | 5,881   |  
|Noncash compensation expense                                                                   |  |                         | 834     |   |      |   | 480     |      |  |   | 1,107   |  
|Purchased in-process research and development, acquisition-related and other charges (noncash) |  |                         |        |   |      |   | 5,923   |      |  |   | 1,100   |  
|Noncash restructuring (benefits) charges                                                       |  |                         | (778    | ) |      |   | 3,200   |      |  |   |        |  
|Noncash investment impairments                                                                 |  |                         |        |   |      |   | 206     |      |  |   | 75      |  
|Gain on Sale of equity investments                                                             |  |                         | (15,264 | ) |      |   |        |      |  |   |        |  
|Gain on disposal of fixed assets                                                               |  |                         | (114    | ) |      |   |        |      |  |   |        |  
|Other noncash items                                                                            |  |                         | 188     |   |      |   | (398    | )    |  |   | (542    | )
|Changes in operating assets and liabilities, net of effects from purchases of businesses:      |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                       |  |                         | 682     |   |      |   | (2,121  | )    |  |   | 3,271   |  
|Prepaid expenses and other assets                                                              |  |                         | 1,412   |   |      |   | 1,741   |      |  |   | (2,984  | )
|Accounts payable                                                                               |  |                         | 1,702   |   |      |   | (622    | )    |  |   | 473     |  
|Accrued expenses                                                                               |  |                         | 497     |   |      |   | (5,808  | )    |  |   | (52,245 | )
|Accrued restructuring expenses                                                                 |  |                         | (12,935 | ) |      |   |         |      |  |   |         |  
|Deferred revenue                                                                               |  |                         | 3,957   |   |      |   | (5,665  | )    |  |   | (12,912 | )
|Other liabilities                                                                              |  |                         | (769    | ) |      |   | 213     |      |  |   | (1,228  | )
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by/ (used) in operating activities                                           |  |                         | 16,730  |   |      |   | (31,491 | )    |  |   | (43,411 | )
|                                                                                               |  |                         |        
|Investing activities:                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Purchase of property and equipment                                                             |  |                         | (4,253  | ) |      |   | (4,983  | )    |  |   | (7,408  | )
|Purchase of businesses, net of cash acquired                                                   |  |                         |        |   |      |   | (43,751 | )    |  |   | (24,439 | )
|Maturity of restricted investments                                                             |  |                         | 2,858   |   |      |   | 457     |      |  |   | 1,486   |  
|Purchase of marketable securities and short-term investments                                   |  |                         | (50,028 | ) |      |   |        |      |  |   |        |  
|Maturity of marketable securities and short-term investments                                   |  |                         | 77,657  |   |      |   | 99,291  |      |  |   | 35,439  |  
|Purchase of equity securities                                                                  |  |                         | (45     | ) |      |   | (276    | )    |  |   | (334    | )
|Proceeds from sale of equity securities                                                        |  |                         | 15,517  |   |      |   | 824     |      |  |   |        |  
|Other                                                                                          |  |                         | 253     |   |      |   | (45     | )    |  |   | 114     |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by in investing activities                                                   |  |                         | 41,959  |   |      |   | 51,517  |      |  |   | 4,858   |  
|                                                                                               |  |                         |        
|Financing activities:                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Payments on long-term debt and capital lease obligations                                       |  |                         |        |   |      |   | (72     | )    |  |   | (280    | )
|Proceeds from exercise of stock options and purchase of employee stock purchase plan shares    |  |                         | 2,843   |   |      |   | 3,307   |      |  |   | 3,684   |  
|Purchase of Company common stock                                                               |  |                         |        |   |      |   |        |      |  |   | (423    | )
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                      |  |                         | 2,843   |   |      |   | 3,235   |      |  |   | 2,981   |  
|                                                                                               |  |                         |        
|Effect of exchange rate changes on cash and cash equivalents                                   |  |                         | (1,209  | ) |      |   | 881     |      |  |   | 2,769   |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Net increase/(decrease) in cash and cash equivalents                                           |  |                         | 60,323  |   |      |   | 24,142  |      |  |   | (32,803 | )
|Cash and cash equivalents at beginning of year                                                 |  |                         | 63,781  |   |      |   | 39,639  |      |  |   | 72,442  |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                       |  | $                       | 124,104 |   |      | $ | 63,781  |      |  | $ | 39,639  |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                                  |  | $                       | 137     |   |      | $ | 118     |      |  | $ | 29      |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Income taxes paid                                                                              |  | $                       | 905     |   |      | $ | 1,609   |      |  | $ | 911     |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Noncash activities:                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Common stock issued and stock options exchanged to acquire businesses                          |  | $                       |        |   |      | $ | 73,300  |      |  | $ | 10,632  |  
|                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  

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



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

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, enterprise content management 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, 2005, the Company continued to execute on its existing business restructuring plan, including the successful early termination of and/or execution of additional subleases for leased office space, and adjusted existing site
consolidation accruals resulting in total business restructuring benefits of $2.9 million. It is reasonably possible that 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 years ended December 31, 2005 and December 31, 2004, no changes to the established estimated lives for identifiable intangible assets were made and no
impairment charges were deemd necessary.

Revenue recognition

Revenue consists of product license and services fees. Product license fee income is earned through licensing the right to use our software and from the sale of specific software products. Services 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 Statements as revised by SAB 104.



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##### Table of Contents

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 each element in the arrangement. 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 we do not have VSOE for license elements of an arrangement, but do 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 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 the Company is obligated to perform professional services for implementation of the product,
the Company evaluates whether delivery has occurred upon shipment of software or upon completion of services and if the customer payment is probable. This evaluation is made based on various factors such as the nature of the services work, order
type (e.g. initial vs. follow-on), customers payment history, etc. In the instances where delivery is deemed not to have occurred upon shipment based on the aforementioned factors, license revenue is taken when the Company has no significant
remaining obligations with regard to the implementation.

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 as they are not essential to the functionality of our products.

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.

The Company follows 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

Accounts receivable

Accounts receivable are recorded at cost. 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.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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.

Auction rate securities are
highly liquid, variable rate securities. While the underlying security has a long-term nominal maturity, the interest rate is reset through dutch auctions that are typically held every 7, 28, or 35 days. The securities trade at par and are callable
at par on any interest payment date at the option of the issuer. Interest is paid at the end of each auction period. Substantially all of the auction rate securities held have contractual maturities in excess of ten years from December 31, 2005

The Company classifies auction rate securities as available for sale pursuant to Statement of accounting Standards
No. 115. Furthermore, the Company classified these securities as short-term because: (i) we acquired and held these securities with the intent to liquidate them as the need for working capital arose in the ordinary course of business;
(ii) we are able to either liquidate our holdings or roll our investment over to the next reset period at each rate reset interval as described above.

Short-term investments consist of marketable securities that have remaining maturities of less than one year from the balance sheet date, excluding cash equivalents, and auction rate securities as described above.
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.

Short-term investments consist of the
following (in thousands):



|                                       |  |                   |        |                      |   |     |                     |  |      |        |                      |   |         |                     |   |     |   |  |   |        
|-------------------------------------- |  | ----------------- | ------ | -------------------- | - | --- | ------------------- |  | ---- | ------ | -------------------- | - | ------- | ------------------- | - | --- | - |  | - | -------
|                                       |  | December 31, 2005 |        | December 31, 2004   
|                                       |  | Cost              |        | UnrealizedGain(Loss) |   |     | EstimatedFair Value |  | Cost |        | UnrealizedGain(Loss) |   |         | EstimatedFair Value
|Marketable securities:                 |  |                   |        |                      |   |     |                     |  |      |        |                      |   |         |                     |   |     |   |  |   |        
|Municipal and U.S. Government agencies |  | $                 | 9,369  |                      | $ | (16 | )                   |  | $    | 9,353  |                      | $ | 2,195   |                     | $ | 8   |   |  | $ | 2,203  
|Corporate notes                        |  |                   | 1,043  |                      |   |    |                     |  |      | 1,043  |                      |   | 16,711  |                     |   | (71 | ) |  |   | 16,640 
|Medium term notes                      |  |                   |       |                      |   |    |                     |  |      |       |                      |   | 921     |                     |   | (4  | ) |  |   | 917    
|Auction rate                           |  |                   | 62,557 |                      |   |    |                     |  |      | 62,557 |                      |   | 80,822  |                     |   |    |   |  |   | 80,822 
|                                       |  |                   |        |                      |   |     |                     |  |      |        |                      |   |         |                     |   |     |   |  |   |        
|                                       |  | $                 | 72,969 |                      | $ | (16 | )                   |  | $    | 72,953 |                      | $ | 100,649 |                     | $ | (67 | ) |  | $ | 100,582
|                                       |  |                   |        |                      |   |     |                     |  |      |        |                      |   |         |                     |   |     |   |  |   |        

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,
|                                                      |  | 2005         |       | 2004
|Restricted investments (cost approximates fair value) |  | $            | 6,960 |      | $ | 9,793 
|Equity investments:                                   |  |              |       |      |   |       
|Common stock                                          |  |              |      |      |   | 1,323 
|Limited partnership interest                          |  |              | 1,328 |      |   | 1,284 
|                                                      |  |              |       |      |   |       
|                                                      |  | $            | 8,288 |      | $ | 12,400
|                                                      |  |              |       |      |   |       



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 and tax obligations. These investments will remain restricted to the extent that the security requirements exist. All restricted investments mature in 2006 and the average
yield of these investments is approximately 2.98%

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
$0.0 million, $0.2 million, and $0.0 million for the years ended December 31, 2005, 2004 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.

