<PAGE>

===============================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                              __________________

                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
                  For the fiscal year ended December 31, 2000

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                       Commission File Number: 000-25375

                             VIGNETTE CORPORATION

            (Exact name of registrant as specified in its charter)


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

                     901 South MoPac Expressway, Bldg III
                              Austin, Texas 78746
                   (Address of principal executive offices)

                              __________________

                                (512) 741-4300
             (Registrant's telephone number, including area code)

                              __________________

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

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

                         Common Stock, $0.01 par value
                             (Title of each class)

                              __________________

     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

     (1) Yes [X]     No [_]
     (2) 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 [_]

     As of January 31, 2001, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $1,472,497,222.

     As of January 31, 2001, there were 240,148,465 shares of the Registrant's
common stock outstanding.

                              __________________

                      DOCUMENTS INCORPORATED BY REFERENCE

     Parts of the Proxy Statement for Registrant's 2001 Annual Meeting of
Stockholders to be held May 11, 2001 are incorporated by reference in Part III
of this Form 10-K Report.

===============================================================================
<PAGE>

                             VIGNETTE CORPORATION
                            FORM 10-K ANNUAL REPORT
                     FOR THE YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

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Part I.
  Item 1.   Business......................................................................................    3
  Item 2.   Properties....................................................................................   21
  Item 3.   Legal Proceedings.............................................................................   21
  Item 4.   Submission of Matters to a Vote of the Security Holders.......................................   21
  Item 4A.  Executive Officers and Directors of the Registrant............................................   22

Part II.
  Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.........................   25
  Item 6.   Selected Consolidated Financial Data..........................................................   26
  Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
              Operations..................................................................................   27
  Item 7A.  Quantitative and Qualitative Disclosures about Market Risk....................................   38
  Item 8.   Consolidated Financial Statements and Supplementary Data......................................   39
  Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosures.................................................................................   39

Part III.
  Item 10.  Directors and Executive Officers of the Registrant............................................   40
  Item 11.  Executive Compensation........................................................................   40
  Item 12.  Security Ownership of Certain Beneficial Owners and Management................................   40
  Item 13.  Certain Relationships and Related Transactions................................................   40

Part IV.
  Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................   41

SIGNATURES................................................................................................   43
</TABLE>

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                                    PART I.

ITEM 1.  BUSINESS

 The statements contained in this Report on Form 10-K that are not purely
historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
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. See "Risk Factors that May Affect Future Results,"
and the factors and risks discussed in our Registration Statement filed on Form
S-1 on December 9, 1999 (File No. 333-91085) with the Securities and Exchange
Commission.

Overview

 Vignette is a leading provider of customer-driven Internet applications used
by the most successful and demanding enterprises to build lasting relationships
with their business, trade and consumer customers.

 The family of Vignette products is focused around three core capabilities that
meet the needs of today's e-business organizations.

        Content - the ability to manage and deliver content to every electronic
        touchpoint.

        Integration - the ability to integrate a variety of e-business
        applications within and across enterprises.

        Analysis - the ability to provide actionable insight into the
        customer's relationship to a business.

 We deliver customer-facing applications that leverage these content,
integration and analysis services and enable organizations to captivate their
customers, build a competitive difference and maximize their returns and
customer value.

 Our products are supported by the Vignette Professional Services organization,
which offers a broad range of services, including strategic planning, project
management, account management, general implementation services, and an
extensive array of training offerings. In addition, our growth is facilitated by
a number of partnerships with world-class systems integrators like Accenture,
Computer Sciences Corporation, IBM Global Services and PricewaterhouseCoopers
who use Vignette technologies to ensure client success. Additionally, our open
platform and application products have fostered strong relationships with key
technology partners such as BEA Systems, IBM, Intel, Microsoft, Oracle and Sun.

 We are intensely focused on customer success and serve over 1200 end-user
customers including market leaders like Daimler/Chrysler, Land's End, Merrill
Lynch, Motorola, PaineWebber and United Airlines.

Products

 Our software solutions are based upon the architectural approach of the
customer-driven applications model for e-business organizations. This modular
architecture makes it possible to rapidly deploy adaptable and powerful
solutions for content management, information portals, business-to-customer, or
B2C, storefronts, business-to-business, or B2B, commerce and e-marketplaces. We
provide sell-side functionality to market to, sell to and service customers
through the Internet, and integrate seamlessly with buy-side procurement,
transaction and settlement application functions. The benefits of our products
and solutions are:

   .     Rapid deployment: accelerate time-to-results;

   .     Adaptable design: respond easily to changing e-business strategies;

   .     Modular approach: maximize current and future investments;

   .     Powerful solutions: ensure the performance of our customers'
         e-business.

                                       3
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Vignette Content Management Server

 Vignette Content Management Server, or CMS, is an industry-leading
collaborative content management platform that tightly integrates content
management, scalable content delivery, and personalization. CMS offers
comprehensive support for managing content stored in databases, Extensible
Markup Language, or XML, repositories, and static files and, as a result, is a
powerful solution for enterprise-wide collaboration for e-businesses.

  With CMS, our customers can:

     .  Allow non-technical content authors to submit, edit, review, and approve
        content using their favorite tools
     .  Manage content from databases, file systems, news feeds, and legacy
        systems
     .  Provide participants a simple to-do list interface for completing tasks
     .  Define workflow processes with e-mail notifications to manage the
        collective efforts of their teams
     .  Keep a full approval history to ensure quality and accountability
     .  Schedule the launch and expiration of content and applications
     .  Retain complete control over their e-business applications and content

Vignette Content Aggregation Server

 Vignette Content Aggregation Server, or CAS, is a product that enables the
rapid and reliable gathering--or aggregation--of numerous types of Internet-
based content, including text, graphics, audio and video files, database
records, and other digital assets such as applets. Typical users include
information portals, e-marketplaces, and large-scale corporations and
institutions with a major online presence. CAS provides a simple, versatile, and
highly cost-effective methodology for gathering and presenting the kind of rich,
varied, and up-to-date information required for success in today's competitive
Internet markets. CAS is versatile and can deliver virtually any type of
information--from virtually any source--automatically, quickly, and
consistently.

Vignette Lifecycle Personalization Server

 Vignette Lifecycle Personalization Server, or LPS, solution includes Adaptive
Personalization and Observation Management Services to improve online customer
service by anticipating customer needs, delivering relevant content, and
minimizing visitor effort.

 Adaptive Personalization services leverage both implicit and explicit visitor
knowledge to enable an e-business to personalize its website on a customer's
first visit, without explicitly asking the visitor for login or preference
information. For instance, system adaptation is used to determine the
characteristics of the user's browser and the connecting device, and behavioral
adaptation, comprised of content and navigational adaptation, provides the
ability to dynamically adapt the site to visitors as they browse. Integration of
these Adaptive Personalization services with CMS software allows content to be
categorized so that, as the visitor browses, a pattern of the visitor's interest
emerges.

 The Observation Management Services work in conjunction with the content
categorization capabilities of CMS to handle all updates of a customer's
behavior. Functionally, this provides:

     .  Access to visitor information
     .  Tracking of implicit data through the visitor's browsing behavior
     .  Profiling of visitors using both implicit and explicit data. This may
        include visitor session data or explicit "traits" expressed in a
        registration form.
     .  Personalizing of content and navigation that the visitor experiences.

Vignette Content Syndication Server

 Vignette Content Syndication Server, or CSS, is a comprehensive solution for
distribution--or syndication--of Web-based content from an e-business to
affiliates, customers, distributors, marketplaces, and other online trading
partners.

 Utilizing a powerful syndication engine and independent application server,
CSS distributes packages of content--including text, graphics, audio, video,
applets, and other information--directly from an e-business site's repository to

                                       4
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the Web repositories of trading partners, over standard Hypertext Transfer
Protocol and File Transfer Protocol, or HTTP and FTP, connections.

 By delivering seamless, powerful, and flexible content syndication
capabilities, CSS enables e-businesses to:

     .  Open new sales channels by simplifying the distribution of timely
        product information and other content in a wide variety of formats;
     .  Increase sales to existing customers by targeting them with customized
        content packages;
     .  Liquidate distressed inventories by distributing targeted product
        information to broader audiences;
     .  Dramatically reduce operating costs and errors by automating the manual
        process of distributing product information and other content;
     .  Build stronger and longer-lasting relationships with key distribution
        partners by supplying them with up-to-the-minute, accurate, and relevant
        information on a schedule of their choosing.

 CSS features the industry's widest range of supported input sources and
content formats, as well as unparalleled flexibility in delivery options. It
enables companies to leverage their web-based content for distribution to their
affiliates and customers quickly and easily.

Vignette Mobile Application Suite

 Vignette Mobile Application Suite, or MAS, is a powerful solution that extends
the Vignette platform's transaction, integration, notification and data
aggregation capabilities to wireless devices such as Palm and Palm-compatible
products and Wireless Application Protocol, or WAP, compliant cellular phones.
With MAS, providers can take the Internet "on the road," giving selected
customers and trading partners personalized, mobile access to corporate
applications, Internet services, and customized messages and alerts.

 E-businesses implementing MAS in conjunction with other Vignette products reap
immediate business benefits:

     .  Fast time-to-market through pre-packaged, "off-the-shelf" options, plus
        an intuitive and highly versatile graphical development environment
        ensure quick turnaround for new and updated wireless business services.
     .  High appeal for trading partners through wireless capabilities, an open
        architecture, and a full range of transactional functionality that make
        it easier to meet the specific needs of trading partners, while
        decreasing the initial and long-term costs of business partnerships.
     .  Faster sales through increased access to corporate applications and
        Internet services from mobile devices can raise the volume and rate of
        sales overall.
     .  Increased productivity through a wireless-enabled field staff, customer
        base, vendor pool and trading partner environment maximizes corporate
        resources, speeding up operations and allowing each individual to have a
        more direct impact on profitability.

Vignette Multi-channel Communication Server

 Vignette Multi-channel Communication Server, or MCS, provides the leading
enterprise platform for developing mobile e-business applications that manage
relationships with customers, partners, and employees via multiple electronic
touchpoints.

 MCS enables the proactive distribution of personalized content and provides
closed-loop interaction with a customer's e-business audience via e-mail,
pagers, mobile phones, personal digital assistants, or PDAs, and other
touchpoints. MCS propels our customers to the forefront of the wireless
revolution fueled by the alliance of computing and telecommunications
technologies.

Vignette Advanced Deployment Server

 Vignette Advanced Deployment Server, or ADS, is designed for companies that
require an enterprise-wide development, testing, and production system for their
e-business applications.

                                       5
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Benefits include:

     .  Management of both static and dynamic content, application code, and
        targeted marketing campaigns, as well as rich metadata for
        personalization, caching, and visitor tracking.
     .  A superior architecture that support an n-tiered development, testing,
        and production environment. As the requirements or business processes of
        the e-business grow, ADS is robust enough to support them.
     .  A flexible and adaptable design so that ADS can adapt to the most unique
        staging environment. The adaptability of ADS allows businesses to
        transfer assets across environments based on business requirements,
        without having to worry about technical limitations.
    .   Rapid implementation time. ADS is an out-of-the-box solution that
        enables a customer to install, configure, and run a robust staging
        system in a matter of hours. The alternative is to create expensive,
        handcoded methods for moving code, content, and other data securely
        between environments.
     .  A robust set of Application Programming Interfaces, or API, that can be
        used to extend the functionality of ADS or to integrate the
        functionality of ADS with third-party applications.
     .  Security. By using strong (128-bit) or weak (40-bit) Secure Sockets
        Layer, or SSL, encryption, ADS can deploy assets in a secure manner,
        protecting your sensitive data. ADS leverages the Information and
        Content Exchange, or ICE, standard protocol for reliable transfer of
        assets between environments, which reduces risk and promotes
        interoperability.

Vignette Application Power Pack

 Vignette Application Power Pack, or VAPP, is a comprehensive set of reusable,
cross-platform, packaged application modules designed to accelerate the
assembly, deployment, and management of e-business applications. These modules
provide browser-based user interfaces and APIs for managing and finding
information, enabling personalized interactions, and building online
communities.

 VAPP supports a "configure-and-go" approach designed to help companies get a
head start on reaching their strategic e-business application goals.

Vignette Business Integration Studio

 Vignette Business Integration Studio, or BIS, connects e-business applications
with internal business applications. It is an easy-to-use solution for
integrating enterprise-wide systems, providing the exact features required to
effectively link Internet services with legacy applications, databases and
enterprise resource planning, or ERP, systems.

 BIS automates information flow among diverse business systems, regardless of
platform, operating system, or native language. The result is consistency,
accuracy, timeliness, and accessibility for critical enterprise information.
E-commerce and traditional modes of doing business are no longer separate
corporate functions. BIS helps information systems reflect this new economic
reality, enhancing the effectiveness of Internet services and improving control
over the enterprise as a whole.

Vignette Collaborative Commerce Server

 Vignette Collaborative Commerce Server, or CCS, is a business-to-business
integration, or B2Bi, solution, enabling the rapid, secure and guaranteed
exchange and processing of business transactions via the Internet and through
corporate firewalls.

 The XML and Java(TM)-based solution delivers robust features and functionality
in several key areas:

     .  Highly scalable, open architecture. Unlike many B2Bi solutions that are
        based on proprietary application servers, CCS is 100% Java and runs on
        top of industry-leading application servers that provide extensive load
        balancing, fault tolerance and clustering capabilities to enable high
        volume execution of simultaneous transactions.
     .  Support for evolving industry standards and specifications. CCS's open
        architecture can accommodate rapidly evolving technologies, which
        simplifies the development and management of complex transaction
        systems. CCS uses XML as the common language for business-to-business
        document exchange and is the first application server to support Biz
        Talk--the Microsoft specification for XML-based business information.
        CCS

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        also provides the ability to support other industry standards, such as
        RosettaNet, cXML, xCBL, ebXML, EDI and OAGIS.
     .  Rapid configuration for complex business processes. CCS offers a robust,
        easy-to-use solution for configuring and managing highly diversified
        trading communities. Comprehensive trading community management features
        ensure that transactions can be tailored to each trading partner's
        specific business and technical requirements, providing an automated
        solution that can scale easily to the high volumes desired for fast-
        paced Internet business operations. The modular, open architecture also
        allows users to incorporate emerging standards and new business
        paradigms.

Vignette Relationship Management Server

 Vignette Relationship Management Server, or RMS, solution enables business
managers to leverage analysis and business insight to create, implement, and
measure cross-channel customer marketing promotions using a closed-loop
marketing architecture. It enables businesses to:

     .  Gain critical insights by measuring and analyzing customer interactions
        across multiple business touchpoints;
     .  Easily segment customers into relevant groups; and
     .  Automatically deliver highly targeted content to those groups in the
        form of campaigns.

 RMS "closes the loop" by continuously repeating this cycle--each time
measuring and analyzing customer responses to campaigns, and adjusting customer
segments and future campaign content based on continuous learning. The result is
that every communication with a business's customers becomes more effective at
achieving the business's objective--whether it be delivering timely and relevant
information, encouraging larger and more frequent online purchases, or
convincing its customers to come back again and again.

Open Architecture

 Vignette has built one of the most open and comprehensive platforms in the
market. In the second quarter 2000, we made available native support for
Microsoft's Active Server Page scripting and COM technology, critical parts of
Microsoft's Windows DNA 2000 environment. In the fourth quarter 2000, we
released a version of our products that support the Java 2 Platform, Enterprise
Edition, or J2EE, scripting environment, Java Server Pages. In early 2001, we
began offering native Enterprise Java Bean implementations of our products.

 With these milestones, we became one of the first vendors in its industry to
support both Sun Microsystems Inc.'s Java platform and Microsoft Corp.'s Windows
DNA, the two dominant Web application development environments in use today.

Professional Services

 The Vignette Professional Services, or VPS, organization is integral to our
ability to provide our clients with an innovative and comprehensive e-business
solution. VPS has over 600 experienced consultants worldwide with extensive
software project management, development and deployment experience. VPS helps
clients plan, design and rapidly implement successful Internet businesses with
innovative e-business applications. VPS focuses its consulting services on
influencing the client's ability to understand and build online relationships
with their customers. The goals of the VPS organization are to mitigate client
implementation risks, improve the time to market and integrity of the solution
and share best practices with client project teams. We charge for our services
on either a time and materials basis or on a fixed-fee basis, and provide our
services through our VPS practices in San Francisco, California; Los Angeles,
California; Austin, Texas; Boston, Massachusetts; New York, New York;
Washington, D.C.; Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington;
Denver, Colorado; London, England; Hamburg, Germany; Paris, France; Madrid,
Spain; Taiwan; Hong Kong; Singapore; Melbourne, Australia; and Sydney,
Australia.

Strategy

 Our objective is to maintain and extend our leadership position as a global
provider of e-business solutions. To achieve this objective, we will focus on
expanding our customer base of Fortune 1000 enterprises, extending our
technology and product leadership through investment in research & development
and targeted acquisitions, expanding our global sales capabilities, and
extending our partnership alliances with leading technology and services
companies.

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Strategic Alliances

 A critical element of our sales strategy is to establish strategic alliances
to assist us in marketing, selling and developing customer applications, as well
as to increase product interoperability within the industry. This approach is
intended to increase the number of personnel available to perform application
design and development services for our clients and provide additional marketing
expertise and technical expertise in certain vertical industry segments. The
"Vignette Economy" includes a community of skilled partners specifically
selected to support our customers and to grow with them to ensure success. As of
December 31, 2000, there were approximately 2,000 Vignette-trained third-party
partner professionals making up the Vignette Economy.

 We have established partnerships with leading systems integrators such as
Accenture, Computer Sciences Corp., IBM Global Services and
PricewaterhouseCoopers. We have also established strategic alliances with
technology leaders like Ariba, BEA Systems, Dell Computer Corp., IBM, Intel,
Microsoft, Oracle and Sun Microsystems.

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

Acquisitions

 We have completed four acquisitions since our inception, three of which
occurred during 2000.

 Effective January 18, 2000, we acquired all of the outstanding stock and
assumed all outstanding stock options of Engine 5, Ltd. ("Engine 5"), a
developer of enterprise-wide Java server technology, in exchange for 248,043
shares of our common stock and approximately $4.9 million in cash. The total
cost of the acquisition, including transaction costs of $400,000, was
approximately $20.0 million. The acquisition was accounted for as a purchase
business combination. Accordingly, the acquired net liabilities were recorded at
their estimated fair values at the effective date of the acquisition and the
results of operations of Engine 5 have been included with ours for the periods
subsequent to the date of the acquisition.