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 ofPeriod |       | Charged toExpense, netof Recoveries |       | Adjustmentsfrom BusinessCombinations |        |   | Deduction ofUncollectibleAccounts |        |   | Balance atEnd of Period
|Year ended December 31, 2005 |  | $                            | 4,454 |                                     | 180   |                                      | 107    |   |                                   | (3,358 | ) |                         | $ | 1,383
|Year ended December 31, 2004 |  | $                            | 3,344 |                                     | 1,288 |                                      | 149    |   |                                   | (327   | ) |                         | $ | 4,454
|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, 2005, 2004 or 2003.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 uses derivative financial instruments to reduce its risk to foreign currency
fluctuations. At December 31, 2005, the notional value of the foreign currency contracts was $10.9 million and based on the applicable exchange rates, the fair value of derivative financial instruments was a liability of $0.1 million. At
December 31, 2004, the notional value of the foreign currency contracts was $16.6 million and based on the applicable exchange rates, the fair value of derivative financial instruments was a liability of $0.6 million. Foreign currency contracts
are classified on the balance sheet in Prepaid expenses and other or in Other current liabilities. The Company had no foreign currency contracts or derivative financial instruments in 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. The
Company periodically assesses its intangible assets, including goodwill, for indications of impairment. Based on this assessment no such impairment charges were recorded in either 2005, 2004, or 2003.

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 six years. Amortization of acquired technology is considered a cost of revenue and is presented as Amortization of acquired
technology in the accompanying Consolidated Statements of Operations. Amortization of non-compete contracts and customer relationships is considered operating expense and included in Amortization of intangible assets 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.

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. During fiscal years 2005, 2004, and 2003 no such costs were capitalized. In years prior to 2003 such 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 $0.0 million, $0.1 million, and $0.5 million for the years ended 2005, 2004 and 2003, respectively and is
included in Cost of revenue  product license in the accompanying Consolidated Statements of Operations.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 accompanying Consolidated Statements of
Operations. Gains and losses from foreign currency denominated transactions amounted to a $0.6 million loss, a $0.1 million loss, and a $0.9 million gain for the years ended December 31, 2005, 2004 and 2003, respectively.

Stock-based compensation

At December 31, 2005,
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. 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 accompanying Consolidated Statements of Operations.

The following table illustrates the effect on net income
(loss) and net income (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, |       
|                                                                                                                                          |  | 2005                    |        |   | 2004 |   |         | 2003 | 
|Net income (loss):                                                                                                                        |  |                         |        |   |      |   |         |      |  |   |         |  
|Reported net income (loss)                                                                                                                |  | $                       | 20,394 |   |      | $ | (52,855 | )    |  | $ | (33     | )
|Add: Total stock-based employee compensation expense included in the determination of net loss as reported, net of related tax
effects    |  |                         | 834    |   |      |   | 480     |      |  |   | 1,107   |  
|Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                         | (7,707 | ) |      |   | (16,951 | )    |  |   | (44,265 | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  
|Pro forma net income (loss)                                                                                                               |  | $                       | 13,521 |   |      | $ | (69,326 | )    |  | $ | (43,191 | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  
|Basic net income (loss) per share :                                                                                                       |  |                         |        |   |      |   |         |      |  |   |         |  
|Reported net income (loss) per share                                                                                                      |  | $                       | 0.70   |   |      | $ | (1.86   | )    |  | $ | (0.00   | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  
|Pro-forma net income (loss) per share                                                                                                     |  | $                       | 0.46   |   |      | $ | (2.44   | )    |  | $ | (1.71   | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  
|Diluted net income (loss) per share :                                                                                                     |  |                         |        |   |      |   |         |      |  |   |         |  
|Reported net income (loss) per share                                                                                                      |  | $                       | 0.68   |   |      | $ | (1.86   | )    |  | $ | (0.00   | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  
|Pro-forma net income (loss) per share                                                                                                     |  | $                       | 0.45   |   |      | $ | (2.44   | )    |  | $ | (1.71   | )
|                                                                                                                                          |  |                         |        |   |      |   |         |      |  |   |         |  



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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

Comprehensive income includes net income (loss) and other comprehensive income (loss) and is presented
in the Consolidated Statements of Changes in Stockholders Equity. Statement of Financial Accounting Standard 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, |      
|                                                          |  | 2005         |       |   | 2004 |  
|Foreign currency translation                              |  | $            | 1,220 |   |      | $ | 1,009 |  
|Unrealized gain (loss) on available-for-sale investments: |  |              |       |   |      |   |       |  
|Short-term investments                                    |  |              | (16   | ) |      |   | (74   | )
|Long-term investments                                     |  |              |      |   |      |   | 1,050 |  
|                                                          |  |              |       |   |      |   |       |  
|                                                          |  | $            | 1,204 |   |      | $ | 1,985 |  
|                                                          |  |              |       |   |      |   |       |  

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.

Advertising costs

Advertising costs are expensed as incurred. The company did not recognize any material advertising expenses for the years ended December 31, 2005, 2004 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 basis 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 income (loss) per share

Basic net income (loss) per share is computed by dividing the net income (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. The Company includes stock options, the employee stock purchase plan (ESPP), and restricted shares in the calculation of diluted
earnings per share. The Company had outstanding common stock options of 3,587,412 and 4,081,384 at December 31, 2004 and 2003, respectively. Such outstanding common stock options have been excluded from the calculation of diluted net loss per
share for fiscal years 2004 and 2003, as the effect of their exercise would be antidilutive.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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



|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                     |  | Year Ended December 31, |       
|                                                                                     |  | 2005                    |        |   | 2004 |   |         | 2003 | 
|Net income (loss)                                                                    |  | $                       | 20,394 |   |      | $ | (52,855 | )    |  | $ | (33    | )
|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Basic:                                                                               |  |                         |        |   |      |   |         |      |  |   |        |  
|Weighted-average common shares outstanding                                           |  |                         | 29,285 |   |      |   | 28,428  |      |  |   | 25,396 |  
|Weighted-average common shares subject to repurchase or forfeiture                   |  |                         | (104   | ) |      |   | (47     | )    |  |   | (86    | )
|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Weighted-average common shares used in computing basic net income (loss) per share   |  |                         | 29,181 |   |      |   | 28,381  |      |  |   | 25,310 |  
|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Diluted:                                                                             |  |                         |        |   |      |   |         |      |  |   |        |  
|                                                                                     |  |                         |       
|Stock Options, ESPP, and restricted shares                                           |  |                         | 626    |   |      |   |        |      |  |   |       |  
|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Weighted-average common shares used in computing diluted net income (loss) per share |  |                         | 29,807 |   |      |   | 28,381  |      |  |   | 25,310 |  
|                                                                                     |  |                         |        |   |      |   |         |      |  |   |        |  
|Basic net income (loss) per share                                                    |  | $                       | 0.70   |   |      | $ | (1.86   | )    |  | $ | (0.00  | )
|                                                                                     |  |                         |       
|Diluted net income (loss) per share                                                  |  | $                       | 0.68   |   |      | $ | (1.86   | )    |  | $ | (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 Plan). Participants are allowed to make voluntary contributions to the Plan up to 25% of
compensation. The Company can make discretionary contributions to the Plan of amounts determined and authorized by the Companys Board of Directors up to the maximum amounts permitted by the Internal Revenue Service (IRS).
Participants direct the investment allocation of all contributions. Contributions are subject to limitations imposed by the Internal Revenue Code (the Code). The Company elected to match the first one thousand dollars of each
participants contributions for a total company contribution of $347 thousand for the year ended December 31, 2005. The Company made no contributions in the years ended December 31, 2004 and 2003.

Through its recent business combinations, the Company assumed the 401(k) Plans of Tower Technology, Epicentric, and Intraspect (the Assumed
Plans). The Assumed 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, the company elected to not make any contributions to the plans. The Company elected to merge the Tower Technology 401(K) Plan into the Vignette Corporation 401(K) Plan, effective July 1, 2004. Employees of Tower Technology became
participants in the Plan as of July 1, 2004. Assets in the amount of $ 0.9 million were converted to the Vignette Corporation 401(k) Plan. In 2005, after deducting all charges and expenses of the Intraspect plan, the balances of all
individual accounts were adjusted and the remaining assets distributed. In December 2003, after deducting all charges and expenses of the Epicentric plan, the balances of all individual accounts were adjusted and the remaining assets distributed.

Reclassifications

Certain prior year amounts have been reclassified to conform to the fiscal 2005 presentation.