 Additionally, as part of the Engine 5 acquisition, contingent consideration of
33,183 shares of our common stock and $1.6 million was issued and paid,
respectively, during the year ended December 31, 2000. Remaining contingent
consideration of approximately 55,278 shares of our common stock and $2.7
million will be based upon defined future employment requirements met through
the first quarter of 2002. The contingent consideration related to the Engine 5
acquisition is not included in the total purchase price, above, but is expensed
as future employment requirements are satisfied; such amount totaled $3.8
million during the year ended December 31, 2000.

 Effective February 15, 2000, we acquired all of the outstanding stock and
assumed all outstanding stock options of DataSage, Inc. ("DataSage"), a leading
provider of e-marketing and personalization applications that help organizations
create a comprehensive single enterprise-wide view of their customers, in
exchange for 9,458,061 shares of our common stock. The total cost of the
acquisition, including transaction costs of $1.1 million, was approximately
$586.6 million. The acquisition was accounted for as a purchase business
combination. Accordingly, the acquired net assets were recorded at their
estimated fair values at the effective date of the acquisition and the results
of operations of DataSage have been included with ours for the periods
subsequent to the date of the acquisition.

 Effective July 5, 2000, we acquired all of the outstanding stock and assumed
all outstanding stock options of OnDisplay, Inc. ("OnDisplay"), a leading
provider of e-business infrastructure software for powering e-business portals
and e-marketplaces, in exchange for 42,016,975 shares of Vignette common stock.
The total cost of the acquisition, including transaction costs of $14.0 million,
was approximately $1.5 billion. The acquisition was accounted for as a purchase
business combination. Accordingly, the acquired net assets were recorded at
their estimated fair values at the effective date of the acquisition and the
results of OnDisplay have been included with ours for the periods subsequent to
the date of the acquisition.

 In connection with our respective acquisitions of Engine 5, DataSage and
OnDisplay, we incurred one-time acquisition costs and integration-related
charges, which included costs associated with product integration, cross
training, and other merger-related costs. Additionally, a portion of the
OnDisplay and DataSage purchase price was allocated to in-process research and
development based upon an independent third-party appraisal and expensed upon
the consummation of the transactions. These related acquisition, integration and
in-process research and development charges totaled

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approximately $169.9 million during fiscal year 2000.

Customers

 As of December 31, 2000, we had 1,248 end-user customers. Our customer list
includes the most successful organizations in the automotive, education,
entertainment, financial services, government, health care, high tech,
manufacturing, new media and publishing, retail, telecom, travel and other
industries. Customers include (but are not limited to) the following:

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<S>                                   <C>                                 <C>
Automotive                            Channel                             Education
----------                            --------                            ---------
BMW                                   AT Kearney                          Acadio Corporation
DaimlerChrysler                       EDS                                 Columbia University
Mercedes Benz                         Hill Holliday Interactive           Digital Think
Volkswagen of America, Inc.           Intelligroup, Inc.                  Kaplan Education
Volvo                                 SPL World Group                     Sageport

Entertainment                         Financial services                  Government
-------------                         ------------------                  ----------
British Sky Broadcasting (BSkyB)      Charles Schwab & Company            California Public Employees' Retirement
Checkout.com                          JP Morgan Chase                       System (CalPERS)
Direct TV                             Fidelity                            National Governors' Association
Globo.com                             PaineWebber                         National Science Foundation
Turner Entertainment Group            New York Life Insurance Company     SJ Rail
                                                                          US Mint

Healthcare                            High tech                           Manufacturing
-----------                           ----------                          -------------
American Medical Association          Cisco                               Herman Miller, Inc.
Centrimed                             Compaq Computer Corp.               Otis Elevator Company
Global Healthcare Exchange            Dell Computer Corp.                 Pergo, Inc.
National Cancer Institute             Hewlett-Packard                     Siemens AG
United Healthcare                     Siebel Systems                      Thomson Direct, Inc.
                                      Sun Microsystems, Inc.

New media/publishing                  Retail                              Telecom
--------------------                  -------                             -------
Bertelsmann                           Amazon.com Holdings, Inc.           AT&T
CBS Broadcasting                      Best Buy Co., Inc.                  British Telecom
Chicago Tribune                       Harrods Ltd.                        Cablevision (CSC Holdings)
CNET /ZD Net                          Lands' End                          Motorola
Time Inc. New Media                   RCA.com                             Telefonica

Travel                                Other/Services
-------                               --------------
Atevo Travel                          Breakaway Solutions
Lufthansa                             DHL Worldwide Express
Preview Travel                        Federal Express
The Sabre Group                       McKinsey & Co.
United Air Lines, Inc.                Waste Management, Inc.
</TABLE>

Competition

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

                                       9
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 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 for e-Business Applications Software Which Could Make it Difficult
to Acquire and Retain Clients Now and in the Future."

Research and Development

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

 The majority of our research and development activity has been directed
towards feature extensions to our family of products. This development consists
primarily of adding new competitive product features and additional tools and
products as we expand into new markets.

 Our research and development expenditures, excluding the write-off of acquired
in-process research and development, for fiscal 1998, 1999 and 2000 were
approximately $7.0 million, $16.4 million and $58.3 million, respectively. We
expect that we will continue to commit significant resources to research and
development in the future. Most research and development expenses have been
expensed as incurred. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

 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. 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 E-Business
Applications Technology Our Existing Products Could Become Obsolete."

Sales and Marketing

 We market our products primarily through our direct sales force and also
intend to expand our indirect sales through additional relationships with
systems integrators, VARs and OEMs. We generate leads from a variety of sources,
including businesses seeking partners to develop interactive marketing and
selling applications. Initial sales activities typically include a demonstration
of our product capabilities followed by one or more detailed technical reviews.
As of December 31, 2000, the direct sales force consisted of 519 sales
executives and support personnel.

 We seek to establish partnerships with major industry vendors that will add
value to our products and expand distribution opportunities. We also pursue
marketing agreements with premier content authoring vendors, site usage analysis
vendors and vertically aligned Web server vendors.

 We use a variety of marketing programs to build market awareness of us, our
brand name and our products, as well as to attract potential clients for our
products. A broad mix of programs are used to accomplish these goals, including

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<PAGE>

market research, product and strategy updates with industry analysts, public
relations activities, advertising, direct marketing and relationship marketing
programs, seminars, trade shows, speaking engagements and Web site marketing.
Our marketing organization also produces marketing materials in support of sales
to prospective clients 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 law and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently own two patents
and have a number of patent applications pending in the United States. We have
eight registered trademarks in the United States, 26 pending trademark
applications in the United States, 22 registered trademarks in foreign
countries, and 27 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 "shrinkwrap" agreements, which impose certain
restrictions on the licensee's ability to utilize the software. Finally, we seek
to avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important than the various legal
protections of our technology to establishing and maintaining a technology
leadership position.

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

 To date, we have not been notified that our products infringe the proprietary
rights of third parties, but there can be no assurance that third parties will
not claim infringement with respect to our current or future products. We expect
that developers of Web-based commerce 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. We
license data encryption and authentication technology from RSA Data Security,
Inc., load balancing and traffic management software from Resonate, Inc.,
development software from Iona Technologies, Inc., database access technology
from Rogue Wave Software, Inc., Express Online Analytical Processing products
from Oracle Corporation, concept and keyword search functionality from Autonomy,
Inc., and other software that is integrated with internally developed software.
If we cannot maintain licenses to 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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<PAGE>

Employees

 As of December 31, 2000, we had a total of 2,330 employees. Of the total
employees, 679 were in engineering, 632 in sales and marketing, 696 in
professional services and 323 in finance and administration. Our future success
will depend in part on our ability to attract, retain and motivate highly
qualified technical and management personnel, for whom competition is intense.
From time to time we also employ independent contractors to support our
professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our employees are good.

 As of February 28, 2001, we had 2,005 employees. The decrease from December
31, 2000 resulted primarily from the restructuring efforts we initiated in
January 2001.

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<PAGE>

                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Risks Related to Our Business

 In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating our business and us.

We Expect to Incur Future Losses

 We have not achieved profitability and we expect to incur net operating losses
at least through the first quarter of 2001. To date, we have primarily funded
our operations from the sale of equity securities. We expect to continue to
incur significant product development, sales and marketing, and administrative
expenses and, as a result, we will need to generate significant revenues to
achieve and maintain profitability. Although our revenues have grown
significantly in recent quarters, we cannot be certain that we can sustain these
growth rates or that we will achieve sufficient revenues for profitability. If
we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future.

Our Limited Operating History Makes Financial Forecasting Difficult

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

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 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;
     .   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 e-business solutions;
     .   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; and
     .   Costs related to possible acquisitions of technology or businesses.

 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 plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve
operational and financial systems as necessary. If our revenues do not increase
along with these expenses, our business, operating results or financial
condition could be materially adversely affected and net losses in a given
quarter would be even greater than expected.

 We believe that our quarterly operating results may experience seasonal
fluctuations. For instance, quarterly results may fluctuate based on client
calendar year budgeting cycles, slow summer purchasing patterns in Europe and
our compensation policies that tend to compensate sales personnel, typically in
the latter half of the year, for achieving

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<PAGE>

annual quotas. Another example is the recent uncertainty surrounding the overall
information technology spending environment and customer hesitancy to make large
capital expenditures.

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

  Since our clients use our products for mission critical applications such as
Internet commerce, errors, defects or other performance problems could result in
financial or other damages to our clients. 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 such limitation of liability provisions. To date, we have
not experienced any product liability claims or litigation that we feel is
material to our business. However, such claims if brought against us, even if
not successful, would likely be time consuming and costly

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 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.

In Order to Increase Market Awareness of Our Products and Generate Increased
Revenue We Need to Expand Our Sales and Distribution Capabilities

  We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenue. We cannot be certain
that we will be successful in these efforts. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Our products and
services require a sophisticated sales effort targeted at the senior management
of our prospective clients. New hires will require training and take time to
achieve full productivity. We cannot be certain that our recent 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 also plan
to expand our relationships with value-added resellers, systems integrators and
other third-party resellers to build an indirect sales channel. In addition, we
will need to manage potential conflicts between our direct sales force and
third-party reselling efforts.

Failure to Maintain the Support of Third-Party E-Business Consultants 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 e-business applications for our clients.
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

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<PAGE>

other companies or to their own products. A significant shift by these companies
toward favoring competing products could negatively affect our license and
service 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
clients regarding the use and benefits of e-business applications. Our long
sales cycle makes it difficult to predict the quarter in which sales may fall.
In addition, since we recognize the majority 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 clients, 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 Clients with the Implementation of Our Products.

  We cannot be certain that we can attract or retain a sufficient number of the
highly qualified services personnel that our business needs. Clients that
license our software typically 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 on our ability to
provide our clients with these services and to educate third-party resellers on
how to use our products. As a result, we plan to increase the number of service
personnel to meet these needs. New services personnel will require training and
education and take time to reach full productivity. To meet our needs for
services personnel, we may also need to use more costly third-party consultants
to supplement our own professional services organization. We expect our services
revenue to increase in absolute dollars as we continue to provide consulting and
training services that complement our products and as our installed base of
clients grows. During 2000, our professional services organization achieved
profitability; however, prior to 2000, services costs related to professional
services had exceeded, or had been substantially equal to, professional
services-related revenue. 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 clients for our services on a time and materials basis. However, from
time to time we enter into fixed-price contracts for services. On occasion, the
costs of providing the services have exceeded our fees from these contracts and,
from time to time, we may misprice future contracts to our detriment. In
addition, competition for qualified services personnel with the appropriate
Internet specific knowledge is intense. There are a limited number of people who
have acquired the skills needed to provide the services that our clients demand.

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

  There may be a shortage of third-party service providers to assist our clients
with the implementation of our products. We do not believe our professional
services organization will be able to fulfill the expected demand for support,
consulting and implementation services for our products. We are actively
attempting to supplement the capabilities of our services organization by
attracting and educating third-party service providers and consultants to also
provide these services. We may not be successful in attracting these third-party
providers or maintaining the interest of current third-party providers. In
addition, these third parties may not devote enough resources to these
activities. A shortfall in service capabilities may affect our ability to sell
our software.

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<PAGE>

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;
     .   Dependence on local vendors;
     .   Multiple, conflicting and changing governmental laws and regulations;
     .   Longer sales cycles;
     .   Difficulties in collecting accounts receivable;
     .   Foreign currency exchange rate fluctuations; and
     .   Political and economic instability.

  We recorded 26% of our total revenue in the year ended December 31, 2000,
through licenses and services sold to clients located outside of the United
States. We expect international revenue to account for an increasing percentage
of total revenue in the future and we believe that we must continue to expand
our international sales activities in order to be successful. Our international
sales growth will be limited if we are unable to establish additional 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.

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

In Order to Properly Manage Growth, We May Need to Implement and Improve Our
Operational Systems on a Timely Basis

  We have expanded our operations rapidly since inception. We intend to continue
to expand in the foreseeable future to pursue existing and potential market
opportunities. This rapid growth places a significant demand on management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures and controls on a timely basis.
If we fail to implement and improve these systems, our business, operating
results and financial condition will be materially adversely affected.

We May Be Adversely Affected if We Lose Key Personnel

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

We Have Relied and Expect to Continue to Rely on Sales of Our V/Series Product
Line for Our Revenue

  We currently derive substantially all of our revenues from the license and
related upgrades, professional services and support of our V/Series software
products. We expect that we will continue to depend on revenue related to new
and enhanced versions of our V/Series product line for at least the next several
quarters. We cannot be certain that we will be successful in upgrading and
marketing our products or that we will successfully develop and market new
products and services. If we do not continue to increase revenue related to our
existing products or generate revenue from new products and services, our
business, operating results and financial condition would be materially
adversely affected.

                                       16
<PAGE>

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, which is subject to significant risks. There are significant
risks inherent in a product introduction such as our existing V/Series software
products. Market acceptance of these and future products will depend on
continued market development for Internet products and services and the
commercial adoption of standards on which the V/Series is based. We cannot be
certain that either will occur. We cannot be certain that our existing or future
products offering will meet customer performance needs or expectations when
shipped or that it 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.

If We are Unable to Meet the Rapid Changes in E-Business Applications
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 client demands, changes in packaging
and combination of existing products and evolving industry standards. We cannot
be certain that we will successfully develop and market new products, new
product enhancements or new products compliant with present or emerging Internet
technology standards. New products based on new technologies, new industry
standards or new combinations of existing products as bundled products can
render existing products obsolete and unmarketable. To succeed, we will need to
enhance our current products and develop new products on a timely basis to keep
pace with developments related to Internet technology and to satisfy the
increasingly sophisticated requirements of our clients. Internet commerce
technology, particularly e-business 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 Face Intense Competition for E-Business Applications Software, Which Could
Make it Difficult to Acquire and Retain Clients Now and in the Future

  The Internet software market is intensely competitive. Our clients'
requirements and the technology available to satisfy those requirements
continually change. We expect competition to persist and intensify in the
future.

  Our principal competitors include: in-house development efforts by potential
clients or partners; other vendors of software that directly address elements of
e-business applications; and developers of software that address only certain
technology components of e-business applications (e.g., content management).

  Many of these companies, as well as some other competitors, 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 such as Netscape and Microsoft may bundle their
products in a manner that many 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
clients 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 Must Successfully Complete the Integration of Our Recent Acquisitions of
Engine 5, Ltd., DataSage, Inc. and OnDisplay, Inc.

  We acquired Engine 5, Ltd., DataSage, Inc. and OnDisplay Inc. on January 18,
2000, February 15, 2000, and July 5, 2000, respectively. Our failure to
successfully address the risks associated with our acquisitions of these
companies could have a material adverse effect on our ability to develop and
market products based on their respective technologies. In particular, we are
developing integrated products and, accordingly, are devoting significant
resources to product development, sales and marketing. The success of these
acquisitions will depend on our ability to successfully integrate and manage
their operations and on our ability to develop and market products based on the
acquired technology.

                                       17
<PAGE>

Potential Future Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results

  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. Our failure to successfully manage future acquisitions could
seriously harm our business. Also, our existing stockholders would experience
dilution if we financed the acquisitions by issuing equity securities.

The Internet is Generating Privacy Concerns in the Public and Within
Governments, Which Could Result in Legislation Materially and Adversely
Affecting Our Business or Result in Reduced Sales of Our Products, or Both

  Businesses use our V/Series products to develop and maintain profiles to
tailor the content to be provided to Web site visitors. Typically, the software
captures profile information when consumers, business customers or employees
visit a Web site and volunteer information in response to survey questions.
Usage data collected over time augments the profiles. However, privacy concerns
may nevertheless cause visitors to resist providing the personal data necessary
to support this profiling capability. More importantly, even the perception of
security and privacy concerns, whether or not valid, may indirectly inhibit
market acceptance of our products. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Web site
users that the data captured after visiting certain Web sites may be used by
marketing entities to unilaterally direct product promotion and advertising to
that user. We are not aware of any such legislation or regulatory requirements
currently in effect in the United States. Other countries and political
entities, such as the European Economic Community, have adopted such legislation
or regulatory requirements. The United States may adopt similar legislation or
regulatory requirements. If consumer privacy concerns are not adequately
addressed, our business, financial condition and operating results could be
materially adversely affected.

  Our V/Series products use "cookies" to track demographic information and user
preferences. A "cookie" is information keyed to a specific server, file pathway
or directory location that is stored on a user's hard drive, possibly without
the user's knowledge, but generally removable by the user. Germany has imposed
laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, operating results and financial condition could be
materially adversely affected.

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

  Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects. Serious
defects or errors could result in lost revenues or a delay in market acceptance,
which would have a material adverse effect on our business, operating results
and financial condition.

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

  We integrate third-party software as a component of our software. The
third-party software may not continue to be available to us on commercially
reasonable terms. If we cannot maintain licenses to key 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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<PAGE>

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 which we believe is material to the
Company's 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; and
     .  Redesign those products or services that incorporate such technology.

  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 Charter Documents and Delaware Law Could Prevent
or Delay a Change in Control of Our Company

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

     .  Authorizing the issuance of "blank check" preferred stock;
     .  Providing for a classified board of directors with staggered, three-year
        terms;
     .  Prohibiting cumulative voting in the election of directors;
     .  Requiring super-majority voting to effect certain amendments to our
        certificate of incorporation and bylaws;
     .  Limiting the persons who may call special meetings of stockholders;
     .  Prohibiting stockholder action by written consent; and
     .  Establishing advance notice requirements for nominations for election to
        the board of directors or for proposing matters that can be acted on by
        stockholders at stockholder meetings.