F - 16



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Recent accounting pronouncements

In December 2004, FASB issued a Statement, Share-Based Payment, an
amendment of FASB Statements Nos. 123 (SFAS 123R) that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or
liabilities that are based on the fair value of the Companys equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using
the intrinsic method that the Company currently uses and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statements of operations. The effective date of the new
standard for the Company will be the first quarter of fiscal 2006.

In March 2005, the SEC issued Staff Accounting Bulletin (SAB)
No. 107 regarding the Staffs interpretation of SFAS 123R. This interpretation provides the Staffs views regarding interactions between SFAS 123R and certain SEC rules and regulations and provides interpretations of the valuation of
share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided. We will follow
the guidance prescribed in SAB 107 in connection with our adoption of SFAS 123R.

We plan to adopt SFAS 123R using the modified prospective method, under
which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted or modified after the effective date and (b) based on the previous requirements of SFAS
123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.

The amounts disclosed within
our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of SFAS 123R. Compensation expense calculated under SFAS 123R may differ from amounts currently disclosed within our footnotes based on changes in
the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors. Upon adoption of SFAS 123R, we plan to use the Black-Scholes
model to value the compensation expense associated with employee stock options and stock purchases under our employee stock purchase plan. We are currently evaluating the potential impact of this standard on our financial position, results of
operations, and cash flows. We expect this standard to have a significant impact on the consolidated statements of operations. The current expected range of expense for the first quarter of 2006 is $750 thousand to $1 million. SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation cost to be reported as cash flow from financing activities rather than as cash flow from operations as required under SFAS 123. The Company is currently evaluating the
impact of 123R in relation to the statement of cash flows relative to any excess tax benefits that may be generated.

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

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 provider of enterprise document and records management solutions. The consideration paid to the Tower Technology stockholders was comprised of approximately 27.2 million shares of the Companys stock and $49.8
million in cash, including a $3.8 million payment made in July 2004 in lieu of issuing additional shares. In addition, the Company incurred approximately $7.4 million in transaction costs. The Companys consolidated financial statements include
Tower Technologys financial position and results of operations for the period subsequent to March 1, 2004.

In accordance with
SFAS 141, Business Combinations (Statement 141), the total purchase consideration of $133.9 million, including transaction costs of $7.4 million, has been allocated to the assets acquired and liabilities assumed, including
identifiable intangible assets, based on their respective estimated fair values at the date of acquisition. Such allocation resulted in goodwill of $82.0 million. Goodwill is assigned at the enterprise level and is not expected to be deductible for
income tax purposes.



F - 17



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The following unaudited condensed consolidated balance sheet data presents the estimated 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                                                        |  |        |  | $ | 9,100   |  
|Accounts receivable                                                              |  |        |  |   | 8,387   |  
|Prepaid expenses and other current assets                                        |  |        |  |   | 1,007   |  
|Property and equipment                                                           |  |        |  |   | 404     |  
|Other assets                                                                     |  |        |  |   | 75      |  
|Intangible assets subject to amortization (5 year weighted-average useful life): |  |        |  |   |         |  
|Technology (6 year useful life)                                                  |  | 30,100 |  |   |         |  
|Customer relationships (4 year useful life)                                      |  | 18,200 |  |   |         |  
|Non-compete (6 year useful life)                                                 |  | 1,400  |  |   |         |  
|In-process research and development                                              |  | 4,800  |  |   |         |  
|                                                                                 |  |        |  |   |         |  
|Total intangible assets                                                          |  |        |  |   | 54,500  |  
|Goodwill                                                                         |  |        |  |   | 82,023  |  
|                                                                                 |  |        |  |   |         |  
|Total assets acquired                                                            |  |        |  |   | 155,496 |  
|                                                                                 |  |       
|Accounts payable                                                                 |  |        |  |   | (710    | )
|Accrued exit costs                                                               |  |        |  |   | (3,146  | )
|Accrued severance                                                                |  |        |  |   | (1,426  | )
|Accrued other expenses                                                           |  |        |  |   | (9,252  | )
|Deferred revenue                                                                 |  |        |  |   | (7,037  | )
|                                                                                 |  |        |  |   |         |  
|Total liabilities assumed                                                        |  |        |  |   | (21,571 | )
|                                                                                 |  |        |  |   |         |  
|Net assets acquired                                                              |  |        |  | $ | 133,925 |  
|                                                                                 |  |        |  |   |         |  

Accrued exit costs of $3.1 million relate to lease obligations for excess office space that the
Company has vacated under the approved facilities exit plan. The total lease commitments include the estimated lease buyout fees, or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to, brokerage
commissions, legal fees, repairs, restoration costs, and sublease incentives, 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 sites are office space located in Slough, United Kingdom; New York City, New York; and Melbourne and Lane Cove, Australia and have lease commitments that expire as late as September
2007.

Accrued severance and relocation costs of $1.4 million relate to severance, payroll taxes, outplacement and relocation benefits for
certain Tower Technology employees impacted by the approved plan of termination and relocation. Approximately 50 employees were severed in the sales, marketing, professional services, engineering and general and administrative departments.



F - 18



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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



|                                                  |  |            |       |   |                        |   |        |       |  |   |        |  
|------------------------------------------------- |  | ---------- | ----- | - | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | Exit Costs |       |   | SeveranceandRelocation |   |        | Total | 
|Initial accrual at March 1, 2004                  |  | $          | 3,146 |   |                        | $ | 1,426  |       |  | $ | 4,572  |  
|                                                  |  |            |      
|Cash activity                                     |  |            | (864  | ) |                        |   | (1,400 | )     |  |   | (2,264 | )
|Adjustment to accrual                             |  |            | (866  | ) |                        |   | (26    | )     |  |   | (892   | )
|                                                  |  |            |       |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2004                      |  | $          | 1,416 |   |                        | $ |       |       |  | $ | 1,416  |  
|Cash activity                                     |  |            | (689  | ) |                        |   |       |       |  |   | (689   | )
|Adjustment to accrual                             |  |            | 190   |   |                        |   |       |       |  |   | 190    |  
|                                                  |  |            |       |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2005                      |  | $          | 917   |   |                        | $ |       |       |  | $ | 917    |  
|Less: current portion                             |  |            |       |   |                        |   |        |       |  |   | 502    |  
|                                                  |  |            |       |   |                        |   |        |       |  |   |        |  
|Long-term exit costs and severance and relocation |  |            |       |   |                        |   |        |       |  | $ | 415    |  
|                                                  |  |            |       |   |                        |   |        |       |  |   |        |  

Acquisition of Intraspect Software, Inc.

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 Statement 141, the total purchase consideration has been
allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective estimated 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.

The following unaudited condensed
consolidated balance sheet data presents the estimated 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



F - 19



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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:



|                                                  |  |            |       |   |                        |   |      |       |  |   |       |  
|------------------------------------------------- |  | ---------- | ----- | - | ---------------------- | - | ---- | ----- |  | - | ----- | -
|                                                  |  | Exit Costs |       |   | 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 |  
|Adjustment to accrual                             |  |            | 21    |   |                        |   | 148  |       |  |   | 169   |  
|Cash activity                                     |  |            | (834  | ) |                        |   | (154 | )     |  |   | (988  | )
|                                                  |  |            |       |   |                        |   |      |       |  |   |       |  
|Balance at December 31, 2004                      |  |            | 1,370 |   |                        |   |     |       |  |   | 1,370 |  
|Adjustment to accrual                             |  |            | (38   | ) |                        |   |     |       |  |   | (38   | )
|Cash activity                                     |  |            | (801  | ) |                        |   |     |       |  |   | (801  | )
|                                                  |  |            |       |   |                        |   |      |       |  |   |       |  
|Balance at December 31, 2005                      |  | $          | 531   |   |                        | $ |     |       |  | $ | 531   |  
|Less: current portion                             |  |            |       |   |                        |   |      |       |  |   | (531  | )
|                                                  |  |            |       |   |                        |   |      |       |  |   |       |  
|Long term exit costs and severance and relocation |  |            |       |   |                        |   |      |       |  | $ |      |  
|                                                  |  |            |       |   |                        |   |      |       |  |   |       |  

Acquisition of Epicentric, Inc

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 Statement 141,the total purchase consideration has been allocated to the assets acquired and liabilities assumed, including
identifiable intangible assets, based on their respective estimated 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 estimated fair value of the assets acquired and liabilities assumed.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 allocated to goodwill. Impacted sites include office space located in San Francisco, California; New York, New York; Chicago,
Illinois; and Austin, Texas and have lease commitments that expire as late as December 2006.