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

Risks Related to the Internet Industry

Our Business is Sensitive to the Overall Economic Environment; Any Slowdown in
E-Business Growth or Other Factors Impacting Information Technology Spending
Budgets Could Harm Our Operating Results

  The primary customers for our products are enterprises seeking to launch or
expand e-business initiatives. Any significant downturn in our customers'
markets or in general economic conditions that results 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 Growth of the Internet for Commerce

  Our future success depends heavily on the Internet being accepted and widely
used for commerce. If Internet commerce does not continue to grow or grows more
slowly than expected, our business, operating results and financial condition
would be materially adversely affected. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including
potentially inadequate network infrastructure, slow development of enabling
technologies or insufficient commercial support. The Internet infrastructure may
not be able to support the demands placed on it by increased Internet usage and
bandwidth requirements. In addition, delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or increased government regulation could cause the Internet to lose
its viability as a commercial medium. Even if the

                                       19
<PAGE>

required infrastructure, standards, protocols or complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.

Our Performance Will Depend on the New Market for E-Business Applications
Software

  The market for e-business applications software is new and rapidly evolving.
We expect that we will continue to need intensive marketing and sales efforts to
educate prospective clients 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.

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, strategic
        partnerships, joint ventures or capital commitments;
     .  Loss of a major client or failure to complete significant license
        transactions;
     .  Additions or departures of key personnel;
     .  Sales of common stock in the future; and
     .  Fluctuations in stock market price and volume, which are particularly
        common among highly volatile securities of Internet and software
        companies.

                                       20
<PAGE>

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 may in the future be the target of similar litigation. 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

  We expect the cash on hand, cash equivalents, marketable securities and
short-term investments to meet our working capital and capital expenditure needs
for at least the next 12 months. After that time, 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.

ITEM 2.  PROPERTIES

  The Company owns no real estate or facilities, and its leased headquarters
offices are located in Austin, Texas. As of December 31, 2000, the Company
leased and occupied, or had committed to lease office space in the following
locations, with remaining terms of up to 10 years: Austin, Texas; Houston,
Texas; San Ramon, California; Redwood Shores, California; New York City, New
York; Reston, Virginia; Waltham, Massachusetts; Boston, Massachusetts;
Maidenhead, England; Madrid, Spain; Hamburg, Germany; Sydney; Australia;
Singapore, Malaysia; and Guragon, India.

  Additionally, the company leases and occupies several medium-sized, short-term
offices, with remaining terms of less than one year: Reading, Massachusetts;
Cambridge, Massachusetts; Atlanta, Georgia; Dallas, Texas; Paris, France;
Melbourne, Australia; Hong Kong, China; Bangalore, India. The Company also
leases and utilizes numerous full service managed suites, executive suites, and
serviced office short-term leases (lease terms of less than one year, or
month-to-month to allow us the flexibility for growth and changing
business/customer requirements) for small sales offices across the United States
and around the world. As of December 31, 2000, the Company leased office space
in 22 countries outside of the United States.

ITEM 3.  LEGAL PROCEEDINGS

  We are not currently involved in any litigation which we feel will be material
to the Company's business.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

  We did not submit any matters to a vote of security holders during the fourth
quarter of the fiscal year ending December 31, 2000.

                                       21
<PAGE>

ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

  The following table sets forth certain information regarding the executive
officers and directors of Vignette as of February 28, 2001.

<TABLE>
<CAPTION>
Name                                Age                                     Position
----                                ---                                     --------
<S>                                 <C>       <C>
Gregory A. Peters...........        40        Chairman of the Board, President and Chief Executive Officer
William R. Daniel...........        45        Senior Vice President of Products
Bryce M. Johnson............        42        Senior Vice President and General Counsel
Joel G. Katz................        37        Chief Financial Officer and Secretary
Steven W. Manweiler.........        39        Senior Vice President and Chief Technology Officer
Philip C. Powers............        42        Senior Vice President of Professional Services
Charles W. Sansbury.........        33        Senior Vice President of Corporate Development
David J. Shirk..............        34        Senior Vice President and General Manager, Application
                                               Platform Products Division
Michael J. Vollman..........        43        Senior Vice President of Sales and Services
Robert E. Davoli (2) .......        52        Director
Joseph A. Marengi...........        47        Director
Steven G. Papermaster (1)...        42        Director
John D. Thornton (1)(2).....        35        Director
</TABLE>

(1) Member of Audit Committee
(2) Member of Compensation Committee

  Set forth below is biographical information about each of our executive
officers and directors.

  Gregory A. Peters has served as our President and Chief Executive Officer and
as a director since June 1998. From October 1997 to May 1998, Mr. Peters served
as President and Chief Executive Officer of Logic Works, Inc., a software
company. Mr. Peters joined Logic Works as Chief Financial Officer and Executive
Vice President, Finance and Operations in August 1996 and served as Acting
President and Chief Executive Officer from April 1997 to October 1997. From
April 1994 to August 1996, Mr. Peters served as Chief Financial Officer,
Treasurer and Senior Vice President, and from 1992 to March 1994, as Controller
and Treasurer, at Micrografx, Inc., a Windows-based graphics software company.
From 1990 to 1992, Mr. Peters held various financial positions at DSC
Communications Corporation, a telecommunications company. Mr. Peters is a
Certified Public Accountant and received his Bachelor of Arts degree in Business
Administration from Rhodes College in Memphis, Tennessee.

   William R. Daniel has served as our Senior Vice President of Products since
September 1999. From November 1998 to August 1999, he served as our Vice
President, Business Development. From August 1995 to May 1998, Mr. Daniel served
as President, Chief Operating Officer, and was a co-founder of Wallop Software,
Inc., a provider of web application development and assembly solutions. From
June 1988 until July 1995, he served as Chief Operating Officer and Senior Vice
President with Datis Corporation (acquired by HCIA, Inc. in 1995), a healthcare
information provider. Mr. Daniel received his Bachelor of Arts degree in
Engineering Sciences with honors from Dartmouth College and his Masters of
Business Administration degree in finance with honors from the Haas School of
Business at the University of California, Berkeley.

  Bryce M. Johnson has served as our Senior Vice President and General Counsel
since December 2000 and is responsible for overseeing the Company's legal and
governmental affairs. From March 1997 to November 2000, Mr. Johnson was the
Chief Legal Counsel for Tivoli Systems Inc. and Associate General Counsel of IBM
Corporation. From May 1984 to March 1997, Mr. Johnson held a variety of legal
positions with IBM Corporation, including Counsel to IBM Europe in Paris,
France. Mr. Johnson received his Bachelor of Arts degree with highest honors
from Georgetown College and his Doctorate of Jurisprudence from the University
of Kentucky.

  Joel G. Katz has served as our Chief Financial Officer and Secretary since
April 1999. From December 1990 to April 1999, Mr. Katz served as Chief Financial
Officer and Secretary of Harbinger Corporation, an e-commerce software and
services company. From December 1985 to December 1990, Mr. Katz held various
financial positions at Arthur Andersen, a professional services organization,
where he was a Certified Public Accountant. Mr. Katz received his Bachelor of
Business Administration in Accounting with honors from the University of
Georgia.

                                       22
<PAGE>

   Steven W. Manweiler has served as our Senior Vice President and Chief
Technology Officer since June 2000 and is responsible for the overall
architectural issues across all product lines as well as future technology
direction. From February 1996 to May 2000, Mr. Manweiler held various positions
within the Company and was a primary developer of our early products. Prior to
Vignette, he worked at Hewlett-Packard, where he developed networking services
for the company's Unix product and worked on Unix kernel development in the area
of distributed file systems. He also served as a leader and key software
developer at HaL Computer Systems. Mr. Manweiler received his Master of Science
degree in Computer Science from the University of Arizona.

   Philip C. Powers has served as our Senior Vice President of Professional
Services since September 1999 and as our Vice President, Professional Services
from August 1998 to September 1999. From February 1997 to August 1998 he served
as Vice President of Worldwide Professional Services at Tivoli Systems, Inc., a
client/server software company. From January 1981 to February 1997, he held
several management roles at IBM which most recently included Director of
Worldwide Channel Marketing for IBM's software group and Director of Worldwide
Marketing, LAN systems for IBM's personal software products division. Mr. Powers
received his Bachelor of Arts in Marketing and Business Management from the
University of Dayton.

   Charles W. Sansbury has served as our Senior Vice President of Corporate
Development since January 2000. From June 1996 to December 1999, Mr. Sansbury
was a Principal in the Technology Investment Banking Group at Morgan Stanley
Dean Witter. While at Morgan Stanley, he specialized in advising companies in
the Internet infrastructure software and Internet professional services
industries. He served as our investment banker during our initial and secondary
public offerings and, over the past two years, has helped guide our corporate
development and strategic financing initiatives. From August 1993 to June 1996,
he was an investment banker at Lehman Brothers. Mr. Sansbury received his Master
of Business Administration degree from the Wharton School of the University of
Pennsylvania and his Bachelor of Science degree from Georgetown University.

   David J. Shirk has served as our Senior Vice President and General Manager,
Application Platform Products Division, since July 2000 and is responsible for
the development and delivery of business-to-business infrastructure software
products. From March 1998 to June 2000, Mr. Shirk worked at Novell Corporation
as Senior Vice President of Product Management and Chief Technology Officer,
where he was responsible for delivering Novell's Net services software strategy
and roadmap for all Novell products. From March 1996 to February 1998, he was
Vice President of Marketing at Oracle Corporation in charge of its Industry
Applications Division. He has more than 12 years of experience in product
development, product marketing, business application and vertical industry
business solutions. Mr. Shirk received his Bachelor of Arts degree in Business
Administration from Ohio State University.

   Michael J. Vollman has served as our Senior Vice President of Sales and
Services since September 1999, our Vice President, North American Sales and
Professional Services from September 1998 to August 1999, and our Vice
President, North American Operations from April 1998 to August 1998. Mr. Vollman
joined Vignette in February 1998 as Vice President, Professional Services and
served in that capacity until April 1998. From February 1997 to February 1998,
Mr. Vollman served as Practice Director within the Central Region Consulting
Business for Oracle Corporation, an enterprise database company. From June 1985
to February 1997, he served in various account leadership and business
development roles for Electronic Data Systems, an information technology
services company. He received his Bachelor of Science degree in Computer Science
from Lawrence Technological University and his Master of Business Administration
degree in Marketing from the University of Michigan.

   Robert E. Davoli has served as a director of Vignette since February 1996.
Mr. Davoli has served as General Partner of Sigma Partners, a venture capital
firm, since January 1995. He served as President and Chief Executive Officer of
Epoch Systems, a client-server software company, from February 1993 to September
1994. From May 1986 through June 1992, Mr. Davoli was the President and Chief
Executive Officer of SQL Solutions, a relational database management systems
consulting and tools company that he founded and sold to Sybase, Inc. in January
1990. He is a director of ISS Group, Inc., a publicly held network security
software company, and he serves as a director of several privately held
companies. Mr. Davoli received his Bachelor of Arts degree in History from
Ricker College.

                                       23
<PAGE>

   Joseph A. Marengi has served as a director of Vignette since July 1999. Mr.
Marengi, who is a Senior Vice President with Dell Computer Corporation,
reporting to the Office of the Chief Executive Officer, is responsible for the
Dell Americas units serving enterprise, large corporate and medium-sized
business customers. Prior to joining Dell in July 1997, Mr. Marengi worked with
Novell, Inc., most recently serving as President and Chief Operating Officer. He
joined Novell in 1989, beginning as director of the Eastern region and moving
through successive promotions to become Executive Vice President of Worldwide
Sales and Field Operations. Mr. Marengi received his Bachelor of Arts degree in
Public Administration from the University of Massachusetts, Boston, and his
Master of Business Administration degree in Management from the University of
Southern California.

   Steven G. Papermaster has served as a director of Vignette since September
1998. Mr. Papermaster has served as the Chairman of Powershift Group, a
technology venture development group, since 1996. He is also Chairman of
Perficient, Inc., a provider of professional services to Internet software
companies, as well as a director of several privately held companies. Mr.
Papermaster was the Founder, Chairman and Chief Executive Officer of BSG
Corporation, a system integration company, from 1987 to 1996. Mr. Papermaster
also founded Enterprise Technology Institute in 1990. He received his Bachelor
of Arts degree in Finance from the University of Texas at Austin.

   John D. Thornton has served as a director of Vignette since February 1996.
Mr. Thornton is a General Partner of Austin Ventures, a venture capital firm,
where he has been employed since 1991. Mr. Thornton serves as a director of
MetaSolv Software, Inc., a telecommunications software company, as well as
several privately held companies. He joined Austin Ventures from McKinsey & Co.,
where he served clients in the United States and Europe. He received his
Bachelor of Arts degree with honors from Trinity University and his Master of
Business Administration degree from the Stanford Graduate School of Business.

                                       24
<PAGE>

                                    PART II.

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

   Our common stock is traded 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, for the periods indicated, the high and low sale price per share of
the common stock on the Nasdaq National Market in each of the last eight fiscal
quarters, as adjusted for the two-for-one forward split of our common stock paid
on December 1, 1999 and for the three-for-one forward split of our common stock
paid on April 14, 2000.

<TABLE>
<CAPTION>
                                                                                              High           Low
                                                                                            ----------    ----------
<S>                                                                                         <C>           <C>
         Year Ended December 31, 2000:
             Fourth Quarter............................................................       $ 34.38       $ 15.75
             Third Quarter.............................................................         52.25         27.00
             Second Quarter............................................................         66.98         25.50
             First Quarter.............................................................         99.00         51.67
         Year Ended December 31, 1999:
             Fourth Quarter............................................................         54.58         14.88
             Third Quarter.............................................................         15.08          8.73
             Second Quarter............................................................         17.52          7.10
             First Quarter (from February 19, 1999)....................................         14.67          6.64
</TABLE>

   As of February 28, 2001, there were approximately 1,181 holders of record of
our common stock.

   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.

   On January 18, 2000, and in connection with our acquisition of Engine 5, Ltd.
("Engine 5"), we issued 248,043 shares of our common stock to the holders of
Engine 5 securities. In exchange for these shares and approximately $4.9 million
in cash, we acquired all of the issued and outstanding securities of Engine 5.
During 2000, we issued an additional 33,183 shares of our common stock to the
holders of Engine 5 securities as contingent consideration for the acquisition.
All of these shares were issued pursuant to the exemption provided by Section
4(2) of the Securities Act of 1933. Among the facts relied upon to determine
that this exemption was available was the existence of less than 35
non-accredited investors that were to receive shares of our common stock in that
transaction.

   On February 15, 2000 and in connection with our acquisition of DataSage, Inc.
("DataSage"), we issued 9,458,061 shares of our common stock to the holders of
DataSage securities. In exchange for these shares, we acquired all of the issued
and outstanding securities of DataSage. These shares were issued pursuant to the
exemption provided by Section 4(2) of the Securities Act of 1933. Among the
facts relied upon to determine that this exemption was available was the
existence of less than 35 non-accredited investors that were to receive shares
of our common stock in that transaction.

                                       25
<PAGE>

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included elsewhere in this Report on Form
10-K. Consolidated statement of operations data for the year ended December 31,
1996 includes results of operations for the period from December 19, 1995, the
date of our inception, through December 31, 1996. The consolidated statement of
operations data for the years ended December 31, 1998, 1999 and 2000 and the
consolidated balance sheet data at December 31, 1999 and 2000 are derived from
audited consolidated financial statements included elsewhere in this Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1996 and 1997 and the consolidated balance sheet data at December
31, 1996, 1997 and 1998 are derived from audited consolidated financial
statements not included in this Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                          -------------------------------------------------------------
                                                          1996         1997         1998        1999 (1)       2000 (2)
                                                         -----       -------      -------     -----------    -----------
                                                                      (in thousands, except per share data)
Consolidated Statements of Operations Data:
<S>                                                    <C>           <C>          <C>          <C>             <C>
Revenue:
     Product license...............................     $    ---     $  1,943     $   8,584     $  46,292      $  216,257
     Services......................................          ---        1,081         7,621        42,893         150,404
                                                        --------     --------     ---------      --------      ----------
             Total revenue.........................          ---        3,024        16,205        89,185         366,661
Cost of revenue:
     Product license...............................          ---           37           964         3,306           7,611
     Services......................................          ---        1,438         9,340        33,488         111,410
                                                        --------     --------     ---------      --------      ----------
             Total cost of revenue.................          ---        1,475        10,304        36,794         119,021
                                                        --------     --------     ---------      --------      ----------
Gross profit.......................................          ---        1,549         5,901        52,391         247,640
Operating expenses:
     Research and development......................          892        2,895         6,962        16,447          58,324
     Sales and marketing...........................          428        4,964        15,880        49,559         175,020
     General and administrative....................          503        1,333         4,864         9,494          38,625
     Purchased in-process research and
       development, acquisition-related and other
       charges.....................................        1,865          ---         2,089        15,641         169,885
     Amortization of deferred stock
       compensation................................          ---          ---         2,475         5,654          33,863
     Amortization of intangibles...................          ---          ---           ---         1,796         328,691
                                                        --------     --------     ---------      --------      ----------
             Total operating expenses..............        3,688        9,192        32,270        98,591         804,408
                                                        --------     --------     ---------      --------      ----------
Loss from operations...............................       (3,688)      (7,643)     (26,369)       (46,200)      (556,768)
Other income, net..................................           62          169           172         3,723          25,992
                                                        --------     --------     ---------      --------      ----------
Loss before income taxes...........................       (3,626)      (7,474)     (26,197)       (42,477)      (530,776)
Provision for income taxes.........................          ---          ---           ---           ---           1,449
                                                        --------     --------     ---------      --------      ----------
Net loss...........................................     $ (3,626)    $ (7,474)    $(26,197)     $ (42,477)     $(532,225)
                                                        ========     ========     =========     =========      ==========
Basic net loss per share...........................     $  (0.96)    $  (0.70)    $  (1.53)     $   (0.31)     $   (2.59)
                                                        ========     ========     =========     =========      ==========
Shares used in computing basic net loss per
   share...........................................        3,780       10,728        17,094       137,253         205,885
Pro forma basic net loss per share.................                                             $   (0.28)
                                                                                               ==========
Shares used in computing pro forma net loss per
   share...........................................                                               150,912
</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                               As of December 31,
                                                        ----------------------------------------------------------------
                                                         1996         1997          1998         1999 (1)      2000 (2)
                                                       -------      -------      ----------     ----------    -----------
Consolidated Balance Sheet Data:                                                 (in thousands)
<S>                                                    <C>          <C>          <C>             <C>          <C>
Cash and cash equivalents                               $  1,863     $  6,865     $  12,242       $391,278     $  435,481
Working capital                                            1,583        4,255         3,757        375,211        389,831
Total assets                                               2,229        8,499        21,349        498,166      2,190,954
Long-term debt and capital lease obligation,
  less current portion                                       198          833           758            ---            782
Redeemable convertible preferred stock                     3,458       13,458        36,258            ---            ---
Total stockholders' equity (deficit)                     (1,770)      (9,248)      (30,767)        437,059      2,024,513
</TABLE>

--------
(1)      Reflects the acquisition of Diffusion, Inc. on June 30, 1999.
(2)      Reflects the acquisitions of Engine 5, Ltd., DataSage, Inc. and
         OnDisplay, Inc. on January 18, 2000, February 15, 2000 and July 5,
         2000, respectively.