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.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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



|                                                  |  |            |        |   |                        |   |        |       |  |   |        |  
|------------------------------------------------- |  | ---------- | ------ | - | ---------------------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | Exit Costs |        |   | 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  |  
|Adjustment to accrual                             |  |            | (454   | ) |                        |   | (72    | )     |  |   | (526   | )
|Cash activity                                     |  |            | (2,360 | ) |                        |   |       |       |  |   | (2,360 | )
|                                                  |  |            |        |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2004                      |  | $          | 3,478  |   |                        | $ |       |       |  | $ | 3,478  |  
|Adjustment to accrual                             |  |            | (833   | ) |                        |   |       |       |  |   | (833   | )
|Cash activity                                     |  |            | (2,559 | ) |                        |   |       |       |  |   | (2,559 | )
|                                                  |  |            |        |   |                        |   |        |       |  |   |        |  
|Balance at December 31, 2005                      |  | $          | 86     |   |                        | $ |       |       |  | $ | 86     |  
|Less: current portion                             |  |            |        |   |                        |   |        |       |  |   | (86    | )
|                                                  |  |            |        |   |                        |   |        |       |  |   |        |  
|Long term exit costs and severance and relocation |  |            |        |   |                        |   |        |       |  | $ |       |  
|                                                  |  |            |        |   |                        |   |        |       |  |   |        |  

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



|                                              |  |                         |     |      |   |       |  |   |      
|--------------------------------------------- |  | ----------------------- | --- | ---- | - | ----- |  | - | -----
|                                              |  | Year Ended December 31,
|                                              |  | 2005                    |     | 2004 |   | 2003 
|Purchased in-process research and development |  | $                       |    |      | $ | 4,800 |  | $ | 1,100
|Cross-training, product integration and other |  |                         | 270 |      |   | 1,345 |  |   | 490  
|Severance and other employee-related costs    |  |                         |    |      |   | 807   |  |   | 136  
|Contingent compensation                       |  |                         |    |      |   | 657   |  |   | 2,532
|                                              |  |                         |     |      |   |       |  |   |      
|                                              |  | $                       | 270 |      | $ | 7,609 |  | $ | 4,258
|                                              |  |                         |     |      |   |       |  |   |      

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

The amounts allocated to IPR&D were based on discounted cash flow models that 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
a compound annual growth rate of 17.2%, 5.0%, and 17.5% for Epicentric, Intraspect, and Tower Technology, 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. 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% for Epicentric, and
Intraspect, respectively. A risk-adjusted rate of return ranging from 20% to 22% was employed for Tower Technology. Such discount rates were based on each acquired companys weighted average cost of capital of 36%, 17%, and 20% for Epicentric,
Intraspect, and Tower Technology, respectively, as adjusted upwards for the additional risk related to the projects development and success.

Acquisition-related and other charges

As part of the Epicentric acquisition, contingent compensation in the form of cash
totaling $2.5 million and $0.3 million was recorded in 2003 and 2004, respectively. The Company expects to incur no additional contingent compensation expense for Epicentric employees. During 2004, contingent expense compensation charges of $0.3
million and $0.1 million were incurred in conjunction with the Intraspect and Tower Technology acquisitions, respectively. 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.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



NOTE 4  Intangible Assets

Intangible assets with indefinite lives

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



|                             |  |          |         |  
|---------------------------- |  | -------- | ------- | -
|                             |  | Goodwill |        
|Balance at December 31, 2003 |  | $        | 46,969  |  
|Acquisition                  |  |          | 82,023  |  
|Purchase price adjustments   |  |          | (5,080  | )
|                             |  |          |         |  
|Balance at December 31, 2004 |  |          | 123,912 |  
|                             | 
|Purchase price adjustments   |  |          | (3,802  | )
|                             |  |          |         |  
|Balance at December 31, 2005 |  | $        | 120,110 |  

The goodwill balance at December 31, 2005 and 2004 pertains to the Tower technology business
combination completed in March 2004, the Intraspect business combination completed in December 2003, and the Epicentric business combination completed in December 2002.

The purchase price adjustments in 2005 relate primarily to a $3 million claim filed in February 2005 against the escrow established in the acquisition of Tower Technology for certain pre-acquisition tax exposures. The
Company is currently reviewing these issues with former Tower shareholders, but the Company expects that substantially all payments related to these liabilities will be funded from the escrow account. As a result, the reduction of goodwill relates
primarily to a reduction in these tax liabilities related to the Tower Technology acquisition.

Purchase price adjustments in 2004
primarily relate to the reduction in the calculated amount of cash consideration paid to certain former Tower Technology option holders subsequent to acquisition pursuant to the Share Sale Agreement dated January 22, 2004. The actual amount
paid was $3.8 million whereas the estimated amount at the acquisition date was $7.1 million. The decline in the actual amount of the payment was directly proportional to the decline in the Companys stock price. Other purchase price adjustments
made in 2004 relate to reductions in deferred tax liabilities, and adjustments to certain accrual assumptions, which were partially offset by an increase in the tax withholding provision in the United Kingdom for Tower Technology.

Goodwill impairment tests

In accordance with
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, 2005 and 2004, 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 $120.1 million is not considered impaired at December 31, 2005.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Intangible assets with definite lives

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



|                                      |  |                     |         |                                      |   |         |                   |  |                     |        |                                      |   |         |                   |   |         |   |  |   |       
|------------------------------------- |  | ------------------- | ------- | ------------------------------------ | - | ------- | ----------------- |  | ------------------- | ------ | ------------------------------------ | - | ------- | ----------------- | - | ------- | - |  | - | ------
|                                      |  | December 31,       
|                                      |  | 2005                |         | 2004                                
|                                      |  | GrossCarryingAmount |         | AccumulatedAmortizationandImpairment |   |         | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortizationandImpairment |   |         | NetCarryingAmount
|Business combinations:                |  |                     |         |                                      |   |         |                   |  |                     |        |                                      |   |         |                   |   |         |   |  |   |       
|Technology                            |  | $                   | 77,101  |                                      | $ | (56,198 | )                 |  | $                   | 20,903 |                                      | $ | 77,101  |                   | $ | (49,931 | ) |  | $ | 27,170
|Non-compete contracts                 |  |                     | 2,200   |                                      |   | (1,442  | )                 |  |                     | 758    |                                      |   | 2,200   |                   |   | (1,092  | ) |  |   | 1,108 
|Customer relationships                |  |                     | 23,400  |                                      |   | (10,425 | )                 |  |                     | 12,975 |                                      |   | 23,400  |                   |   | (5,772  | ) |  |   | 17,628
|                                      |  |                     |         |                                      |   |         |                   |  |                     |        |                                      |   |         |                   |   |         |   |  |   |       
|Balance at December 31, 2003 and 2004 |  | $                   | 102,701 |                                      | $ | (68,065 | )                 |  | $                   | 34,636 |                                      | $ | 102,701 |                   | $ | (56,795 | ) |  | $ | 45,906
|                                      |  |                     |         |                                      |   |         |                   |  |                     |        |                                      |   |         |                   |   |         |   |  |   |       

The net carrying amount of intangible assets acquired in business combinations relates to the
Epicentric, Intraspect, and Tower Technology purchases.

The Companys intangible assets with definite lives are being amortized over
the assets estimated useful lives using the straight-line method. Estimated useful lives range from two to six years. The weighted average useful life for Technology is 72 months. The weighted average useful life for Non-compete contracts is
48 months. The weighted average useful life of customer relationships is 70 months. The weighted average useful life for intangible assets in total with definite lives is 71 months. The Company periodically reviews the estimated useful lives of its
identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. Total amortization expense for the years ended December 31, 2005, 2004 and 2003
was $11.2 million, $15.0 million, and $5.4 million, respectively. Of these amounts, $5.0 million, $4.9 million, and $2.0 million, was recorded as Amortization of intangible assets in operating expenses, respectively, and the remaining
$6.3 million, $10.1 million, and $3.4 million, respectively, was recorded as a cost of revenue.

Estimated annual amortization expense (in
thousands) for the next five years is as follows:



|                                     |  |   |      
|------------------------------------ |  | - | -----
|For the year ended December 31, 2006 |  | $ | 8,736
|For the year ended December 31, 2007 |  | $ | 8,400
|For the year ended December 31, 2008 |  | $ | 8,108
|For the year ended December 31, 2009 |  | $ | 8,050
|For the year ended December 31, 2010 |  | $ | 1,342

NOTE 5  Stockholders Equity

Reverse Stock Split

On June 10, 2005, the one for ten reverse stock split of the common stock of the Company
became effective. The reverse stock split was approved by the Companys stockholders on May 27, 2005 at the Companys annual meeting. The Company filed a Certificate of Amendment to the Companys Amended and Restated Certificate
of Incorporation to effect the reverse stock split. All share and per share information included in these consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.

Preferred stock

The number of shares authorized to
be designated as preferred stock was 10,000,000 at December 31, 2005 and 30,000,000 at December 31, 2004. In June 2005 the Company amended its Amended and Restated Certificate of Incorporation to change the number of shares authorized to
be designated as preferred stock from 30,000,000 shares to 10,000,000 shares. There were no shares outstanding at December 31, 2005 or 2004.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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-hundredth of a share of Series
A Junior Participating Preferred Stock, par $0.01 per share, at a price of $300.00 per one one-hundredth, 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 one to three years from grant or issuance. As of December 31, 2005, 103,644 shares were
subject to forfeiture.

As of December 31, 2005, the Company reserved shares of its common stock for the following purposes:



|                                      |  |          
|------------------------------------- |  | ---------
|Employee stock purchase plan          |  | 1,179,519
|Stock options available for grant     |  | 4,820,773
|Exercise of outstanding stock options |  | 3,146,523
|                                      |  |          
|                                      |  | 9,146,815
|                                      |  |          

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 Plan) and (v) the Employee Stock Purchase Plan and the International 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, 2004, 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, 2005. Options that expire under the 1995 Plan will be available for future grants under the 1999 Plan.



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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) 1,180,482 shares. At
December 31, 2005, there were 7,239,387 shares authorized for issuance, including shares assumed from the 1995 Plan, of which 2,848,324 were available for future grant.

Under the 1999 Supplemental Plan, only employees and consultants who are common-law employees of the corporation are eligible for the grant of options.
Employees who are officers of the corporation are not eligible for the grant of options under this Plan. The term and vesting periods are equivalent to those under the 1999 Plan. At December 31, 2005, there were 3,300,000 shares authorized for
issuance of which 1,874,199 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 for options granted prior to April 2004 occurs over a four-year cumulative period. Vesting of options granted after April 2004 occurs over a one-year period. The term of each
option is no more than ten years from the date of grant. At December 31, 2005, there were 150,000 shares authorized for issuance of which 98,250 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).

The following table summarizes stock option activity and
related information through December 31, 2005. The activity presented below is on a post split basis after giving effect for the one-for-ten reverse stock split and is as follows:



|                                   |  |                         |   |      |                              |       |         |            |   |                              |   |         |  |            |                              |  |   |      
|---------------------------------- |  | ----------------------- | - | ---- | ---------------------------- | ----- | ------- | ---------- | - | ---------------------------- | - | ------- |  | ---------- | ---------------------------- |  | - | -----
|                                   |  | Year Ended December 31,
|                                   |  | 2005                    |   | 2004 |                              | 2003 
|                                   |  | Options                 |   |      | Weightedaverageexerciseprice |       | Options |            |   | Weightedaverageexerciseprice |   | Options |  |            | Weightedaverageexerciseprice
|Outstanding at beginning of period |  | 3,587,412               |   |      | $                            | 31.24 |         | 4,081,384  |   |                              | $ | 45.42   |  | 4,604,156  |                              |  | $ | 52.00
|Granted                            |  | 736,953                 |   |      |                              | 13.15 |         | 1,235,327  |   |                              |   | 17.74   |  | 855,659    |                              |  |   | 20.10
|Exercised                          |  | (416,437                | ) |      |                              | 4.45  |         | (175,155   | ) |                              |   | 10.33   |  | (283,368   | )                            |  |   | 8.50 
|Canceled                           |  | (761,405                | ) |      |                              | 50.18 |         | (1,554,144 | ) |                              |   | 60.11   |  | (1,095,063 | )                            |  |   | 62.90
|                                   |  |                         |   |      |                              |       |         |            |   |                              |   |         |  |            |                              |  |   |      
|Outstanding at end of period       |  | 3,146,523               |   |      |                              | 25.96 |         | 3,587,412  |   |                              |   | 31.24   |  | 4,081,384  |                              |  |   | 45.42
|                                   |  |                         |   |      |                              |       |         |            |   |                              |   |         |  |            |                              |  |   |      
|Options exercisable at period end  |  | 2,213,835               |   |      |                              | 31.54 |         | 1,985,033  |   |                              |   | 41.50   |  | 2,123,004  |                              |  |   | 62.30
|                                   |  |                         |   |      |                              |       |         |            |   |                              |   |         |  |            |                              |  |   |      
|Options available for grant        |  | 4,820,773               |   |      |                              |       |         | 4,567,251  |   |                              |   |         |  | 4,380,433  |                              |  |   |      
|                                   |  |                         |   |      |                              |       |         |            |   |                              |   |         |  |            |                              |  |   |      



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##### Table of Contents

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The following table summarizes options outstanding and exercisable as of December 31, 2005:



|                        |                  |                  |           |                                                     |     |                               |   |                  |  |                               |  |   |       
|----------------------- | ---------------- | ---------------- | --------- | --------------------------------------------------- | --- | ----------------------------- | - | ---------------- |  | ----------------------------- |  | - | ------
|                        |                  | Outstanding      |           | Exercisable                                        
|Range of ExercisePrices |                  | Number ofOptions |           | Weighted-AverageRemainingContractualLife (in years) |     | Weighted-AverageExercisePrice |   | Number ofOptions |  | Weighted-AverageExercisePrice
|$                       | 0.01 - $7.50     |                  | 4,809     |                                                     | 0.6 |                               | $ | 5.49             |  | 4,809                         |  | $ | 5.49  
|$                       | 7.51 - $15.00    |                  | 1,340,217 |                                                     | 5.3 |                               |   | 11.21            |  | 559,195                       |  |   | 10.16 
|$                       | 15.01 - $30.00   |                  | 954,564   |                                                     | 6.1 |                               |   | 21.30            |  | 802,898                       |  |   | 22.16 
|$                       | 30.01 - $50.00   |                  | 542,391   |                                                     | 3.5 |                               |   | 38.76            |  | 542,391                       |  |   | 38.76 
|$                       | 50.01 - $75.00   |                  | 202,306   |                                                     | 3.4 |                               |   | 59.27            |  | 202,306                       |  |   | 59.27 
|$                       | 75.01 - $150.00  |                  | 86,654    |                                                     | 2.6 |                               |   | 86.12            |  | 86,654                        |  |   | 86.12 
|$                       | 150.01 - 250.00  |                  | 1,829     |                                                     | 2.8 |                               |   | 188.64           |  | 1,829                         |  |   | 188.64
|$                       | 250.01 - $700.00 |                  | 13,753    |                                                     | 2.3 |                               |   | 399.64           |  | 13,753                        |  |   | 399.64
|                        |                  |                  |           |                                                     |     |                               |   |                  |  |                               |  |   |       
|                        |                  |                  | 3,146,523 |                                                     | 5.0 |                               | $ | 25.96            |  | 2,213,835                     |  | $ | 31.54 
|                        |                  |                  |           |                                                     |     |                               |   |                  |  |                               |  |   |       

Under the ESPP, as amended, the Company has reserved 2,157,286 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 200 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) 450,000 shares. As of December 31, 2005, 977,767 shares were issued under the ESPP. This plan has 1,179,519 shares available for future issuance.

Fair value disclosures

Pro forma information
regarding net income (loss) and net income (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 |       |   | EmployeeStockPurchasePlan |  
|                                                              |  | 2005                   |       |   | 2004                      |   |       | 2003 |  |   | 2005  |  
|Risk-free interest rate                                       |  |                        | 3.8   | % |                           |   | 2.7   | %    |  |   | 2.0   | % |  |   | 3.94  | %
|Weighted-average expected life of the options (years)         |  |                        | 2.0   |   |                           |   | 2.4   |      |  |   | 2.5   |   |  |   | 1.2   |  
|Dividend rate                                                 |  |                        | 0.0   | % |                           |   | 0.0   | %    |  |   | 0.0   | % |  |   | 0.0   | %
|Assumed volatility                                            |  |                        | 63    | % |                           |   | 109   | %    |  |   | 120   | % |  |   | 60    | %
|Weighted-average fair value of options granted                |  |                        |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Exercise price equal to fair value of stock on date of grant  |  | $                      | 13.15 |   |                           | $ | 17.74 |      |  | $ | 14.90 |   |  | $ | 11.40 |  
|Exercise price less than fair value of stock on date of grant |  | $                      |      |   |                           | $ |      |      |  | $ |      |   |  | $ |      |  

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



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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, |       
|                                            |  | 2005                    |        | 2004 |   |         | 2003 | 
|Pro forma stock-based compensation expense  |  | $                       | 7,707  |      | $ | 16,951  |      |  | $ | 44,265  |  
|Pro forma net income (loss)                 |  | $                       | 13,521 |      | $ | (69,326 | )    |  | $ | (43,191 | )
|Pro forma basic net income (loss) per share |  | $                       | 0.46   |      | $ | (2.44   | )    |  | $ | (1.71   | )
|Pro forma diluted income (loss) per share   |  | $                       | 0.45   |      | $ | (2.44   | )    |  | $ | (1.71   | )

Stock Option Vesting Acceleration

On December 27, 2005, the Board of Directors of the Company approved the acceleration of vesting for certain of the Companys unvested and out of the money stock options previously awarded to its
employees, officers and directors under the Companys Stock Plans with exercise prices ranging from $20.00 to $54.40 per share. The acceleration was effective for stock options unvested and outstanding as of December 27, 2005 and held by
optionees providing service to the company as of December 27, 2005. There were approximately 343,000 shares for which the vesting was accelerated with a weighted average exercise price of $22.35.

The purpose of the acceleration is to enable the Company to avoid recognizing compensation expense associated with these options in future periods in its consolidated
statements of operations, upon effectiveness of the application of FASB Statement No.123R (Share-Based Payment) which the company will adopt effective January 1, 2006. The pre-tax charge estimated by the Company to be avoided as a result of the
acceleration amounts to approximately $ 1.0 million over the course of the original vesting periods. The estimated charge avoided is $0.5 million in 2006, $0.4 million in 2007 and $0.1 million in 2008. All other previously awarded stock options
are not impacted by this change.