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

   The statements contained in this Report on Form 10-K that are not purely
historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
forward-looking statements. All forward-looking statements included in this
Report on Form 10-K are based upon information available to the Company as of
the date hereof and we are under no duty to update any of the forward-looking
statements after the date of this Report to conform these statements to actual
results. See "Risk Factors that May Affect Future Results," and the factors and
risks discussed in our Registration Statement filed on Form S-1 on December 9,
1999 (File No. 333-91085) with the Securities and Exchange Commission.

Overview

   We are a leading global provider of customer-driven Internet application
software products and services. Our e-business solutions are designed to enable
businesses to build successful and sustainable online businesses that are
customer-managed. Our customer-driven Internet applications and solutions allow
businesses to create and manage Internet business channels that are designed to
attract, engage and retain their customers, partners, and suppliers online.
Using our products' content, integration, and analysis capabilities, our clients
deploy applications, which are focused on personalized and mass-customized
interaction across multiple touchpoints and communication channels. We were
founded in December 1995. To date, we have developed and released several
versions of our product and have sold our products and services to approximately
1,250 clients. We market and sell our products worldwide primarily through our
direct sales force but also market through third-party providers.

   We derive our revenue from the sale of software product licenses and from
professional consulting, maintenance and support services. Product license
revenue is recognized when persuasive evidence of an agreement exists, the
product has been delivered, we have no remaining significant obligations with
regard to implementation, the license fee is fixed or determinable and
collection of the fee is probable. Product license revenue for arrangements to
deliver unspecified additional software products in the future is recognized
ratably over the term of the arrangement, beginning with the delivery of the
first product. Services revenue consists of fees from professional services and
from maintenance and telephone support. Professional services include
integration of software, application development, training and software
installation. We bill professional services fees on a time-and-materials basis.
We recognize professional services fees billed on a time-and-materials basis as
the services are performed. Our clients typically purchase maintenance
agreements annually, and we price maintenance agreements based on a percentage
of our current product list price. We price telephone support based on differing
levels of support. Clients purchasing maintenance agreements receive unspecified
product upgrades and electronic, Web-based technical support, while purchasers
of support contracts receive additional telephone support. We recognize revenue
from maintenance and support agreements ratably over the

                                       27
<PAGE>

term of the agreement, which is typically one year.

   Cost of revenue consists of costs to manufacture, package and distribute our
products and related documentation, as well as personnel and other expenses
related to providing professional services. Since our inception, we have
incurred substantial costs to develop our technology and products, to recruit
and train personnel for our engineering, sales and marketing and professional
services departments, and to establish an administrative organization. As a
result, we have incurred significant losses since inception and, as of December
31, 2000, we had an accumulated deficit of approximately $612.0 million. We
believe our success depends on further increasing our client base and on
continued growth in the e-business solutions market. Accordingly, we intend to
continue to invest in sales, marketing, professional services, research and
development and in our operational and financial systems as necessary.
Furthermore, we expect to continue to incur operating losses, excluding
amortization of intangibles and stock-based compensation and restructuring
charges, at least through the first quarter of 2001, and our expected increase
in operating expenses will require significant increases in revenues before we
become profitable.

   We had 2,330 full-time employees at December 31, 2000, up from 757 at
December 31, 1999. This rapid growth places a significant demand on our
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely basis. In addition, we expect that future expansion will continue to
challenge our ability to hire, train, motivate, and manage our employees.
Competition is intense for highly qualified technical, sales and marketing and
management personnel. If our total revenue does not increase relative to our
operating expenses, our management systems do not expand to meet increasing
demands, we fail to attract, assimilate and retain qualified personnel, or our
management otherwise fails to manage our expansion effectively, there would be a
material adverse effect on our business, operating results and financial
condition.

Business Combinations

   Effective January 18, 2000, we acquired all of the outstanding stock and
assumed all outstanding stock options of Engine 5, Ltd. ("Engine 5"), a
developer of enterprise-wide Java server technology, in exchange for 248,043
shares of our common stock and approximately $4.9 million in cash. The total
cost of the acquisition, including transaction costs of $400,000, was
approximately $20.0 million. The acquisition was accounted for as a purchase
business combination. Accordingly, the acquired net liabilities were recorded at
their estimated fair values at the effective date of the acquisition and the
results of operations of Engine 5 have been included with those of the Company
for the periods subsequent to the date of the acquisition.

   Additionally, contingent consideration of approximately 88,461 shares of our
common stock and approximately $4.3 million in cash will be based upon defined
future employment requirements met through the first quarter of fiscal year
2002. The contingent consideration related to the Engine 5 acquisition is not
included in the total purchase price, above, but will be expensed when the
future employment requirements have been met; such amount totaled $3.8 million
in 2000.

   Effective February 15, 2000, we acquired all of the outstanding stock and
assumed all outstanding stock options of DataSage, Inc. ("DataSage"), a leading
provider of e-marketing and personalization applications that help organizations
create a comprehensive single enterprise-wide view of their customers, in
exchange for 9,458,061 shares of our common stock. The total cost of the
acquisition, including transaction costs of $1.1 million, was approximately
$586.6 million. The acquisition was accounted for as a purchase business
combination. Accordingly, the acquired net assets were recorded at their
estimated fair values at the effective date of the acquisition and the results
of operations of DataSage have been included with those of the Company for the
periods subsequent to the date of the acquisition.

   Effective July 5, 2000, we acquired all of the outstanding stock and assumed
all outstanding stock options of OnDisplay, Inc. ("OnDisplay"), a leading
provider of e-business infrastructure software for powering e-business portals
and e-marketplaces, in exchange for 42,016,975 shares of Vignette common stock.
The total cost of the acquisition, including transaction costs of $14.0 million,
was approximately $1.5 billion. The acquisition was accounted for as a purchase
business combination. Accordingly, the acquired net assets were recorded at
their estimated fair values at the effective date of the acquisition and the
results of OnDisplay have been included with those of the Company for the
periods subsequent to the date of the acquisition.

                                       28
<PAGE>

   In connection with our respective acquisitions of Engine 5, DataSage and
OnDisplay, we incurred one-time acquisition costs and integration-related
charges, which included costs associated with product integration, cross
training, and other merger-related costs. Additionally, a portion of the
OnDisplay and DataSage purchase price was allocated to in-process research and
development based upon an independent third-party appraisal and expensed upon
the consummation of the transactions. These related acquisition, integration and
in-process research and development charges totaled approximately $169.9 million
during fiscal year 2000.

   Intangible assets, net of accumulated amortization, represented 68% and 4% of
total assets at December 31, 2000 and 1999, respectively.

Accounting Reclassification

   Effective December 31, 2000, we report as deferred revenue only amounts
received from customers for which revenue has not been recognized, and we report
as accounts receivable only amounts due from customers for which revenue has
been recognized. Deferred revenue and accounts receivable balances for all
previous periods have been reclassified to conform to the current year
presentation. This reclassification reduced our deferred revenue and accounts
receivable balances by approximately $16.6 million and $28.6 million at December
31, 1999 and 2000, respectively.

Subsequent Events

   In January 2001, we initiated a restructuring plan that will allow us to
streamline our operations and reduce our cost structure. As part of this
restructuring plan, which primarily consists of a workforce reduction and the
consolidation of certain facilities, we expect to incur restructuring charges
totaling approximately $45.0 to $55.0 million in 2001.

   In February 2001, we issued approximately 2.4 million restricted shares to
certain employees who elected to participate in the Company's stock option
exchange program, a program that was designed to provide our employees with a
long-term incentive for maximizing shareholder value. As a result of this
transaction, we will record deferred compensation for the deemed market value of
the restricted shares issued as of the grant date in the amount of approximately
$14.8 million. Beginning on or about May 15, 2001, we will amortize this amount
to expense over the one-year vesting period.

   Also under the same option exchange program, we canceled approximately 19.2
million stock options previously granted to those employees who voluntarily
participated in the program in exchange for new options that will be granted on
or after August 15, 2001. The number of new options to be granted will be
dependent on the closing price of our common stock on the grant date and will
range from 52.5% to 87.5% of the total options canceled. The exercise price of
these new options will be equal to the fair market value of our common stock on
the grant date. The program has been organized to comply with FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, and is not expected to result in any additional compensation
charges or variable plan accounting.

                                       29
<PAGE>

Results of Operations

   The following table sets forth for the periods indicated the percentage of
revenues represented by certain line items in our consolidated statements of
operations.

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                            ------------------------------------------
                                                                                1998          1999           2000
                                                                            ----------     ----------     ------------
<S>                                                                         <C>            <C>            <C>
Consolidated Statements of Operations Data:
Revenue:
     Product license....................................................             53%            52%           59%
     Services...........................................................             47             48            41
                                                                            -----------        -------         -----
             Total revenue..............................................            100            100           100

Cost of revenue:
     Product license....................................................              6              4             2
     Services...........................................................             58             38            30
                                                                            -----------        -------         -----
             Total cost of revenue......................................             64             42            32
                                                                            -----------        -------         -----
Gross profit..........................................................               36             58            68
Operating expenses:
     Research and development...........................................             43             18            16
     Sales and marketing................................................             98             56            48
     General and administrative.........................................             30             11            11
     Purchased in-process research and development,
       acquisition-related and other charges............................             13             18            46
     Amortization of deferred stock compensation........................             15              6             9
     Amortization of intangibles........................................             --              2            90
                                                                            -----------        -------         -----
             Total operating expenses...................................            199            111           220
                                                                            -----------        -------         -----
Loss from operations..................................................             (163)           (53)         (152)
Other income, net.....................................................                1              4             7
                                                                            -----------        -------         -----
Loss before income taxes..............................................             (162)           (49)         (145)
Provision for income taxes............................................               --             --            --
                                                                            -----------        -------         -----
Net loss..............................................................             (162)%          (49)%        (145)%
                                                                            ===========        =======         =====
</TABLE>

  Revenue

   Total revenue increased to $366.7 million in 2000 from $89.2 million in 1999
and from $16.2 million in 1998. This increase was attributable to an increase in
our client base, which grew from 193 at the end of 1998 to 518 at the end of
1999 and to 1,250 at the end of 2000, an increase in the average size of new
client orders and follow-on orders from existing clients. Although our total
revenue has increased in recent periods, we cannot be certain that total revenue
will grow in future periods or that it will grow at similar rates as in the
past.

   Product License. Product license revenue increased to $216.3 million in 2000
from $46.3 million in 1999 and from $8.6 million in 1998, representing 59%, 52%
and 53% of total revenue, respectively. The increase in product license revenue
in absolute dollars was due to increases in the number of clients and the
average size of new client orders resulting from growing market acceptance of
our product lines over prior periods, increased follow-on orders from existing
clients and orders influenced and implemented by third-party integration
partners.

   Services. Services revenue increased to $150.4 million in 2000 from $42.9
million in 1999 and from $7.6 million in 1998, representing 41%, 48% and 47% of
total revenue, respectively. Services revenue from professional services fees
continues to be the primary component of total services revenue, representing
31% of total revenues in 2000 as compared to 39% in 1999 and 38% in 1998. The
increase in all types of services revenue in absolute dollars was due primarily
to an increase in the number of clients and the sale of product licenses, which
generally include or lead to contracts to perform professional services and
training and purchases of software maintenance and technical support service
agreements.

   We believe that growth in our product license sales depends on our ability to
provide our clients with support, training,

                                       30
<PAGE>

consulting and implementation services and educating third-party resellers on
how to implement our products. As a result, we continued to expand our
professional services organization throughout 2000 and intend to continue
expanding our professional services organization for the foreseeable future.

   Cost of Revenue

   Product License. Product license costs consist of expenses we incur to
manufacture, package and distribute our products and related documentation and
costs of licensing third-party software incorporated into our products. Product
license costs increased to $7.6 million in 2000 from $3.3 million in 1999 and
from $1.0 million in 1998, representing 4%, 7% and 11% of product license
revenue, respectively. The increase in absolute dollars in each period was
principally a result of both product license sales growth and royalties paid to
third-party vendors for technology embedded in our product offerings. Product
license costs were less as a percentage of product license revenue in 2000 and
1999, as compared to 1998, primarily because significant product license revenue
growth outpaced increases in product license costs in addition to a higher
average sales price in 2000 relative to 1998 and 1999. We expect product license
costs to increase in the future in absolute dollar terms due to additional
clients licensing our products and the acquisition of OEM licenses to
third-party technology that we may choose to embed in our product offerings.

   Services. Services costs include salary expense and other related costs for
our professional service, maintenance and customer support staffs, as well as
third-party contractor expenses. Services costs increased to $111.4 million in
2000 from $33.5 million in 1999 and from $9.3 million in 1998, representing 74%,
78% and 123% of services revenue, respectively. The increase in absolute dollars
resulted from the rapid expansion of our services organization. The overall
improvement in services gross profit margin reflects increased leverage from the
productivity of support, training, consulting and implementation activities. We
expect services costs to increase in the future in absolute dollars to the
extent that services revenues increase. We expect services costs as a percentage
of services revenue to continue to decrease over time. Services costs as a
percentage of services revenue can be expected to vary significantly from period
to period depending on the mix of services we provide, whether such services are
provided by us or third-party contractors, and overall utilization rates.

   Professional services-related costs increased to $104.3 million in 2000 from
$31.5 million in 1999 and from $8.8 million in 1998, representing 91%, 92% and
143% of professional services-related revenue. Maintenance and support-related
costs increased to $7.1 million in 2000 from $2.0 million in 1999 and from
$510,000 in 1998, representing 20%, 23% and 35% of maintenance and
support-related revenue, respectively.

   Operating Expenses

   Research and Development. Research and development expenses consist primarily
of personnel costs to support product development. Research and development
expenses increased to $58.3 million in 2000 from $16.4 million in 1999 and from
$7.0 million in 1998, representing 16%, 18% and 43% of total revenue,
respectively. The increase in absolute dollars was due to the increase in
engineering personnel and to the expansion of our product offerings. The
decrease in research and development as a percentage of total revenue resulted
primarily because significant revenue growth outpaced increases in research and
development expenditures. We believe that continued investment in research and
development is critical to maintaining a competitive advantage, and, as a
result, we expect research and development expenses to increase in absolute
dollars in future periods. Software development costs that were eligible for
capitalization in accordance with Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed ("Statement 86") totaled $1.9 million, $550,000 and $0 in
2000, 1999 and 1998, respectively.

   Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and tradeshows.
Sales and marketing expenses increased to $175.0 million in 2000 from $49.6
million in 1999 and from $15.9 million in 1998, representing 48%, 56% and 98% of
total revenue, respectively. Sales and marketing expenses increased in absolute
dollars due to a significant increase in sales and marketing personnel,
increased marketing program expenditures as well as higher commissions expense
resulting from the absolute dollar growth in our customer bookings. The decrease
in sales and marketing expenses as a percentage of total revenue resulted
primarily because significant revenue growth outpaced increases in sales and
marketing expenditures. We believe these expenses will continue to increase in
absolute dollars in future periods as we expect to continue to expand our sales
and marketing efforts to promote further growth.

                                       31
<PAGE>

We also anticipate that sales and marketing expenses may fluctuate as a
percentage of total revenue from period to period as new sales personnel are
hired and begin to achieve productivity and achieve commission accelerators as
well as the timing of new product releases.

   General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations, human resources,
finance, accounting, information technology and legal employees and certain
facilities-related expenses. General and administrative expenses increased to
$38.6 million in 2000 from $9.5 million in 1999 and from $4.9 million in 1998,
representing 11%, 11% and 30% of total revenue, respectively. The increase in
absolute dollars for these periods was due to increased personnel, information
technology and facility expenses necessary to support our expanding operations.
General and administrative expenses decreased as a percentage of total revenue
primarily because significant revenue growth outpaced increases in general and
administrative expenditures. We believe general and administrative expenses will
increase in absolute dollars as we expect to increase staffing and
infrastructure expenses to support our continued growth.

   Purchased In-Process Research and Development, Acquisition-Related and Other
Charges. In connection with our acquisitions of OnDisplay in July 2000, DataSage
in February 2000, Engine 5 in January 2000 and Diffusion in June 1999, we
incurred one-time acquisition costs and integration-related charges, which
include costs associated with product integration, cross training, and other
merger-related costs. Additionally, a portion of the Diffusion, DataSage and
OnDisplay purchase prices were allocated to in-process research and development,
or IPR&D, based upon an independent third-party appraisal. The resulting IPR&D
was expensed at the time of purchase because technological feasibility had not
been established and no future alternative uses existed. These related charges
totaled $169.9 million in 2000 and $15.6 million in 1999.

   The independent third-party IPR&D valuations utilized a modified discounted
cash flow model. The cash flow projections for revenue were based on the
projected incremental increase in revenue that was expected to be received from
the completed acquired in-process research and development. Revenue was assumed
to continue for a period of five years, including a residual period beyond the
five-year analysis. Estimated operating expenses were deducted from estimated
revenue to arrive at estimated pre-tax cash flows. Projected operating expenses
included cost of goods sold, selling general and administrative expense, and
research and development expense. Operating expenses were estimated as a percent
of revenue based on the respective acquired company's historical results.
Projected results were also used in combination with past operating results and
industry averages. Capital charges, or cash flow attributable to other assets
such as fixed assets, working capital, trademark and assembled workforce, were
deducted from pre-tax operating income to isolate the cash flow attributable
solely to in-process research and development. Applicable income taxes were then
deducted to arrive at after-tax cash flows. The after-tax cash flow projections
were discounted using a risk-adjusted rate of return, ranging between 21% and
23%. A tax amortization benefit was added to the discounted cash flows. In using
the discounted model, the costs to complete the respective in-process technology
were excluded from the research and development expense, and the percentage
completion of the in-process research and development was reflected in each
year's projected cash flow.