Employee option exchange program

On September 28, 2004, the Company granted 2.0 million stock options to 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. Under the option exchange program, a total of 0.5 million stock options, which were previously granted to the participating employees, were canceled on March 25, 2004 (the
cancellation date). For non-executive employees at the option exchange programs cancellation date, the exercise price of these new options was $12.70, which was the fair market value of the Companys common stock on
September 28, 2004, or the grant date. For executive employees at the option exchange programs cancellation date, the exercise price of these new options was $22.0 which was the fair market value of the Companys common stock on the
exchange programs cancellation date. The exchange program was organized to comply with Financial Accounting Standard Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation,
and did not result in any additional compensation charges or variable plan accounting. The Companys senior executive officers and Board of Directors were not eligible to participate in this program.

Deferred stock compensation

In 2005, 2004 and 2003,
the Company recorded total deferred stock compensation of $0.8 million $0.1 million, and $1.0 million, respectively. In 2005, the amount related in part to the issuance of 0.6 million shares of restricted common stock to various employees.
The reduction in total deferred stock compensation in 2004 was the net result of forfeitures recognized upon the departure of certain employees. 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 $0.8 million, $0.5 million and $1.1 million for the years ended December 31,
2005, 2004, and 2003 respectively.



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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 2003, the Company repurchased 0.2 million shares of its common stock for $0.2 million. All such repurchases were conducted through open market transactions. The Company did not
repurchase stock in 2005 or 2004.

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, 2003, and 2004. Components of business restructuring charges and the remaining restructuring accruals as of December 31, 2005 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  |  
|Effect of expanded restructuring plan             |  |                           | 12,421  |   |                  |   | 2,331   |                                  |  |   | 4,085   |   |  |   | 18,837  |  
|Adjustment to accrual                             |  |                           | (780    | ) |                  |   |        |                                  |  |   | (83     | ) |  |   | (863    | )
|Cash activity                                     |  |                           | (8,584  | ) |                  |   |        |                                  |  |   | (3,404  | ) |  |   | (11,988 | )
|Non-cash activity                                 |  |                           | (869    | ) |                  |   | (2,331  | )                                |  |   | (8      | ) |  |   | (3,208  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2004                      |  |                           | 14,713  |   |                  |   |        |                                  |  |   | 962     |   |  |   | 15,675  |  
|Adjustment to accrual                             |  |                           | (1,676  | ) |                  |   |        |                                  |  |   | (123    | ) |  |   | (1,799  | )
|Cash activity                                     |  |                           | (6,358  | ) |                  |   |        |                                  |  |   | (709    | ) |  |   | (7,067  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Balance at December 31, 2005                      |  | $                         | 6,679   |   |                  | $ |        |                                  |  | $ | 130     |   |  | $ | 6,809   |  
|Less: current portion                             |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   | (2,901  | )
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  
|Accrued restructuring costs, less current portion |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  | $ | 3,908   |  
|                                                  |  |                           |         |   |                  |   |         |                                  |  |   |         |   |  |   |         |  

During 2004, the Company expanded the existing restructuring plan initiated in 2001. In the first
quarter of 2004, the Company moved out of its existing headquarters and relocated to nearby office space that now serves as its headquarters. As such, the Company recorded a restructuring charge of



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



approximately $8.0 million in the first quarter of 2004 pursuant to Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement
146). In addition, we incurred severance and other real estate-related expenses of approximately $1.2 million resulting from our business combination with Tower Technology. In the fourth quarter of 2004, the Board of Directors authorized
the Company to effect job reductions. The plan included a worldwide reduction in headcount of approximately 120 personnel, including consolidating software development facilities in Boston, Massachusetts and San Francisco, California into the
Companys other existing development facilities. Expenses incurred in the fourth quarter of 2004 as a result of this plan totaled approximately $9.4 million, of which $3.2 million related employee severance, benefits, and outplacement services,
$5.3 million related to real estate, and $0.9 million related to the write-off of leasehold improvements for vacated real estate.

Remaining cash expenditures resulting from the restructuring are estimated to be $6.8 million and relate primarily to facility lease commitments, of which the remaining maximum lease commitment extends out to 2011. 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. These are managements best estimates based
on currently available information and are subject to 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 Companys
restructuring plan. The Company continues to actively pursue mitigation strategies to dispose of all excess office space through subleasing and/or early termination negotiations where possible. The total lease commitments include the estimated lease
buyout fees, or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to, brokerage commissions, legal fees, repairs, restoration costs, and sublease incentives, 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 and by the needs of the business. 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, Texas; Brisbane and San Francisco, California; New York City, New York; Waltham and Boston, Massachusetts; Chicago, Illinois;
Slough, United Kingdom; Madrid, Spain; and Lane Cove and Melbourne, Australia. The maximum lease commitment of such vacated properties extends through December 2011.

Asset impairments

Asset impairments relate to the impairment of certain fixed 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, resulting in an impairment charge of $0.0 million, $2.3, and $0.0 million, in 2005,
2004, and 2003, respectively.

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 1,620 employees since
the plans inception in 2001. 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.



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



NOTE 7 Commitments and Contingencies

The Company leases its office facilities and office
equipment under various operating lease agreements having expiration dates through 2011. The Company has operating leases for facilities with escalating rents. Pursuant to SFAS 13  Accounting for Leases, the Company recognizes rent
expense on a straight line basis over the lease term. Rent expense, excluding vacated properties, for the years ended December 31, 2005, 2004, and 2003 was $4.8 million, $6.2 million, and $5.7 million respectively. At December 31, 2005,
estimated future rents receivable from signed sublease agreements are $5.7 million through 2011. Future minimum payments due and receivable as of December 31, 2005 under these leases and subleases, including operating lease commitments for all
vacated properties, are as follows (in thousands):



|                               |  |                 |        |                |   |      
|------------------------------ |  | --------------- | ------ | -------------- | - | -----
|                               |  | OperatingLeases |        | SubleaseIncome
|2006                           |  | $               | 7,629  |                | $ | 1,190
|2007                           |  |                 | 5,304  |                |   | 1,337
|2008                           |  |                 | 4,267  |                |   | 1,199
|2009                           |  |                 | 3,640  |                |   | 1,027
|2010                           |  |                 | 2,920  |                |   | 576  
|Thereafter                     |  |                 | 2,476  |                |   | 416  
|                               |  |                 |        |                |   |      
|Total minimum lease payments   |  | $               | 26,236 |                |   |      
|                               |  |                 |        |                |   |      
|Total minimum sublease rentals |  |                 |        |                | $ | 5,745
|                               |  |                 |        |                |   |      

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.

Software license indemnifications

Financial Accounting Standards Board Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others(Interpretation 45), requires that the Company recognize the fair value for certain guarantee and indemnification arrangements issued or modified by the Company after December 31,
2002. When the Company determines that a loss is probable, the estimated loss must be recognized as it relates to applicable guarantees and indemnifications. Some of the software licenses granted by the Company contain provisions that indemnify
customers of the Companys software from damages and costs resulting from claims alleging that the Companys software infringes on the intellectual property rights of a third party. The Company records resulting costs as incurred and
historically, such costs have not been material. Accordingly, the Company has not recorded a liability related to these indemnification provisions.

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



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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
plaintiff 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 seeks damages in an unspecified
amount.

The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. 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. On February 19, 2003, the Court denied a motion to dismiss the complaint
against the Company. On October 13, 2004, the Court certified a class in six of the other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining
cases. Plaintiffs have not yet moved to certify a class in the Companys case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the individual defendants, the
plaintiff class and the vast majority of the other issuer defendants. Among other provisions, the settlement 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. The settlement agreement also provides a guaranteed recovery of $1 billion
to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers settlement agreement. To
the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the
settlement agreement and related agreements will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance
carriers. Its carriers are solvent, and the company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any
payment by the Company. Even if material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Companys insurance carriers should arise, the Companys maximum financial obligation to
plaintiffs pursuant to the settlement agreement is less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. Those
modifications have been made. There is no assurance that the Court will grant final approval of the settlement. The Company can not predict whether or when a settlement will occur or be finalized. If the settlement is not approved, the Company is
unable 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. The Company believes that this lawsuit is without merit and would continue to defend
itself vigorously if the settlement is not approved.

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.



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



NOTE 9  Income Taxes

As of December 31, 2005, the Company had federal net operating loss,
capital loss and research credit carryforwards of approximately $767.3 million, $39.9 million and $11.8 million, respectively. The net operating loss, capital loss, and research credit carryforwards will expire in varying amounts, between 2006 and
2026, if not utilized. The Company also had a foreign net operating loss carryover of approximately $6.9 million. The foreign net operating loss carryover is not subject to expiration.

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, 2005 approximately $157.9 million of the net operating loss, $5.0 million of the net foreign operating loss, and $1.8 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 $609.4 million, capital loss carryforward of $39.9 million, and research credit carryover of $10.0 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, 2004 and 2005 are as follows (in thousands):



|                                                |  |              |          |   |      |   |          |  
|----------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                |  | December 31, |         
|                                                |  | 2005         |          |   | 2004 |  
|Deferred tax liabilities:                       |  |              |          |   |      |   |          |  
|Intangible assets                               |  | $            | (124     | ) |      | $ | (1,186   | )
|Other                                           |  |              | (1,235   | ) |      |   | (1,259   | )
|                                                |  |              |          |   |      |   |          |  
|                                                |  |              | (1,359   | ) |      |   | (2,445   | )
|                                                |  |             
|Deferred tax assets:                            |  |              |          |   |      |   |          |  
|Depreciable assets                              |  |              | 1,675    |   |      |   | 3,290    |  
|Foreign intangible assets                       |  |              | 4,008    |   |      |   | 2,100    |  
|Equity investments                              |  |              | 790      |   |      |   | 12,151   |  
|Capitalized development costs                   |  |              | 30,576   |   |      |   | 34,349   |  
|Deferred revenue                                |  |              | 2,098    |   |      |   | 2,651    |  
|Tax carryforwards                               |  |              | 312,623  |   |      |   | 302,113  |  
|Accrued liabilities and other                   |  |              | 5,163    |   |      |   | 12,470   |  
|                                                |  |              |          |   |      |   |          |  
|                                                |  |              | 356,933  |   |      |   | 369,124  |  
|                                                |  |              |          |   |      |   |          |  
|Net deferred tax assets                         |  |              | 355,574  |   |      |   | 366,679  |  
|Valuation allowance for net deferred tax assets |  |              | (355,574 | ) |      |   | (366,679 | )
|                                                |  |              |          |   |      |   |          |  
|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, 2005, the valuation allowance includes approximately $26.4 million related to the acquisition of Epicentric,
Intraspect and Tower Technology 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. In both years ended
December 31, 2005 and 2004 the company recognized approximately $0.3 million of acquired deferred tax assets as a reduction to goodwill. Approximately $150.0 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.

The Companys income or loss before taxes includes foreign losses of $6.1 million, $4.1 million and income of $0.2 million for the three years ended
December 31, 2005, 2004 and 2003, respectively, from foreign subsidiaries. The losses from foreign operations in the years ended December 31, 2005 and 2004 include the impact of amortization of intangible assets recorded in the
acquisition of Tower in March of 2004.



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Undistributed earnings of the Companys foreign subsidiaries were immaterial as of December 31, 2004 and 2005. 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 2005, 2004 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, |  
|                                    |  | 2005                    |   |  | 2004  |    |  | 2003   |  
|Federal statutory rate              |  | 34.0                    | % |  | (34.0 | )% |  | 34.0   | %
|State taxes, net of federal benefit |  | 2.4                     |   |  | (1.5  | )  |  | 8.9    |  
|In-process research and development |  |                        |   |  | 3.2   |    |  | 33.9   |  
|Stock compensation                  |  | 1.2                     |   |  | 0.3   |    |  | 34.1   |  
|Foreign taxes at different rates    |  | 6.5                     |   |  | (1.9  | )  |  | 94.7   |  
|Change in valuation allowance       |  | (35.4                   | ) |  | 36.6  |    |  | (212.5 | )
|Non-deductible expenses & other     |  | 1.9                     |   |  | 0.2   |    |  | 109.9  |  
|                                    |  |                         |   |  |       |    |  |        |  
|                                    |  | 10.6                    | % |  | 2.9   | %  |  | 103.0  | %
|                                    |  |                         |   |  |       |    |  |        |  

Several of the Companys foreign subsidiaries are currently being reviewed by foreign tax
authorities. One tax assessment has been received as a result of an examination and is currently being appealed though a foreign administrative court. The Companys tax accounts include an accrual for income taxes for amounts intended to
satisfy income tax assessments that may result from the examination of the Companys corporate tax returns. The amounts ultimately paid upon resolution of these examinations could be materially different from the amounts included in the
provision for income taxes and result in additional tax benefit, or expense, depending on the ultimate outcome.

NOTE 10  Related Party
Transactions

A receivable loan from an employee granted in 2001 totaled $0.0 million and $0.3 million at December 31, 2005 and
2004, respectively. At December 31, 2005 the Company deemed the receivable to be uncollectible and has written off the receivable balance. The Company holds a Promissory Note from the 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. 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. The Company is pursuing legal remedies under the terms of the security agreement. At both December 31, 2005 and 2004, 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 December 31,
2005 and 2004 there were no other related party balances.



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##### Table of Contents

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,
|               |  | 2005                    |         | 2004 |   | 2003   
|Revenue:       |  |                         |         |      |   |         |  |   |        
|Americas:      |  |                         |         |      |   |         |  |   |        
|United States  |  | $                       | 116,057 |      | $ | 109,736 |  | $ | 116,564
|Other          |  |                         | 3,234   |      |   | 2,446   |  |   | 2,257  
|               |  |                         |         |      |   |         |  |   |        
|Total Americas |  |                         | 119,291 |      |   | 112,182 |  |   | 118,821
|               |  |                         |        
|Europe         |  |                         | 58,079  |      |   | 53,681  |  |   | 35,278 
|Asia Pacific   |  |                         | 13,305  |      |   | 12,064  |  |   | 4,215  
|               |  |                         |         |      |   |         |  |   |        
|Total          |  | $                       | 190,675 |      | $ | 177,927 |  | $ | 158,314
|               |  |                         |         |      |   |         |  |   |        



|                     |  |                 |         |      |   |        
|-------------------- |  | --------------- | ------- | ---- | - | -------
|                     |  | At December 31,
|                     |  | 2005            |         | 2004
|Identifiable assets: |  |                 |         |      |   |        
|Americas:            |  |                 |         |      |   |        
|United States        |  | $               | 269,401 |      | $ | 362,369
|Other                |  |                 | 6,055   |      |   | 4,535  
|                     |  |                 |         |      |   |        
|Total Americas       |  |                 | 275,456 |      |   | 366,904
|Europe               |  |                 | 28,064  |      |   | 30,502 
|Asia Pacific         |  |                 | 113,641 |      |   | 8,050  
|                     |  |                 |         |      |   |        
|Total                |  | $               | 417,161 |      | $ | 405,456
|                     |  |                 |         |      |   |        