   The development of these technologies remains a significant risk due to the
remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products and competitive threats. The
nature of the efforts to develop the acquired technologies into commercially
viable products consists principally of planning, designing and testing
activities necessary to determine that the products can meet market
expectations, including functionality and technical requirements. Failure to
bring these products to market in a timely manner could result in a loss of
market share or a lost opportunity to capitalize on emerging markets and could
have a material adverse impact on our business and operating results.

                                       32
<PAGE>

   The following table summarizes the significant assumptions underlying the
valuations for our purchase acquisitions completed in 2000 and 1999 (in
thousands):

<TABLE>
<CAPTION>
                                                                                                         Estimated Cost to
                                                                                                             Complete
                                                                                  Estimated stage        Technology at Time
                                           Acquisition                             of Completion           of Acquisition
                                           -----------                             -------------           --------------
<S>                                                                               <C>                    <C>
    Fiscal 2000:
         OnDisplay............................................................         65%                    $ 2,880
         DataSage.............................................................         63%                    $   811
         Engine 5.............................................................         --%                    $    --

     Fiscal 1999:
         Diffusion............................................................         88%                    $   850
</TABLE>


   Regarding our purchase acquisitions in 2000 and 1999, actual results to date
have been consistent, in all material respects, with our assumptions at the time
of the acquisitions. The assumptions primarily consist of an expected completion
date for the in-process projects, estimated costs to complete the projects, and
revenue and expense projections upon the introduction of the products into the
market. Shipment volumes of products from the above-acquired technologies are
not material to our overall financial results at the present time. Therefore, it
is difficult to determine the accuracy of overall revenue projections early in
the technology or product life cycle. Failure to achieve the expected levels of
revenue and net income from these products will negatively impact the return on
investment expected at the time that the acquisitions were completed.

   In May 1998, we acquired from RandomNoise, Inc. certain in-process research
and development efforts, a developed product and an insignificant amount of
equipment in exchange for $2.1 million, consisting of $100,000 in cash and
2,254,980 shares of our Series G Preferred Stock valued at $2.0 million.
Substantially all of the purchase price was allocated to in-process research and
development and expensed upon the consummation of the transaction. These charges
totaled $2.1 million in 1998.

   Amortization of Deferred Stock Compensation. For the stock options we award
to employees from our stock option plans, we have recorded deferred compensation
for the difference between the exercise price of certain stock option grants and
the deemed market value of our common stock at the time of such grants. For the
stock options we assumed in connection with our acquisition of OnDisplay, we
have recorded deferred compensation for the difference between the exercise
price of the unvested stock options and the deemed fair value of our common
stock at the acquisition date. We are amortizing this amount over the vesting
periods of the applicable options, resulting in amortization expense of $33.9
million, $5.7 million and $2.5 million in 2000, 1999 and 1998, respectively.

   Amortization of Intangibles. Intangible amortization expense was $328.7
million, $1.8 million and $0 in 2000, 1999 and 1998, respectively. Amortization
of intangible assets relates primarily to our acquisitions of Diffusion, Engine
5, DataSage and OnDisplay. See Note 2 and Note 3 of Notes to Consolidated
Financial Statements.

   We expect to adjust the carrying amount of our intangible assets due to our
recent restructuring efforts, resulting in anticipated restructuring charges
totaling $6.2 million during the first quarter of fiscal year 2001.

   Other Income, Net

   Other income, net consists primarily of interest income and expense. Other
income, net increased to $26.0 million in 2000 from $3.7 million in 1999 and
from $172,000 in 1998. The significant increase in 1999 and 2000 was due to
interest income earned on higher cash balances, cash equivalents and short-term
investments resulting from both our secondary and initial public offerings in
December 1999 and February 1999, respectively, as well as cash acquired through
our purchases of businesses.

                                       33
<PAGE>

Provision for Income Taxes

   The Company has incurred income tax expense of approximately $1.4 million, $0
and $0 in 2000, 1999 and 1998, respectively. The income tax expense consists
primarily of foreign withholding taxes on income generated in non-US tax
jurisdictions.

   We have provided a full valuation allowance on our net deferred tax assets,
which include net operating loss and research and development 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.

                                       34
<PAGE>

Quarterly Results

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

<TABLE>
<CAPTION>
                                                                                Three Months Ended
                                              ------------------------------------------------------------------------------------
                                               March 31,   June 30, Sept 30,  Dec 31,   March 31,  June 30,   Sept 30,    Dec 31,
                                                 1999        1999     1999      1999      2000       2000       2000        2000
                                              ----------  ---------  -------  -------  ---------- ---------- ----------  ---------
                                                            (in thousands, except share data and percentages)
<S>                                           <C>        <C>        <C>       <C>       <C>        <C>       <C>        <C>
Consolidated Statements of Operations Data:
Revenue:
  Product license                             $ 4,623   $  7,575   $12,364   $21,730   $ 29,148   $ 42,173   $  66,194   $  78,742
  Services                                      4,509      7,298    11,874    19,212     26,081     34,958      44,193      45,172
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

   Total Revenue                                9,132     14,873    24,238    40,942     55,229     77,131     110,387     123,914
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Cost of revenue:
  Product license                                 419        734       777     1,376      1,361      2,372       2,365       1,513
  Services                                      4,469      5,765     9,734    13,520     19,689     25,724      33,249      32,748
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

    Total cost of revenue                       4,888      6,499    10,511    14,896     21,050     28,096      35,614      34,261
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Gross Profit                                    4,244      8,374    13,727    26,046     34,179     49,035      74,773      89,653
                                              -------   --------   -------   -------   --------   --------   ---------   ---------


Operating expenses:
  Research and development                      2,725      2,992     4,514     6,216      7,534     10,386      17,734      22,670
  Sales and marketing                           6,553     10,027    12,239    20,740     27,072     34,661      53,091      60,196
  General and administrative                    1,611      1,738     2,637     3,508      4,890      7,533      13,097      13,105
  Purchased in-process research and
    development, acquisition-related,
    and other charges                              --     14,690       493       458     56,475      3,135     107,279       2,996
  Amortization of deferred stock
    compensation                                1,669      1,288     1,161     1,536      1,681      1,320      22,366       8,496
  Amortization of intangibles                      --         --       898       898     26,081     48,503     126,826     127,281
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
  Total operating expenses                     12,558     30,735    21,942    33,356    123,733    105,538     340,393     234,744
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Loss from operations                           (8,314)   (22,361)   (8,215)   (7,310)   (89,554)   (56,503)   (265,620)   (145,091)
Other income, net                                 376        834       829     1,684      6,037      5,814       6,741       7,400
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Loss before provision for income taxes         (7,938)   (21,527)   (7,386)   (5,626)   (83,517)   (50,689)   (258,879)   (137,691)
Provision for income taxes                         --         --        --        --         --         --         440       1,009
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
Net loss                                      $(7,938)  $(21,527)  $(7,386)  $(5,626)  $(83,517)  $(50,689)  $(259,319)  $(138,700)
                                              =======   ========   =======   =======   ========   ========   =========   =========
Basic net loss per share                      $ (0.06)  $  (0.14)  $ (0.05)  $ (0.03)  $  (0.47)  $  (0.27)  $   (1.15)  $   (0.60)
                                              =======   ========   =======   =======   ========   ========   =========   =========

As a Percentage of Total  Revenue:
Revenue:
  Product license                                  51%        51%       51%       53%        53%        55%         60%         64%
  Services                                         49         49        49        47         47         45          40          36
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
    Total Revenue                                 100        100       100       100        100        100         100         100
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Cost of revenue:
  Product license                                   5          5         3         3          2          3           2           2
  Services                                         49         39        40        33         36         33          30          26
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
    Total cost of revenue                          54         44        43        36         38         36          32          28
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Gross Profit                                       46         56        57        64         62         64          68          72
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Operating expenses:
  Research and development                         30         20        19        15         14         13          16          18
  Sales and marketing                              71         67        50        51         49         45          48          49
  General and administrative                       18         11        11         9          9         10          12          11
  Purchased in-process research and
    development, acquisition-related,
    and other charges                              --         99         2         1        102          4          97           2
  Amortization of deferred stock
    compensation                                   18          9         5         4          3          2          20           7
  Amortization of intangibles                      --         --         4         2         47         63         115         102
                                              --------  --------   -------   -------   --------   --------   ---------   ---------
 Total operating expenses                         137        206        91        82        224        137         308         189
                                              -------   --------   -------   -------   --------   --------   ---------   ---------

Loss from operations                              (91)      (150)      (34)      (18)      (162)       (73)       (240)       (117)
Other income, net                                   4          5         4         4         11          7           6           6
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
Loss before for income taxes                      (87)      (145)      (30)      (14)      (151)       (66)       (234)       (111)
Provision for income taxes                         --         --        --        --         --         --          --           1
                                              -------   --------   -------   -------   --------   --------   ---------   ---------
Net loss                                          (87)%     (145)%     (30)%     (14)%     (151)%      (66)%      (234)%      (112)%
                                              =======   ========   =======   =======   ========   ========   =========   =========
</TABLE>

                                       35
<PAGE>

  As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our forecast for
expenses in part on future revenue projections. Most 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 forecast accurately 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 client 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;

     .    The timing of customer orders and product implementations;

     .    Unexpected delays in introducing new products and services;

     .    Increased expenses, whether related to sales and marketing, product
          development or administration;

     .    Changes in the rapidly evolving market for e-business solutions;

     .    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; and

     .    Costs related to possible acquisitions of technology or businesses.

  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 plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our business, operating results or financial condition could be
materially adversely affected and net losses in a given quarter would be even
greater than expected.

  We believe that our quarterly operating results may experience seasonal
fluctuations. For instance, quarterly results may fluctuate based on client
calendar year budgeting cycles, slow summer purchasing patterns in Europe and
our compensation policies that tend to compensate sales personnel, typically in
the latter half of the year, for achieving annual quotas. Another example is the
recent uncertainty surrounding the overall information technology spending
environment and customer hesitancy to make large capital expenditures.

Net Operating Losses and Tax Credit Carryforwards

  As of December 31, 2000, we had federal net operating loss and research and
development carryforwards of approximately $391.0 million and $4.7 million,
respectively. The net operating loss and credit carryforwards will expire at
various dates, beginning 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and
tax credits in the event of an "ownership change" of a corporation. Net
operating loss carryforwards of approximately $105.4 million and tax credit
carryforwards of $2.0 million at December 31, 2000 were incurred by Diffusion,
Engine 5, DataSage and OnDisplay prior to being acquired by us and will be
subject to annual limitation. The annual limitation may result in the
expiration of net operating losses and tax credits before utilization.

                                       36
<PAGE>

  We have provided a full valuation allowance on our net deferred tax assets,
which include net operating loss and research and development 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, 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. See Note 6 of Notes to Consolidated Financial Statements.

  As of December 31, 2000, the valuation allowance includes approximately $27.5
million related to the acquisition of Diffusion, Engine 5, DataSage and
OnDisplay net deferred tax assets. The initial recognition of these acquired
deferred tax asset items will first reduce goodwill, then other non-current
intangible assets of the acquired entity. Approximately $103.1 million of the
valuation allowance relates to tax benefits for stock option deductions included
in the net operating loss carryforward, which when realized, will be allocated
directly to contributed capital to the extent the benefits exceed amounts
attributable to deferred compensation expense.

Liquidity and Capital Resources

  Total cash, cash equivalents and short-term investments totaled $447.8 million
at December 31, 2000, up from $402.2 million at December 31, 1999. Net cash used
in operating activities were $13.0 million, $1.5 million and $17.2 million in
2000, 1999, and 1998, respectively. The increase in operating cash outflows from
1999 to 2000 was due primarily to the integration activities resulting from the
Engine 5, DataSage and OnDisplay acquisitions in 2000.

  Net cash inflows from investing activities were $23.1 million in 2000, as
compared to net cash outflows of $50.8 million and $2.2 million in 1999 and
1998, respectively. Our investing activities have consisted largely of capital
expenditures totaling $53.8 million, $11.9 million and $2.2 million in 2000,
1999 and 1998, respectively, to acquire property and equipment, composed
primarily of computer hardware and software and leasehold improvements for
facilities expansions, for our growing employee base. In addition, during 2000
our investing activities included purchases of equity securities totaling $31.0
million for strategic investments in companies as compared to $27.0 million and
$0 in 1999 and 1998, respectively. Our investing activities have also included
purchases of short-term investments totaling $1.5 million, $11.0 million and $0
in 2000, 1999 and 1998, respectively. Our investing cash outflows were offset by
net cash acquired through purchases of businesses of $123.4 million, $56,000 and
$0 during 2000, 1999 and 1998, respectively. We expect that our investing
activities will continue to increase in the foreseeable future as we support our
continued growth.

  Net cash provided by financing activities was $34.0 million, $431.3 million
and $24.8 million in 2000, 1999 and 1998, respectively. Our financing activities
during 2000 resulted primarily from proceeds received from the exercise of stock
options and purchase of employee stock purchase plan shares. Our financing
activities in 1999 resulted primarily from our initial and secondary public
offerings.

  During 2000, we continued to expand our product offerings through the
acquisition and integration of complementary businesses, namely Engine 5,
DataSage and OnDisplay. In January 2000, we acquired 100 percent of the
outstanding stock and assumed all outstanding stock options of Engine 5 in
exchange for $4.9 million in cash and approximately 248,043 shares of Vignette
common stock. In February 2000, we acquired 100 percent of the outstanding stock
and assumed all outstanding stock options of DataSage in exchange for
approximately 9.5 million shares of Vignette common stock. In July 2000, we
acquired 100 percent of the outstanding stock and assumed all outstanding stock
options of OnDisplay in exchange for approximately 42.0 million shares of
Vignette common stock.

  Our long-term investments, consisting primarily of redeemable convertible
preferred stock in privately held companies, totaled $84.3 million and $27.0
million at December 31, 2000 and 1999, respectively. We classify these
investments as available-for-sale and have recorded a cumulative net unrealized
gain/(loss) related to these securities of $12.1 million and $0 at December 31,
2000 and 1999, respectively. These purchases were made to enable us to invest in
emerging technology companies strategic to our software business. Only one of
the investments at December 31, 2000 is publicly traded. There is no established
market for the remaining equity investments and, therefore, they are valued
based on the most recent round of financing involving new non-strategic
investors as well as estimates made by us. The future value of these investments
may be affected by a number of factors including general economic conditions,
and the ability of the companies to secure additional funding and execute on
their respective business plans. We anticipate that we will continue to invest
in e-commerce companies as our product offerings expand; however, we do not
expect the impact of this activity to be material to our liquidity position.

  In addition to our strategic investments, $14.0 million and $0 of our
long-term investments was pledged as collateral for certain lease obligations at
December 31, 2000 and 1999, respectively. There are certain time restrictions
placed on these instruments that we are obligated to meet in order to liquidate
the principal of these investments. We anticipate that we will occupy more
leased property in the future that will require similar pledged securities;
however, we do not expect the impact of this activity to be material to our
liquidity position.

                                       37
<PAGE>

  Based on our current operating plan, we believe that our cash on hand, cash
equivalents and short-term investments will be sufficient to meet our working
capital, capital expenditure and investment requirements for the foreseeable
future. We may require additional funds for other purposes and may seek to raise
such additional funds through public and private equity financings from other
sources. 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.

Recent Accounting Pronouncements

  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133 ("Statement
137"), which defers for one year the effective date of Statement 133. As a
result of the deferral provisions of Statement 137, Statement 133 is now
effective for our fiscal year 2001. We have minimal use of derivatives, except
for our strategic investments that are generally in the form of redeemable
convertible stock in privately held companies and equity instruments we own in
privately held companies. The adoption of Statement 133 did not have a material
impact on our results of operations or our financial position.

  In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. We have adopted SAB 101 for all transactions during the year ending
December 31, 2000. Such adoption did not have a material impact on our results
of operations or our financial position.

  In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation ("Interpretation 44"), effective July
1, 2000. Interpretation 44 clarifies guidance for certain issues that arose in
the application of APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25"). We have applied the requirements of Interpretation 44 in connection
with our acquisition and assumption of all of OnDisplay's outstanding stock
options in July 2000. Using the Black-Scholes option valuation methodology, we
assigned an estimated fair value of $168.5 million to the employee stock options
assumed. Approximately $52.9 million of this amount was recorded as deferred
stock compensation and is being amortized over the options' remaining life. The
remaining $115.6 was included in the excess of cost over fair value of net
assets acquired and is being amortized over the asset's estimated useful life,
which is equivalent to a four-year period.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. Dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. Currently, we have operations throughout Latin
America, Asia Pacific, Europe, the Middle East and Africa and conduct
transactions in the local currency of each location. To date, the impact of
fluctuations in the relative value of other currencies has not been material.

  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 market risk exposure. Our investment
policy requires us to invest funds in excess of current operating requirements
in:

     .    obligations of the U.S. government and its agencies;

     .    investment grade state and local government obligations;

     .    securities of U.S. corporations rated A1 or P1 by Standard & Poors or
          the Moody's equivalents; and/or

     .    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.

                                       38
<PAGE>

  At December 31, 2000, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.,
and our short-term investments were invested in corporate debt maturing in less
than 90 days.

ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this report.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURES

  Not applicable.

                                       39
<PAGE>

                                   PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information regarding directors is incorporated herein by reference from
the section entitled "Proposal No. 1--Election of Directors" of the Company's
definitive Proxy Statement (the "Proxy Statement") to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, for the
registrant's Annual Meeting of Stockholders to be held on May 11, 2001. The
Proxy Statement is anticipated to be filed within 120 days after the end of the
registrant's fiscal year ended December 31, 2000. For information regarding
executive officers of the Company, see the Information appearing under the
caption "Executive Officers of the Registrant" in Part I, Item 4A of this Report
on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

  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

  Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  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.

                                       40
<PAGE>

                                   PART IV.

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

  (a)(1) Financial Statements

  The following consolidated financial statements of the Company are filed as
part of this Annual Report on Form 10-K as follows:

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                   <C>
Report of Independent Auditors...................................................................     F - 2
Consolidated Balance Sheets at December 31, 1999 and 2000........................................     F - 3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000.......     F - 4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
    December 31, 1998, 1999 and 2000.............................................................     F - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.......     F - 7
Notes to Consolidated Financial Statements.......................................................     F - 8
</TABLE>

                                       41
<PAGE>

  (a)(2)  Financial Statement Schedules

    Not applicable.

  (a)(3)  Exhibits

     Exhibit
     Number.                                 Description
     -------        -----------------------------------------------------------
        2.1*        Agreement between Registrant and Diffusion, Inc. dated May
                    10, 1999.
        2.2**       Agreement between Registrant and DataSage, Inc. dated
                    January 7, 2000.
        2.3****     Agreement and Plan of Merger, among Registrant, Wheels
                    Acquisition Corp. and OnDisplay, Inc. dated May 21, 2000.
        3.1+        Certificate of Incorporation of the Registrant.
        3.2***      Amendment to Certificate of Incorporation.
        3.3+        Bylaws of the Registrant.
        4.1         Reference is made to Exhibits 3.1, 3.2. and 3.3
        4.2+        Specimen common stock certificate.
        4.3+        Fifth Amended and Restated Registration Rights Agreement
                    dated November 30, 1998.
      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+         Employee Stock Purchase Plan.
      10.5+         1999 Non-Employee Directors Option Plan.
      10.6+         Security and Loan Agreement dated March 24, 1998 between the
                    Registrant and Imperial Bank.
      10.7+         Lease Agreement dated September 20, 1996 between the
                    Registrant and David B. Barrow, Jr.
      10.8+         First Supplement to Lease Agreement dated November 4, 1997
                    between Registrant and 3410 Far West, Ltd.
      10.9+         Second Supplement to Lease Agreement dated February 23, 1998
                    between Registrant and 3410 Far West, Ltd.
      10.10+        Office Lease Agreement date August 4, 1998 between
                    Registrant and B.O. III, Ltd.
      10.11+        "Prism" Development and Marketing Agreement dated July 19,
                    1996 between the Registrant and CNET, Inc.
      10.12+        Letter Amendment to "Prism" Development and Marketing
                    Agreement between the Registrant and CNET, Inc. dated August
                    15, 1998 and attachments thereto.
      10.13+        Software License Agreement dated April 6, 1998 between
                    Registrant and Net Perceptions, Inc.
      10.14+        StoryServer Q2 Volume Purchase Agreement between Registrant
                    and Tribune Interactive Inc.
      10.15+        Protege Software (Holdings) Confidential Professional
                    Services Agreement dated November 15, 1997.
      10.16+        Subordinated Loan and Security Agreement dated December 3,
                    1998 between Registrant and Comdisco, Inc.
      10.17+        Master Lease Agreement dated December 3, 1998 between
                    Registrant and Comdisco, Inc.
      10.18         Lease Agreement dated March 3, 2000 between the Registrant
                    and Prentiss Properties Acquisition Partners, L.P. (to be
                    filed by amendment).
      10.19         First Amendment to Lease Agreement dated September 1, 2000
                    between the Registrant and Prentiss Properties Acquisition
                    Partners, L.P. (to be filed by amendment).
      10.20         Sublease dated June 26, 2000 among the Registrant, Aptis,
                    Inc. and Billing Concepts Corp. (to be filed by amendment).
      10.21         First Amendment to Lease dated October 30, 1998 between the
                    Registrant and B.O. III, Ltd. (to be filed by amendment).
      10.22         Second Amendment to Lease dated December 30, 1998 between
                    the Registrant and B.O. III, Ltd. (to be filed by
                    amendment).
      10.23         Third Amendment to Lease dated April 27, 1999 between the
                    Registrant and The Prudential Insurance Company of America
                    (successor in interest to B.O. III, Ltd.)(to be filed by
                    amendment).
      10.24         Fourth Amendment to Lease dated August 1, 2000 between the
                    Registrant and The Prudential Insurance Company of America
                    (successor in interest to B.O. III, Ltd.)(to be filed by
                    amendment).
      10.25         Fifth Amendment to Lease dated December 12, 2000 between
                    the Registrant and The Prudential Insurance Company of
                    America (successor in interest to B.O. III, Ltd.)(to be
                    filed by amendment).
      23.1          Consent of Independent Auditors.

___________
+         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 8-K filed on July 15,
          1999 (File No. 000-25375).
**        Incorporated by reference to the Company's Form 8-K filed on February
          29, 2000 (File No. 000-25375).
***       Incorporated by reference to the Company's definitive Proxy Statement
          for Special Meeting of Stockholders, dated February 17, 2000.
****      Incorporated by reference to the Company's Registration Statement on
          Form S-4, as amended (File No. 333-38478).

  (b) Reports on Form 8-K

  None.

                                       42
<PAGE>

                                  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/ Gregory A. Peters
                                            ------------------------------------
                                                  Gregory A. Peters
                                          President and Chief Executive Officer


Dated: March 2, 2001

     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:

<TABLE>
<CAPTION>
                   Signature                                      Title                               Date
                   ---------                                      -----                               ----
<S>                                                   <C>                                         <C>
            /s/ Gregory A. Peters                     Chairman of the Board,                      March 2, 2001
-----------------------------------------------        President and CEO
                Gregory A. Peters

            /s/ Joel G. Katz                          Secretary and Chief Financial               March 2, 2001
-----------------------------------------------        Officer
                Joel G. Katz

            /s/ Robert E. Davoli                      Director                                    March 2, 2001
-----------------------------------------------
               Robert E. Davoli

            /s/ Joseph A. Marengi                     Director                                    March 2, 2001
-----------------------------------------------
                Joseph A. Marengi

            /s/ Steven G. Papermaster                 Director                                    March 2, 2001
-----------------------------------------------
            Steven G. Papermaster

            /s/ John D. Thornton                      Director                                    March 2, 2001
-----------------------------------------------
                John D. Thornton
</TABLE>

                                       43
<PAGE>

                              VIGNETTE CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                 --------
<S>                                                                                              <C>
Report of Independent Auditors.................................................................     F-2
Consolidated Balance Sheets at December 31, 1999 and 2000......................................     F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and
    2000.......................................................................................     F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
    December 31, 1998, 1999 and 2000...........................................................     F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and
    2000.......................................................................................     F-7
Notes to Consolidated Financial Statements.....................................................     F-8
</TABLE>

                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Vignette Corporation

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

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                      /s/ Ernst & Young LLP

Austin, Texas
January 16, 2001

                                      F-2
<PAGE>

                              VIGNETTE CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                         ---------------------
                                                                                             1999         2000
                                  ASSETS                                                 --------   ----------
<S>                                                                                      <C>        <C>
Current assets:
  Cash and cash equivalents...........................................................   $391,278   $  435,481
  Marketable securities and short-term investments....................................     10,951       12,352
  Accounts receivable, net of allowance of $1,254 in
    1999 and $9,643 in 2000...........................................................     28,501       99,485
  Prepaid expenses and other..........................................................      5,588        8,172
                                                                                         --------   ----------
          Total current assets........................................................    436,318      555,490
Property and equipment:
  Equipment...........................................................................        753        2,847
  Computers and purchased software....................................................     10,920       44,429
  Furniture and fixtures..............................................................        280        7,037
  Leasehold improvements..............................................................      3,122       20,651
                                                                                         --------   ----------
                                                                                           15,075       74,964
  Accumulated depreciation............................................................     (4,016)     (17,501)
                                                                                         --------   ----------
                                                                                           11,059       57,463
Investments...........................................................................     27,011       84,295
Intangibles, net of amortization of $1,796 in 1999
  and $330,487 in 2000................................................................     20,467    1,489,040
Other assets..........................................................................      3,311        4,666
                                                                                         --------   ----------
          Total assets................................................................   $498,166   $2,190,954
                                                                                         ========   ==========

                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................................................   $  4,924   $   17,634
  Accrued expenses....................................................................     26,150       72,659
  Deferred revenue....................................................................     28,282       65,591
  Current portion of capital lease obligation.........................................        254          751
  Other current liabilities...........................................................      1,497        9,024
                                                                                         --------   ----------
          Total current liabilities...................................................     61,107      165,659
Capital lease obligation, less current portion........................................         --          782
                                                                                         --------   ----------
          Total liabilities...........................................................     61,107      166,441
Stockholders' equity:
  Common stock--$.01 par value; 500,000,000 shares
    authorized; 178,642,806 shares in 1999 and
    237,765,075 shares in 2000 (net of treasury
    shares of 456,165 in 1999 and 515,679 in 2000)
    issued and outstanding............................................................      1,788        2,380
  Additional paid-in capital..........................................................    528,466    2,642,494
  Warrants............................................................................         12           --
  Notes receivable for purchase of common stock.......................................        (75)        (900)
  Deferred stock compensation.........................................................    (13,359)     (19,786)
  Accumulated other comprehensive income..............................................          1       12,324
  Accumulated deficit.................................................................    (79,774)    (611,999)
                                                                                         --------   ----------
           Total stockholders' equity.................................................    437,059    2,024,513
                                                                                         --------   ----------
           Total liabilities and stockholders' equity.................................   $498,166   $2,190,954
                                                                                         ========   ==========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                             VIGNETTE CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                       --------------------------------------
                                                                                              1998        1999         2000
                                                                                          --------    --------    ---------
<S>                                                                                       <C>         <C>         <C>
Revenue:
    Product license.................................................................      $  8,584    $ 46,292    $ 216,257
    Services........................................................................         7,621      42,893      150,404
                                                                                          --------    --------    ---------

      Total revenue.................................................................        16,205      89,185      366,661
Cost of revenue:
    Product license.................................................................           964       3,306        7,611
    Services........................................................................         9,340      33,488      111,410
                                                                                          --------    --------    ---------

      Total cost of revenue.........................................................        10,304      36,794      119,021
                                                                                          --------    --------    ---------

Gross profit........................................................................         5,901      52,391      247,640
Operating expenses:
    Research and development........................................................         6,962      16,447       58,324
    Sales and marketing.............................................................        15,880      49,559      175,020
    General and administrative......................................................         4,864       9,494       38,625
    Purchased in-process research and development,
       acquisition-related and other charges........................................         2,089      15,641      169,885
    Amortization of deferred stock compensation.....................................         2,475       5,654       33,863
    Amortization of intangibles.....................................................            --       1,796      328,691
                                                                                          --------    --------    ---------

       Total operating expenses.....................................................        32,270      98,591      804,408
                                                                                          --------    --------    ---------

Loss from operations................................................................       (26,369)    (46,200)    (556,768)
Other income (expenses):
    Interest income.................................................................           517       3,894       29,312
    Interest expense................................................................          (253)       (201)      (3,281)
    Other...........................................................................           (92)         30          (39)
                                                                                          --------    --------    ---------
      Total other income, net.......................................................           172       3,723       25,992
                                                                                          --------    --------    ---------

Loss before income taxes............................................................       (26,197)    (42,477)    (530,776)

Provision for income taxes..........................................................            --          --        1,449
                                                                                          --------    --------    ---------

Net loss............................................................................      $(26,197)   $(42,477)   $(532,225)

                                                                                          ========    ========    =========
Basic net loss per share............................................................        $(1.53)     $(0.31)      $(2.59)
                                                                                          ========    ========    =========
Shares used in computing basic net loss per share...................................        17,094     137,253      205,885
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                              VIGNETTE CORPORATION

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                               Stockholders' Equity (Deficit)
                                                      ----------------------------------------------------------------------------
                                                          Convertible
                                                        Preferred Stock             Common Stock
                                                      -------------------      --------------------
                                                                                                        Additional
                                                      Number of                Number of                 Paid-in
                                                       Shares       Value       Shares        Value      Capital        Warrants
                                                       ------       -----       ------        -----      -------        --------
<S>                                                   <C>           <C>        <C>            <C>       <C>             <C>
Balance at December 31, 1997.......................   22,787,544    $  38      20,952,558     $ 210     $    1,607      $     --

Issuance of Series F stock.........................           --       --              --        --             --            --

Series F issuance costs............................           --       --              --        --            (54)           --

Issuance of Series G stock.........................    2,254,980        4              --        --          1,982            --

Issuance of Series H stock and warrant.............           --       --              --        --             --            --

Series H issuance costs............................           --       --              --        --            (29)           --

Stock options exercised............................           --       --      13,277,238       133            352            --

Repurchase of unvested stock.......................           --       --        (168,696)       (2)            (3)           --

Deferred stock compensation related to
  stock options, net of forfeitures................           --       --              --        --          8,671            --

Amortization of deferred stock compensation........           --       --              --        --             --            --

Payments received on notes receivable for
  purchase of common stock.........................           --       --              --        --             --            --

Comprehensive loss:

   Net loss........................................           --       --              --        --             --            --

   Foreign currency translation adjustment,
     cumulative translation loss of $(11) at
     December 31, 1998.............................           --       --              --        --             --            --

Total comprehensive loss...........................
                                                      ----------------------------------------------------------------------------

<CAPTION>
                                                                                Stockholders' Equity (Deficit)
                                                      ------------------------------------------------------------------------------
                                                         Notes
                                                       Receivable for                    Accumulated                       Total
                                                        Purchase of       Deferred          Other                      Stockholders'
                                                           Common          Stock        Comprehensive   Accumulated       Equity
                                                           Stock        Compensation    Income (Loss)     Deficit        (Deficit)
                                                           -----        ------------    -------------     -------        ---------
<S>                                                    <C>              <C>             <C>             <C>            <C>
Balance at December 31, 1997.......................      $      --        $       --        $      (3)     $(11,100)     $   (9,248)

Issuance of Series F stock.........................             --                --               --            --              --

Series F issuance costs............................             --                --               --            --             (54)

Issuance of Series G stock.........................             --                --               --            --           1,986

Issuance of Series H stock and warrant.............             --                --               --            --              --

Series H issuance costs............................             --                --               --            --             (29)

Stock options exercised............................           (192)               --               --            --             293

Repurchase of unvested stock.......................             --                --               --            --              (5)

Deferred stock compensation related to
  stock options, net of forfeitures................             --            (8,671)              --            --              --

Amortization of deferred stock compensation........             --             2,475               --            --           2,475

Payments received on notes receivable for
  purchase of common stock.........................             20                --               --            --              20

Comprehensive loss:

   Net loss........................................             --                --               --       (26,197)        (26,197)

   Foreign currency translation adjustment,
     cumulative translation loss of $(11) at
     December 31, 1998.............................             --                --               (8)           --              (8)
                                                                                                                           --------
Total comprehensive loss...........................                                                                         (26,205)
                                                      ------------------------------------------------------------------------------
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                              VIGNETTE CORPORATION
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) -
                                  (Continued)
                       (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                                   Stockholders' Equity (Deficit)
                                                         ---------------------------------------------------------------------------
                                                             Convertible
                                                           Preferred Stock             Common Stock
                                                         --------------------     ----------------------
                                                                                                             Additional
                                                          Numbers of               Numbers of                  Paid-in
                                                            Shares      Value        Shares        Value       Capital      Warrants
                                                         -----------    -----      ----------      -----     ----------     --------
<S>                                                      <C>            <C>       <C>             <C>        <C>            <C>
Balance at December 31, 1998..........................    25,042,524    $ 42       34,061,100     $  341      $   12,526      $  --
Conversion of preferred stock upon
  initial public offering, net........................   (25,042,524)    (42)     101,749,914      1,018          35,282        169
Common stock issued upon
  initial public offering, net........................            --      --       25,680,000        257          73,500         --
Issuance of common stock in
  purchase of business................................            --      --        2,300,532         23          31,211         --
Issuance of common stock pursuant
  to employee stock purchase plan.....................            --      --          784,446          8           2,103         --
Common stock issued upon secondary offering, net......            --      --        8,028,000         80         355,403         --
Stock options exercised...............................            --      --        6,897,705         69           2,353         --
Warrants exercised....................................            --      --          861,108          9             399       (157)
Repurchase of unvested stock..........................            --      --       (1,719,999)       (17)            (40)        --
Deferred stock compensation related to
  stock options, net of forfeitures...................            --      --               --         --          15,729         --
Payments on notes receivable for
  purchase of common stock............................            --      --               --         --              --         --
Amortization of deferred stock compensation...........            --      --               --         --              --         --
Comprehensive loss:
  Net loss............................................            --      --               --         --              --         --
  Unrealized investment gains.........................            --      --               --         --              --         --
  Foreign currency translation adjustment,
     cumulative translation loss of $(53) at
     December 31, 1999................................            --      --               --         --              --         --

Total comprehensive loss..............................
                                                         ---------------------------------------------------------------------------
Balance at December 31, 1999..........................            --      --      178,642,806      1,788         528,466         12
Issuance of common stock in purchase of businesses....            --      --       43,830,486        438       2,077,149         --
Issuance of common stock pursuant
  to employee stock purchase plan.....................            --      --        2,072,902         21          10,217         --
Stock options exercised...............................            --      --       13,138,972        131          28,404         --
Warrants exercised....................................            --      --          145,475          2           3,514        (12)
Repurchase of unvested stock..........................            --      --          (59,514)        --             (38)        --
Deferred stock compensation related to
  stock options, net of forfeitures...................            --      --               --         --          (4,733)        --
Payments on notes receivable for
  purchase of common stock............................            --      --               --         --              --         --
Amortization of deferred stock compensation..........             --      --               --         --             (42)        --
Treasury stock purchase...............................            --      --           (6,052)        --            (443)        --
Comprehensive loss:                                               --      --               --         --              --         --
  Net loss............................................            --      --               --         --              --         --
  Unrealized investment gains.........................            --      --               --         --              --         --
  Foreign currency translation adjustment,
     cumulative translation gain of $284 at
     December 31, 2000................................            --      --               --         --              --         --