F - 35



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##### Table of Contents

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 the opinion of the Companys management, 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                                |       
|                                                                                     |  | Dec. 31,2005                                      |        |   | Sept. 30,2005 |   |        | June 30,2005 |  |   | March 31,2005 |   |  | Dec. 31,2004 |        |   | Sept. 30,2004 |   |         | June 30,2004 |  |   | March 31,2004 |  
|                                                                                     |  | (in thousands, except share data and percentages) |       
|Revenue:                                                                             |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Product license                                                                      |  | $                                                 | 20,054 |   |               | $ | 16,822 |              |  | $ | 17,150        |   |  | $            | 16,290 |   |               | $ | 19,309  |              |  | $ | 12,313        |   |  | $ | 16,852 |   |  | $ | 14,679  |  
|Services                                                                             |  |                                                   | 30,810 |   |               |   | 30,354 |              |  |   | 29,839        |   |  |              | 29,356 |   |               |   | 29,512  |              |  |   | 30,301        |   |  |   | 29,960 |   |  |   | 25,001  |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Total revenue                                                                        |  |                                                   | 50,864 |   |               |   | 47,176 |              |  |   | 46,989        |   |  |              | 45,646 |   |               |   | 48,821  |              |  |   | 42,614        |   |  |   | 46,812 |   |  |   | 39,680  |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Cost of revenue:                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Product license                                                                      |  |                                                   | 528    |   |               |   | 706    |              |  |   | 885           |   |  |              | 792    |   |               |   | 1,352   |              |  |   | 939           |   |  |   | 1,625  |   |  |   | 1,121   |  
|Amortization of acquired technology                                                  |  |                                                   | 1,254  |   |               |   | 1,240  |              |  |   | 1,769         |   |  |              | 2,004  |   |               |   | 2,538   |              |  |   | 2,804         |   |  |   | 2,806  |   |  |   | 1,968   |  
|Services                                                                             |  |                                                   | 14,499 |   |               |   | 14,396 |              |  |   | 13,540        |   |  |              | 12,992 |   |               |   | 14,638  |              |  |   | 13,618        |   |  |   | 13,398 |   |  |   | 11,306  |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Total cost of revenue                                                                |  |                                                   | 16,281 |   |               |   | 16,342 |              |  |   | 16,194        |   |  |              | 15,788 |   |               |   | 18,528  |              |  |   | 17,361        |   |  |   | 17,829 |   |  |   | 14,395  |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Gross profit                                                                         |  |                                                   | 34,583 |   |               |   | 30,834 |              |  |   | 30,795        |   |  |              | 29,858 |   |               |   | 30,293  |              |  |   | 25,253        |   |  |   | 28,983 |   |  |   | 25,285  |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Operating expenses:                                                                  |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Research and development                                                             |  |                                                   | 8,042  |   |               |   | 7,944  |              |  |   | 8,545         |   |  |              | 8,670  |   |               |   | 8,901   |              |  |   | 10,860        |   |  |   | 10,300 |   |  |   | 10,149  |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Sales and marketing                                                                  |  |                                                   | 18,306 |   |               |   | 17,178 |              |  |   | 16,536        |   |  |              | 15,936 |   |               |   | 17,774  |              |  |   | 18,553        |   |  |   | 19,270 |   |  |   | 19,212  |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|General and administrative                                                           |  |                                                   | 5,117  |   |               |   | 4,648  |              |  |   | 4,867         |   |  |              | 4,960  |   |               |   | 4,258   |              |  |   | 4,453         |   |  |   | 4,466  |   |  |   | 4,795   |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Purchased in-process research and development, acquisition-related and other charges |  |                                                   |       |   |               |   |       |              |  |   |              |   |  |              | 270    |   |               |   | 442     |              |  |   | 270           |   |  |   | 974    |   |  |   | 5,923   |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Business restructuring charges                                                       |  |                                                   | (10    | ) |               |   | (778   | )            |  |   | 43            |   |  |              | (2,154 | ) |               |   | 9,384   |              |  |   | 39            |   |  |   | (519   | ) |  |   | 9,179   |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Amortization of deferred stock Compensation                                          |  |                                                   | 267    |   |               |   | 252    |              |  |   | 183           |   |  |              | 132    |   |               |   | 98      |              |  |   | 15            |   |  |   | 211    |   |  |   | 156     |  
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Amortization of intangible assets                                                    |  |                                                   | 1,166  |   |               |   | 1,279  |              |  |   | 1,279         |   |  |              | 1,279  |   |               |   | 1,346   |              |  |   | 1,379         |   |  |   | 1,379  |   |  |   | 815     |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Total operating expenses                                                             |  |                                                   | 32,888 |   |               |   | 30,523 |              |  |   | 31,453        |   |  |              | 29,093 |   |               |   | 42,203  |              |  |   | 35,569        |   |  |   | 36,081 |   |  |   | 50,229  |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Income (loss) from operations                                                        |  |                                                   | 1,695  |   |               |   | 311    |              |  |   | (658          | ) |  |              | 765    |   |               |   | (11,910 | )            |  |   | (10,316       | ) |  |   | (7,098 | ) |  |   | (24,944 | )
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Other income (expense), net                                                          |  |                                                   | 1,800  |   |               |   | 1,551  |              |  |   | 14,908        |   |  |              | 2,451  |   |               |   | 574     |              |  |   | 686           |   |  |   | 1,126  |   |  |   | 509     |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Income (loss) before income taxes                                                    |  |                                                   | 3,495  |   |               |   | 1,862  |              |  |   | 14,250        |   |  |              | 3,216  |   |               |   | (11,336 | )            |  |   | (9,630        | ) |  |   | (5,972 | ) |  |   | (24,435 | )
|                                                                                     |  |                                                   |        |   |               |   |        |             
|Provision for income taxes                                                           |  |                                                   | 600    |   |               |   | 542    |              |  |   | 789           |   |  |              | 498    |   |               |   | 596     |              |  |   | 391           |   |  |   | 265    |   |  |   | 230     |  
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Net income ( loss)                                                                   |  | $                                                 | 2,895  |   |               | $ | 1,320  |              |  | $ | 13,461        |   |  | $            | 2,718  |   |               | $ | (11,932 | )            |  | $ | (10,021       | ) |  | $ | (6,237 | ) |  | $ | (24,665 | )
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Basic income (loss) per share (1)                                                    |  | $                                                 | 0.10   |   |               | $ | 0.05   |              |  | $ | 0.46          |   |  | $            | 0.09   |   |               | $ | (0.41   | )            |  | $ | (0.35         | ) |  | $ | (0.22  | ) |  | $ | (0.92   | )
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  
|Diluted income (loss) per share (1)                                                  |  | $                                                 | 0.10   |   |               | $ | 0.04   |              |  | $ | 0.46          |   |  | $            | 0.09   |   |               | $ | (0.41   | )            |  | $ | (0.35         | ) |  | $ | (0.22  | ) |  | $ | (0.92   | )
|                                                                                     |  |                                                   |        |   |               |   |        |              |  |   |               |   |  |              |        |   |               |   |         |              |  |   |               |   |  |   |        |   |  |   |         |  

---

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|------------------------------------------------------------------------------------ |  | ------------------ | - |  | ------------ | - |  | ------------ | - |  | ------------- | - |  | ------------ | -- |  | ------------- | -- |  | ------------ | -- |  | ------------- | --
|                                                                                     |  | Three Months Ended |  
|                                                                                     |  | Dec. 31,2005       |   |  | Sept.30,2005 |   |  | June 30,2005 |   |  | March 31,2005 |   |  | Dec. 31,2004 |    |  | Sept. 30,2004 |    |  | June 30,2004 |    |  | March 31,2004 |   
|As a Percentage of Total Revenue:                                                    |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Revenue:                                                                             |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Product license                                                                      |  | 39                 | % |  | 36           | % |  | 36           | % |  | 36            | % |  | 40           | %  |  | 29            | %  |  | 36           | %  |  | 37            | % 
|Services                                                                             |  | 61                 |   |  | 64           |   |  | 64           |   |  | 64            |   |  | 60           |    |  | 71            |    |  | 64           |    |  | 63            |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Total revenue                                                                        |  | 100                |   |  | 100          |   |  | 100          |   |  | 100           |   |  | 100          |    |  | 100           |    |  | 100          |    |  | 100           |   
|Cost of revenue:                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Product license                                                                      |  | 1                  |   |  | 1            |   |  | 2            |   |  | 2             |   |  | 3            |    |  | 2             |    |  | 3            |    |  | 3             |   
|Amortization of acquired technology                                                  |  | 2                  |   |  | 3            |   |  | 4            |   |  | 4             |   |  | 5            |    |  | 7             |    |  | 6            |    |  | 5             |   
|Services                                                                             |  | 29                 |   |  | 31           |   |  | 28           |   |  | 29            |   |  | 30           |    |  | 32            |    |  | 29           |    |  | 28            |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Total cost of revenue                                                                |  | 32                 |   |  | 35           |   |  | 34           |   |  | 35            |   |  | 38           |    |  | 41            |    |  | 38           |    |  | 36            |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Gross profit                                                                         |  | 68                 |   |  | 65           |   |  | 66           |   |  | 65            |   |  | 62           |    |  | 59            |    |  | 62           |    |  | 64            |   
|Operating expenses:                                                                  |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Research and development                                                             |  | 16                 |   |  | 17           |   |  | 18           |   |  | 19            |   |  | 18           |    |  | 25            |    |  | 22           |    |  | 26            |   
|Sales and marketing                                                                  |  | 36                 |   |  | 36           |   |  | 35           |   |  | 35            |   |  | 36           |    |  | 44            |    |  | 41           |    |  | 48            |   
|General and administrative                                                           |  | 10                 |   |  | 10           |   |  | 10           |   |  | 11            |   |  | 9            |    |  | 10            |    |  | 10           |    |  | 12            |   
|Purchased in-process research and development, acquisition-related and other charges |  |                   |   |  |             |   |  |             |   |  | 1             |   |  | 1            |    |  | 1             |    |  | 2            |    |  | 15            |   
|Business restructuring charges                                                       |  |                   |   |  | (2           | ) |  |             |   |  | (5            | ) |  | 19           |    |  |              |    |  | (1           | )  |  | 23            |   
|Amortization of deferred stock compensation                                          |  | 1                  |   |  |             |   |  | 1            |   |  |              |   |  |             |    |  |              |    |  |             |    |  |              |   
|Amortization of intangible assets                                                    |  | 2                  |   |  | 3            |   |  | 3            |   |  | 3             |   |  | 3            |    |  | 3             |    |  | 3            |    |  | 2             |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Total operating expenses                                                             |  | 65                 |   |  | 64           |   |  | 67           |   |  | 64            |   |  | 86           |    |  | 83            |    |  | 77           |    |  | 126           |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Income (loss) from operations                                                        |  | 3                  |   |  | 1            |   |  | (1           | ) |  | 1             |   |  | (24          | )  |  | (24           | )  |  | (15          | )  |  | (62           | ) 
|Other income, net                                                                    |  | 4                  |   |  | 3            |   |  | 31           |   |  | 5             |   |  | 1            |    |  | 2             |    |  | 2            |    |  | 1             |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Income (loss) before income taxes                                                    |  | 7                  |   |  | 4            |   |  | 30           |   |  | 6             |   |  | (23          | )  |  | (22           | )  |  | (13          | )  |  | (61           | ) 
|Provision for income taxes                                                           |  | 1                  |   |  | 1            |   |  | 1            |   |  | 1             |   |  | 1            |    |  | 1             |    |  | 1            |    |  | 1             |   
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   
|Net income (loss)                                                                    |  | 6                  | % |  | 3            | % |  | 29           | % |  | 5             | % |  | (24          | )% |  | (23           | )% |  | (14          | )% |  | (62           | )%
|                                                                                     |  |                    |   |  |              |   |  |              |   |  |               |   |  |              |    |  |               |    |  |              |    |  |               |   



F - 37