Total comprehensive loss..............................            --      --               --         --              --         --
                                                         ---------------------------------------------------------------------------
Balance at December 31, 2000..........................            --    $ --      237,765,075     $2,380      $2,642,494      $  --
                                                                  ==    ====      ===========     ======      ==========      ======
<CAPTION>
                                                              Notes
                                                          Receivable for                   Accumulated                   Total
                                                           Purchase of       Deferred         Other                   Stockholders'
                                                             Common           Stock       Comprehensive  Accumulated     Equity
                                                             Stock         Compensation   Income (loss)    Deficit     (Deficit)
                                                          -------------   -------------   -------------  -----------   -------------
<S>                                                         <C>           <C>             <C>           <C>           <C>
Balance at December 31, 1998..........................      $ (172)       $  (6,196)      $     (11)    $ (37,297)    $  (30,767)
Conversion of preferred stock upon
  initial public offering, net........................          --               --              --            --         36,427
Common stock issued upon
  initial public offering, net........................          --               --              --            --         73,757
Issuance of common stock in
  purchase of business................................          --               --              --            --         31,234
Issuance of common stock pursuant
  to employee stock purchase plan.....................          --               --              --            --          2,111
Common stock issued upon secondary offering, net......          --               --              --            --        355,483
Stock options exercised...............................          --               --              --            --          2,422
Warrants exercised....................................          --               --              --            --            251
Repurchase of unvested stock..........................          --               --              --            --            (57)
Deferred stock compensation related to
stock options, net of forfeitures...................            --          (15,729)             --            --             --
Payments on notes receivable for
  purchase of common stock............................          97               --              --            --             97
Amortization of deferred stock compensation...........          --            8,566              --            --          8,566
Comprehensive loss:
  Net loss............................................          --               --              --       (42,477)       (42,477)
  Unrealized investment gains.........................          --               --              54            --             54
  Foreign currency translation adjustment,
     cumulative translation loss of $(53) at
     December 31, 1999................................          --               --             (42)           --            (42)
                                                                                                                      ----------
Total comprehensive loss..............................                                                                   (42,465)
                                                           -------         --------       ---------     ---------     ----------

Balance at December 31, 1999..........................        (75)          (13,359)              1       (79,774)       437,059
Issuance of common stock in purchase of businesses....     (1,788)          (52,865)             --            --      2,022,934
Issuance of common stock pursuant
  to employee stock purchase plan.....................         --                --              --            --         10,238
Stock options exercised...............................         --                --              --            --         28,535
Warrants exercised....................................         --                --              --            --          3,504
Repurchase of unvested stock..........................         --                --              --            --            (38)
Deferred stock compensation related to
  stock options, net of forfeitures...................         --             4,733              --            --             --
Payments on notes receivable for
  purchase of common stock............................        963                --              --            --            963
Amortization of deferred stock  compensation..........         --            41,705              --            --         41,663
Treasury stock purchase...............................         --                --              --            --           (443)
Comprehensive loss:                                            --                --              --            --             --
  Net loss............................................         --                --              --      (532,225)      (532,225)
  Unrealized investment gains.........................         --                --          11,986            --         11,986
  Foreign currency translation adjustment,
     cumulative translation gain of $284 at
     December 31, 2000................................         --                --             337            --            337
                                                                                                                      ----------
Total comprehensive loss..............................         --                --              --                     (519,902)
                                                           -------         --------       ---------     ---------     ----------
Balance at December 31, 2000..........................     $ (900)         $(19,786)      $  12,324     $(611,999)    $2,024,513
                                                           =======         ========       =========     =========     ==========
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                             VIGNETTE CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                                      Year ended December 31,
                                                                                              -----------------------------------
                                                                                                 1998          1999         2000
                                                                                              -----------------------------------
<S>                                                                                            <C>           <C>        <C>
Operating activities
Net loss..................................................................................      $(26,197)     $(42,477)  $ (532,225)
Adjustment to reconcile net loss to cash used in operating activities:
 Depreciation.............................................................................         1,068         2,736       13,599
 Amortization.............................................................................            --         1,796      328,691
 Noncash compensation expense.............................................................         2,475         5,654       33,863
 Purchased in-process research and development, acquisition-related and other
  charges (noncash).......................................................................         2,000        14,512      161,826
 Loss on disposal of fixed assets.........................................................           101            --           --
 Other noncash items......................................................................             4            --          679
 Changes in operating assets and liabilities, net of effects from purchases of businesses:
  Accounts receivable, net................................................................        (5,406)      (22,330)     (64,388)
  Prepaid expenses and other assets.......................................................          (893)       (6,263)     (11,731)
  Accounts payable........................................................................           156         3,524       10,509
  Accrued expenses........................................................................         5,716        17,407       19,264
  Deferred revenue........................................................................         3,497        22,905       19,433
  Other liabilities.......................................................................           251         1,075        7,519
                                                                                                --------      --------     --------

 Net cash used in operating activities....................................................       (17,228)       (1,461)     (12,961)

Investing activities
Purchase of property and equipment........................................................        (2,179)      (11,863)     (53,849)
Cash acquired in purchase of businesses, net of transaction costs.........................            --            56      123,356
Purchase of restricted investments........................................................            --            --      (13,963)
Purchase of marketable securities and short-term investments..............................            --       (11,005)      (1,529)
Purchase of equity securities.............................................................            --       (27,011)     (30,963)
Deferred acquisition costs................................................................            --        (1,000)          --
                                                                                                --------      --------     --------

 Net cash provided by (used in) investing activities......................................        (2,179)      (50,823)      23,052

Financing activities
Proceeds from issuance of common stock, net...............................................            --        429,240          --
Proceeds from long-term debt..............................................................         1,837             --          --
Payments on long-term debt and capital lease obligations..................................           (56)        (2,762)     (5,709)
Proceeds from issuance of Series F Convertible Preferred
 Stock, net...............................................................................        14,246             --          --
Series G Convertible Preferred Stock issuance cost........................................           (14)            --          --
Proceeds from issuance of Series H Convertible Preferred
 Stock, net...............................................................................         8,471             --          --
Proceeds from exercise of stock options and purchase of
 employee stock purchase plan shares......................................................           312          4,533      38,773
Proceeds from exercise of warrants........................................................            --            251         --
Payments for repurchase of unvested common stock..........................................            (5)           (57)       (38)
Proceeds from repayment of stockholder notes receivable...................................            __             97        963
                                                                                                --------       --------    --------

 Net cash provided by financing activities................................................        24,791        431,302      33,989
                                                                                                --------       --------    --------

Effect of exchange rate changes on cash and cash
 equivalents..............................................................................            (7)            18         123
                                                                                               ---------       --------    --------
Net increase in cash and cash equivalents.................................................         5,377        379,036      44,203
Cash and cash equivalents at beginning of year............................................         6,865         12,242     391,278
                                                                                               ---------       --------    --------
Cash and cash equivalents at end of year..................................................      $ 12,242      $ 391,278  $  435,481
                                                                                               =========       ========    ========

Supplemental disclosure of cash flow information:
 Interest paid............................................................................      $    250      $     201  $    3,281
                                                                                               =========       ========    ========
 Taxes paid...............................................................................      $     --      $      --  $       --
                                                                                               =========       ========    ========
Noncash activities:
 Convertible preferred stock issued to acquire in-process
 research and development.................................................................      $  2,000      $      --  $       --
                                                                                               =========       ========   =========
 Common stock issued and stock options exchanged to
 acquire businesses.......................................................................      $     --      $  31,234  $2,104,484
                                                                                               =========       ========   =========
</TABLE>
                            See accompanying notes.


                                     F-7
<PAGE>

                             VIGNETTE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 2000

1. Business

    Vignette Corporation and its wholly-owned subsidiaries (collectively, the
"Company" or "Vignette") is a leading global provider of customer-driven
Internet application software products and services. The Company's e-business
solutions are designed to enable businesses to build successful and sustainable
online businesses that are customer-managed. The Company's customer-driven
Internet applications and solutions allow businesses to create and manage
Internet business channels that are designed to attract, engage and retain their
customers, partners, and suppliers online. Using the Company's products'
content, integration, and analysis capabilities, the Company's clients deploy
applications, which are focused on personalized and mass-customized interaction
across multiple touchpoints and communication channels. 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.

    The Company was incorporated in Delaware on December 19, 1995.

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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates, and such differences could be material to the financial statements.

Revenue Recognition

    Revenue from license fees and from sales of software products is recognized
when persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations with regard to implementation
remain, the fee is fixed or determinable and collectibility is probable.

    Revenue from license fees and from sales of software products under
arrangements to deliver unspecified additional software products in the future
is recognized ratably over the term of the arrangement beginning with the
delivery of the first product.

    Services revenue is primarily comprised of revenue from consulting fees,
maintenance agreements and training. Services revenue from consulting and
training billed on a time and materials basis is recognized as performed.
Maintenance agreements include the right to unspecified upgrades on an if-and-
when available basis. Maintenance revenue is deferred and recognized on a
straight-line basis as services revenue over the life of the related agreement,
which is typically one year.

    In prior years, the Company recorded cash receipts from clients and billed
amounts due from clients in excess of revenue recognized as deferred revenue.
Effective December 31, 2000, deferred revenue includes only amounts received
from customers in excess of revenue recognized, and accounts receivable includes
amounts due from customers for which revenue has been recognized. The
presentation of deferred revenue and accounts receivable for all prior periods
has been adjusted to conform to the current year presentation.

    In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. The application of SAB 101, as amended, was implemented in
the fourth quarter of 2000 and


                                      F-8
<PAGE>

                             VIGNETTE CORPORATION
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)

did not have a material impact on the Company's financial position, results of
operations or cash flows.

Cash Equivalents

    Cash equivalents consist primarily of cash deposits and investments with
original maturities of ninety days or less when purchased. The Company
classifies these investments as available-for-sale. Unrealized gains and losses
are included in other comprehensive income. At December 31, 1999 and 2000, cash
and cash equivalents included a net unrealized gain of $108,000 and net
unrealized loss of $66,000, respectively.

Short-Term Investments

    Short-term investments consist primarily of cash deposits and investments
with original maturities greater than ninety days and less than one year when
purchased. The Company classifies these investments as available-for-sale.
Unrealized gains and losses are included in other comprehensive income. Realized
gains and losses are computed based on the specific identification method.
Realized gains and losses were not material during 2000.

    Short-term investments consist of the following at December 31, 1999 (in
thousands):


<TABLE>
<CAPTION>
                                                                  Unrealized   Estimated Fair
                                                        Cost         Loss       Market Value
                                                     ----------   ----------   ------------
<S>                                                   <C>            <C>         <C>
 Marketable securities:
 U.S. Government agencies...........................   $ 1,994        $(23)         $ 1,971
 Corporate bonds....................................     9,011         (31)           8,980
                                                     ---------   ---------       ----------
                                                       $11,005        $(54)         $10,951
                                                     =========   =========       ==========
</TABLE>

 Short-term investments consist of the following at December 31, 2000 (in
thousands):


<TABLE>
<CAPTION>
                                                                        Unrealized        Estimated Fair
                                                           Cost         Gain (Loss)        Market Value
                                                         ----------    -------------     ----------------
<S>                                                     <C>                <C>                  <C>
 Marketable securities:
 U.S. Government agencies..............................  $  5,338             $  (6)             $  5,332
 U.S. Treasury notes...................................     1,998                (4)                1,994
 Corporate bonds.......................................     2,027                 1                 2,028
 Corporate notes.......................................     2,996                 2                 2,998
                                                         --------           -------              --------
                                                         $ 12,359             $  (7)             $ 12,352
                                                         ========           =======              ========
</TABLE>

Long-Term Investments

    Long-term investments consist primarily of redeemable convertible preferred
stock. The Company classifies these investments as available-for-sale. The
Company recorded a cumulative net unrealized gain/(loss) of $0 and $12.1 million
related to these securities at December 31, 1999 and 2000, respectively. These
investments were established to enable the Company to invest in emerging
technology companies strategic to the Company's software business. Only one of
the technology companies held by the Company at December 31, 2000 is publicly
traded. There is no established market for the remaining equity investments and
therefore, the remaining investments in non-public companies are valued based on
the most recent round of financing involving new non-strategic investors and
estimates made by management.

    In addition to these investments, the Company purchased $14.0 million in
certificates of deposit during 2000. These investments are restricted for
certain security deposits for office space leases, which support the Company's
expanding operations and are placed with a high credit quality financial
institution. The maturity dates range from 2002 to 2010 and the stated yields of
these investments vary between 5.45% and 5.87%. There are certain time
restrictions placed on these instruments that the Company is obligated to meet
in order to liquidate the principal of these investments.

                                      F-9
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Property and Equipment

  Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the useful lives of
the assets (generally 1.5 to 3 years). Amortization of assets recorded under
capital leases is computed using the straight-line method over the shorter of
the asset's useful life or the term of the lease. Such amortization of capital
leases is included with depreciation expense.

Intangible Assets

  Intangible assets are being amortized using the straight-line method. The
amounts allocated to acquired technology, workforce, trademark and excess of
cost over fair value of net assets acquired or net liabilities assumed are being
amortized over the assets' estimated useful lives, which range from two to four
years.

Impairment of Long-Lived Assets

  The Company periodically reviews the carrying amounts of property and
equipment, identifiable intangible assets and excess of cost over fair value of
net assets acquired or liabilities assumed, both purchased in the normal course
of business and acquired through business combinations, to determine whether
current events or circumstances, as defined in Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("Statement 121"), warrant adjustments to
such carrying amounts. In reviewing the carrying values of property and
equipment and identifiable intangible assets, the Company considers, among other
things, 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. At this time, future cash inflows exceed future cash
outflows; thus, no material impairment loss has been recognized.

  The Company periodically performs reviews to evaluate the recoverability of
excess of cost over fair value of net liabilities assumed or assets acquired and
takes into account events or circumstances that warrant revised estimates of
useful lives or that indicate that an impairment exists. In assessing goodwill
at an enterprise level, the Company employs the market value approach. This
approach compares the Company's consolidated net book value to the then
estimated market capitalization at the period under review. In the event that
the Company's then net book value exceeds the estimated market capitalization,
and this condition is considered to be permanent in nature, the excess carrying
amount of goodwill is charged to earnings in the current period. During 1999 and
2000, there were no material impairment charges resulting from these periodic
assessments.

  Management reviews the valuation and amortization periods of excess of cost
over fair value of net assets acquired on a periodic basis, taking into
consideration any events or circumstances, which might result in, diminished
fair value or revised useful life. No events or circumstances have occurred to
warrant a diminished fair value or reduction in the useful life of excess of
cost over fair value of net assets acquired other than the change in the
estimated life of the excess of cost over fair value of net assets acquired from
Diffusion, Inc., which was reduced from seven years in 1999 to three years in
2000.

Research and Development

  Research and development expenditures are expensed to operations as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed ("Statement 86"),
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Software development costs capitalized in accordance with
Statement 86 totaled $0, $550,000 and $1.9 million in 1998, 1999 and 2000,
respectively. These capitalized costs are amortized to cost of revenue over the
respective application's estimated useful life, generally not exceeding eighteen
months. Amortization expense was $0, $0 and $632,000 for the years ended 1998,
1999 and 2000, respectively.

                                      F-10
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Advertising Costs

  The Company expenses advertising costs as incurred. These expenses were
approximately $85,000, $2.1 million and $8.4 million for the years ended
December 31, 1998, 1999 and 2000, respectively.

Income Taxes

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

Foreign Currency

  For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year-end or period-end exchange rates, and income statement items
are translated at average exchange rates prevailing during the year or period.
Such translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and are not material to
Company's operations.

Stock-Based Compensation

  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 in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), as clarified by Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation ("Interpretation 44").

  In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation ("Interpretation 44"), which was
generally effective July 1, 2000. Interpretation 44 clarifies guidance for
certain issues that arose in the application of APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"). The Company has applied the
requirements of Interpretation 44 in connection with its acquisition and
assumption of all of OnDisplay's outstanding stock options in July 2000. See
note 3.

                                      F-11
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Concentration of Credit Risk

  Financial instruments that potentially subject the Company to concentrations
of credit risk consist of short-term investments and trade receivables. The
Company's short-term investments, which are included in cash and cash
equivalents and short-term investments for reporting purposes, 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 following table summarizes the changes in
allowance for doubtful accounts for trade receivables (in thousands):

<TABLE>
                <S>                                                                                   <C>
                Balance at January 1, 1998.....................................................           $    37
                    Additions charged to costs and expenses....................................               273
                    Write-off of uncollectible accounts........................................               (13)
                                                                                                    -------------
                Balance at December 31, 1998...................................................               297
                    Additions charged to costs and expenses....................................             1,030
                    Write-off of uncollectible accounts........................................               (73)
                                                                                                    -------------
                Balance at December 31, 1999...................................................             1,254
                    Additions charged to costs and expenses....................................            10,482
                    Additions resulting from business combinations.............................             1,560
                    Write-off of uncollectible accounts........................................            (3,653)
                                                                                                    -------------
                Balance at December 31, 2000...................................................           $ 9,643
                                                                                                    =============
</TABLE>

  No customers accounted for more than 10% of the Company's total revenue during
the years ended December 31, 1998, 1999 or 2000.

Net Loss Per Share

  The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("Statement 128"). Basic net loss per
share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding during the period,
excluding shares subject to repurchase. Diluted net loss per share has not been
presented as the effect of the assumed exercise of stock options, warrants and
contingently issued shares is antidilutive due to the Company's net loss. The
Company had outstanding common stock options of 32,523,462, 51,199,728 and
63,594,736 at December 31, 1998, 1999 and 2000, respectively, that have been
excluded from the calculation of diluted loss per share, as the effect of their
exercise would be antidilutive. Additionally, the Company had outstanding
101,749,914 shares of preferred stock as of December 31, 1998 that have been
excluded from the calculation of diluted loss per share, as the effect of their
conversion to common stock would be antidilutive. During 1999, 101,749,914
shares of preferred stock for the period from January 1, 1999 to February 19,
1999 have been excluded from diluted loss per share, as the effect of their
conversion prior to the Company's initial public offering would be antidilutive.

  The Company's 1999 historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock and redeemable convertible preferred stock into
common stock concurrent with the closing of the Company's initial public
offering in February 1999. Accordingly, a pro forma calculation assuming the
conversion of all outstanding shares as of December 31, 1999 of convertible
preferred stock and redeemable convertible preferred stock into common stock
upon the Company's initial public offering using the if-converted method from
their respective dates of issuance is presented.

                                      F-12
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

<TABLE>
<CAPTION>
                                                                                       Year ended December 31,
                                                                               ------------------------------------
                                                                                    1998        1999         2000
                                                                                    ----        ----         ----
      <S>                                                                         <C>         <C>         <C>
      Net loss.................................................................   $(26,197)   $(42,477)   $(532,225)
                                                                                  ========    ========    =========
      Basic:
          Weighted-average shares of common stock outstanding..................     29,406     143,898      209,184
          Weighted-average shares of common stock subject to repurchase........    (12,312)     (6,645)      (3,299)
                                                                                  --------    --------    ---------
          Shares used in computing basic net loss per share....................     17,094     137,253      205,885
                                                                                  ========    ========    =========
          Basic net loss per share.............................................   $  (1.53)   $  (0.31)   $   (2.59)
                                                                                  ========    ========    =========
      Pro forma:
          Shares used above....................................................                137,253
          Pro forma adjustment to reflect weighted effect of assumed
                conversion of convertible preferred stock......................                 13,659
                                                                                              --------
          Shares used in computing pro forma basic net loss per share..........                150,912
                                                                                              ========
          Pro forma basic net loss per share...................................               $  (0.28)
                                                                                              ========
</TABLE>

Segments

  Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). The adoption of Statement No. 131 did not have a significant effect on
the disclosure of segment information as the Company continues to consider its
business activities as a single segment.

Recent Pronouncements

  In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"), as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
Statement 133, which is effective for the Company's fiscal year beginning
January 1, 2001, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company has minimal use of
derivatives, except for its strategic investments that are generally in the form
of redeemable convertible preferred stock of privately held companies and equity
instruments it owns in privately held companies. The adoption of Statement 133
did not have a material impact on the Company's results of operations or its
financial position.

Reclassifications

  Certain reclassifications have been made to prior years financial statements
to conform to the current year presentation.

3. Business Combinations and Acquired In-Process Research and Development

  During the three years ended December 31, 2000, the Company acquired a series
of complementary businesses. In connection with these acquisitions, the Company
acquired all outstanding stock and assumed all outstanding stock options of the
respective acquirees. All acquisitions were accounted for as a purchase business
combination. Accordingly, the results of operations of the acquired companies
have been included with those of the Company for periods subsequent to the
respective dates of acquisition.

  The amounts allocated to in-process research and development (IPR&D) were
based on a modified discounted cash flow model. This model employed cash flow
projections for revenue based on the projected incremental increase in revenue
that the Company expected to receive from the completed IPR&D. Estimated
operating expenses, capital charges and applicable income taxes were deducted to
arrive at an estimated after-tax cash flow. The Company

                                      F-13
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

discounted the after-tax cash flow projections using a risk-adjusted rate of
return, ranging between 21% and 23%. 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 following table presents the purchase price allocation of the Company's
acquisitions during the three years ended December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                1998            1999                        2000
                                            ------------     -----------     --------------------------------------
                                            RandomNoise,     Diffusion,      Engine 5,     DataSage,     OnDisplay,
                                                Inc.            Inc.            Ltd.          Inc.          Inc.
                                                ----            ----            ----          ----          ----
<S>                                         <C>              <C>             <C>           <C>           <C>
In-process research and development.......  $     2,089       $  11,600     $       --    $   43,400     $  103,200
Acquired technology.......................           --           6,300          1,000         4,000         24,800
Workforce.................................           --             900            300         3,300         19,100
Trademark.................................           --              --             --           800             --
Deferred compensation.....................           --              --             --            --         52,865
Excess of cost over fair value of
  net assets acquired.....................           --          15,063         19,831       517,824      1,197,167
Net fair value of tangible assets
  acquired and liabilities assumed........           11          (2,629)        (1,153)       17,272        100,778
                                            -----------       ---------     ----------    ----------     ----------
Purchase price............................  $     2,100       $  31,234     $   19,978    $  586,596     $1,497,910
                                            ===========       =========     ==========    ==========     ==========

Acquisition date..........................     May 1998       June 1999      Jan. 2000     Feb. 2000      July 2000
Shares of Company stock issued............        2,255           2,301            105         7,746         35,869
Employee stock options exchanged..........           --              59            143         1,712          6,148
                                            -----------       ---------     ----------    ----------     ----------
   Total shares of Company stock                  2,255           2,360            248         9,458         42,017
     issued and exchanged.................  ===========       =========     ==========    ==========     ==========
 Cash paid by Company...................... $        --       $      --     $    4,900    $       --     $       --
</TABLE>

  As part of the Engine 5, Ltd. ("Engine 5") acquisition, contingent
consideration of 33,183 shares of the Company's common stock and $1.6 million
was issued and paid, respectively during the year ended December 31, 2000.
Remaining contingent consideration of approximately 55,278 shares of the
Company's common stock and $2.7 million will be based upon defined future
employment requirements met through the first quarter of 2002. The contingent
consideration related to the Engine 5 acquisition is not included in the total
purchase price, above, but is expensed as future employment requirements are
satisfied; such amount totaled $3.8 million during the year ended December 31,
2000.

  In connection with the OnDisplay, Inc. ("OnDisplay") acquisition, the Company
exchanged all outstanding OnDisplay stock options for 6,147,919 of Vignette
stock options. Using the Black-Scholes method of valuing options, the estimated
fair value of employee stock options granted was $168.5 million. Approximately
$52.9 million of such value, representing the intrinsic value of unvested stock
options, was recorded as deferred stock compensation and is being amortized over
the options' remaining vesting term. The remaining $115.6 million was included
in the excess of cost over fair value of net assets acquired and is amortized
over the asset's estimated useful life, which is equivalent to four years.

  The following presents the unaudited pro forma combined results of operations
of the Company with Diffusion Inc., Engine 5, Ltd., DataSage, Inc. and
OnDisplay, Inc. for the years ended December 31, 1999 and 2000, after giving
effect to certain pro forma adjustments. These unaudited pro forma results are
not necessarily indicative of the actual consolidated results of operations had
the acquisitions actually occurred on January 1, 1999 or of future results of
operations of the consolidated entities (in thousands, except for per share
data):

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                        -----------------------------------
                                                             1999                 2000
                                                        --------------      ---------------
           <S>                                           <C>                  <C>
           Revenue......................................     $ 107,611            $ 388,718
           Operating loss...............................      (564,989)            (643,537)
           Net loss.....................................      (561,104)            (615,498)
           Basic loss per share.........................     $   (3.11)           $   (2.73)
</TABLE>

                                      F-14
<PAGE>

                             VIGNETTE CORPORATION

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)


The pro forma amounts reflected above exclude one-time acquisition charges,
including in-process research and development charges, of $11.6 million and
$146.5 million for the years ended December 31, 1999 and 2000, respectively.

4.  Stockholders' Equity and Redeemable Convertible Preferred Stock

  In November 1999, the Company announced a two-for-one stock split in the form
of a stock dividend. Stockholders received one additional share for each share
of Vignette common stock held on the record date of November 15, 1999. These
shares were paid after market close on December 1, 1999. All financial
information contained herein retroactively reflects the effect of this stock
dividend.

  In April 2000, the Company effected a three-for-one stock split in the form of
a stock dividend. Stockholders received two additional shares for each share of
Vignette common stock held on the record date of March 27, 2000. These shares
were paid after market close on April 13, 2000. All financial information
contained herein retroactively reflects the effect of this stock dividend.

Preferred Stock

  In February 1999, upon the closing of the Company's initial public offering,
all of the outstanding preferred stock was converted into 101,749,914 shares of
common stock. In addition, the Company's Certificate of Incorporation was
amended authorizing the Board of Directors to issue preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. At December 31, 2000, the
Company had not issued any new preferred stock.

  As of December 31, 1999 and 2000, there were 30,000,000 shares authorized to
be designated as preferred stock. No preferred shares were outstanding at
December 31, 1999 or 2000.

Voting Rights

  Each share of common stock has one voting right.

Public Offering

  In February 1999, the Company completed an initial public offering in which
the Company sold 25,680,000 shares of its common stock for proceeds to the
Company of $81.3 million, less offering costs of $7.5 million.

  In December 1999, the Company completed a secondary public offering in which
the Company sold 8,028,000 shares of its common stock for proceeds to the
Company of $374.3 million, less offering costs of $18.8 million.

Stock Plans

  The Company has the 1995 Stock Option/Stock Issuance Plan, the 1999 Equity
Incentive Plan, the 1999 Supplemental Stock Option Plan, the 1999 Non-Employee
Directors Option Plan and the Employee Stock Purchase Plan.

  Under the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"), employees,
members of the Board of Directors and independent advisors were eligible to be
granted options to purchase shares of the Company's common stock or may be
issued shares of the Company's common stock directly. Options are immediately
exercisable. Upon certain events, the Company has repurchase rights for unvested
shares equal to the original exercise price. 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







                                     F-15
<PAGE>

                             VIGNETTE CORPORATION

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)


Company.

  Under the 1999 Equity Incentive Plan (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. There
were 14,932,140 shares authorized under the 1999 Plan at December 31, 2000 of
which 6,796,769 are available for future grant. As of January 1 of each year,
commencing with the year 2000 and ending with the year 2002, the aggregate
number of shares authorized under the 1999 Plan shall automatically increase by
a number equal to the lesser of 5% of the total number of shares of the Common
Stock then outstanding or 11,804,820 shares.

  Under the 1999 Supplemental Stock Option Plan (the "1999 Supplemental Plan"),
employees, non-employee members of the Board and consultants may be granted non-
qualified options to purchase shares of common stock. The term and vesting
periods are the same as those under the 1999 Plan. There were 33,000,000 shares
authorized under the 1999 Supplemental Plan at December 31, 2000 of which
3,402,907 were available for future grants.

  Under the 1999 Non-Employee Directors Option Plan, non-employee board members
may be granted non-statutory options to purchase shares of common stock. Vesting
occurs over a four-year cumulative period. The term of each option is no more
than ten years from the date of grant. There were 1,500,000 shares authorized
under the Non-Employee Directors Option Plan at December 31, 2000 of which
1,440,000 were available for future grants.

  Under the Employee Stock Purchase Plan ("ESPP"), the Company has reserved
8,372,856 shares of common stock for issuance under the ESPP. As of January 1,
each year, the number of shares under the ESPP will automatically increase by
the lesser of 2% of the total number of shares of common stock outstanding or
4,500,000 shares. As of December 31, 2000, 2,857,348 shares were issued under
the ESPP.

  In 1999 and 2000, the Company recorded total deferred stock compensation of
$15.7 million and $56.1 million, respectively. In 1999, this amount represents
the difference between the exercise price of stock option grants for 3,661,254
shares of common stock and the deemed fair value of the Company's common stock
at the time of such grants, which ranged from $.81 to $27.81 per share and $2.20
to $32.72 per share, respectively. In 2000, this amount is represented, in part,
by the difference between the exercise price of stock option grants for 412,500
shares of common stock and the deemed fair value of the Company's common stock
at the time of such grants, which was $43.92 per share and $51.67 per share,
respectively; it is also represented by the difference between the exercise
price of the unvested stock options exchanged in the OnDisplay acquisition and
the deemed fair value of the Company's common stock at the acquisition date.
These amounts are being amortized over the vesting periods of the applicable
options, resulting in amortization of $8.6 million and $41.7 million for the
years ended December 31, 1999 and 2000, respectively.










                                     F-16
<PAGE>

                             VIGNETTE CORPORATION

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (Continued)

  A summary of the Company's stock option activity and related information
through December 31, 2000 follows:

<TABLE>
<CAPTION>
                                                                                                                   Weighted-
                                                                 Number of           Range of Exercise              Average
                                                                  Shares                   Prices                Exercise Price
                                                             -----------------      ----------------------     ---------------------
<S>                                                            <C>                  <C>                          <C>
Options outstanding - January 1, 1998........................       13,058,856         $0.01    -    $0.04                    $ 0.03
    Granted and assumed......................................       35,119,404          0.04    -     1.10                      0.48
    Exercised................................................      (13,277,238)         0.02    -     1.06                      0.04
    Canceled.................................................       (2,377,560)         0.02    -     0.81                      0.07
                                                             -----------------      ----------------------     ---------------------
Options outstanding - December 31, 1998......................       32,523,462          0.01    -     1.10                      0.52
    Granted and assumed......................................       27,240,774          1.14    -    54.33                     17.64
    Exercised................................................       (6,848,193)         0.01    -     2.90                      0.35
    Canceled.................................................       (1,716,315)         0.01    -    27.50                      2.35
                                                             -----------------      ----------------------     ---------------------
Options outstanding - December 31, 1999......................       51,199,728          0.01    -    54.33                      9.64
    Granted and assumed......................................       31,151,439          0.06    -    99.00                     40.84
    Exercised................................................      (13,138,972)         0.01    -    51.67                      2.17
    Canceled.................................................       (5,617,459)         0.01    -    88.92                     29.39
                                                             -----------------      ----------------------     ---------------------
Options outstanding - December 31, 2000......................       63,594,736         $0.01    -   $99.00                    $24.71
                                                             =================
Options available for grant at December 31, 2000.............       11,639,676
                                                             =================
</TABLE>

  The following is a summary of options outstanding as of December 31, 2000:

<TABLE>
<CAPTION>
                                   Number or Options             Weighted-Average
                                    Outstanding at          Remaining Contractual Life           Weighted-Average
 Range of Exercise Prices          December 31, 2000                (in years)                    Exercise Price
--------------------------   --------------------------   ------------------------------   -----------------------------
<S>                          <C>                         <C>                              <C>
    $  .01 - $9.90                    24,081,584                        5.6                           $ 1.92
    $ 9.91 - $19.80                    9,224,555                        5.3                           $13.41
    $19.81 - $29.70                    3,275,607                        5.8                           $26.09
    $29.71 - $39.60                    8,430,674                        6.0                           $34.78
    $39.61 - $49.50                    5,311,843                        6.6                           $43.96
    $49.51 - $59.40                    8,803,323                        5.6                           $52.81
    $59.41 - $69.30                    2,350,650                        6.6                           $66.79
    $69.31 - $79.20                    1,630,500                        6.0                           $74.73
    $79.21 - $89.10                      268,500                        6.5                           $88.92
    $89.11 - $99.00                      217,500                        7.2                           $99.00
                             --------------------------
                                      63,594,736
                             ==========================
</TABLE>

  A total of 3,275,761 shares of outstanding common stock were unvested at
December 31, 2000 and may be repurchased by the Company should vesting
requirements not be fulfilled. A total of 32,523,462, 28,955,955 and 27,559,181
outstanding options are exercisable at December 31, 1998, 1999 and 2000,
respectively.

  Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. During
1998, the fair value for these options was estimated at the date of grant using
a minimum value option-pricing model, and during 1999 and 2000 the fair value of
each option grant was estimated using the Black-Scholes option-pricing model,
with the following assumptions:

<TABLE>
<CAPTION>
                                                                                                                     Employee Stock
                                                                                    Employee Stock Options           Purchase Plan
                                                                               ---------------------------------    ----------------
                                                                                 1998         1999        2000            2000
                                                                               ---------    --------   ---------     ---------------
<S>                                                                           <C>          <C>        <C>          <C>
Risk-free interest rate........................................................      6.0%        5.8%        5.1%          5.7%
Weighted-average expected life of the options..................................  4 years     4 years     4 years      0.5 years
Dividend rate..................................................................        0%          0%          0%            0%
Assumed volatility.............................................................      ---         1.2         1.4           1.4
Weighted-average fair value of options granted
    Exercise price equal to fair value of stock on date of grant...............    $ .37      $13.95      $43.01
    Exercise price less than fair value of stock on date of grant..............    $ .30      $ 7.23      $45.10
</TABLE>

                                     F-17
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

     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 Employee Stock Purchase Plan is amortized over the six-month
purchase period. The Company's pro forma information follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                         -----------------------------------------
                                                                           1998              1999          2000
                                                                         --------          --------      ---------
          <S>                                                            <C>               <C>           <C>
          Pro forma stock-based compensation expense................     $    259          $ 25,661      $ 290,342
          Pro forma net loss........................................     $(26,456)         $(68,138)     $(822,567)
          Pro forma basic net loss per share........................     $  (1.55)         $  (0.50)     $   (4.00)
</TABLE>

Warrants

     In December 1998, the Company entered into agreements with a company
providing for available credit of up to $5.0 million and an equipment lease line
of $1.25 million. In connection with such agreements, the Company issued a
warrant to the company to purchase 542,148 shares of Series H Redeemable
Convertible Preferred Stock at an exercise price of $1.38. The Company valued
the warrant at $169,000 using the Black-Scholes model, an assumed volatility of
51%, a risk-free interest rate of 6%, a weighted-average expected life of 1
year, and a dividend rate of 0%. The warrants were exercised in full during the
years ended December 31, 1999 and 2000, respectively under the cashless exercise
provision of the warrant agreement.

5. Lease Commitments

     The Company has financed the acquisition of certain computers and equipment
through capital lease transactions that are accounted for as financings.
Included in property and equipment at December 31, 1999 and 2000 are the
following assets held under capital leases (in thousands):

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     --------------------
                                                                      1999          2000
                                                                     ------       -------
     <S>                                                             <C>          <C>
     Property and equipment...................................       $  65        $ 4,834
     Less accumulated depreciation............................         (65)        (1,531)
                                                                     -----        -------
                                                                     $ ---        $ 3,303
                                                                     =====        =======
</TABLE>

     The Company leases its office facilities and office equipment under various
operating and capital lease agreements. Future minimum payments as of December
31, 2000, under these leases, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                          Operating        Capital
                                                                                            Leases         Leases
                                                                                            ------         ------
          <S>                                                                             <C>             <C>
          2001.................................................................           $ 15,639        $  829
          2002.................................................................             17,197           636
          2003.................................................................             16,375           221
          2004.................................................................             14,358            --
          2005.................................................................             12,705            --
          Thereafter...........................................................             29,316            --
                                                                                          --------        ------
          Total minimum lease payments.........................................           $105,590         1,686
                                                                                          ========
          Amounts representing interest........................................                             (153)
                                                                                                          ------
          Present value of net minimum lease payments (including
             current portion of $751)..........................................                           $1,533
                                                                                                          ======
</TABLE>

     Rent expense for the years ended December 31, 1998, 1999 and 2000 was $1.5
million, $3.8 million and $9.0 million, respectively.

6.  Income Taxes

     As of December 31, 2000, the Company had federal net operating loss and
research and development credit carryforwards of approximately $391.0 million
and $4.7 million, respectively. The net operating loss and credit carryforwards
will expire in varying amounts, between 2004 and 2020, if not utilized.

     The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credit

                                      F-18
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

carryforwards in the event of an "ownership change" of a corporation. Net
operating loss carryforwards of approximately $105.4 million and tax credit
carryforwards of $2.0 million at December 31, 2000 were incurred by Diffusion,
Engine 5, DataSage and OnDisplay prior to being acquired by us and will be
subject to annual limitation. The annual limitation may result in the expiration
of net operating losses and tax credits before 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, 1999 and 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                          1999            2000
                                                                                       ---------       ---------
          <S>                                                                           <C>            <C>
          Deferred tax liabilities:
              Intangible assets.................................................        $ (2,398)      $ (17,706)
              Other.............................................................             (22)            (22)
                                                                                       ---------       ---------
                                                                                          (2,420)        (17,728)
          Deferred tax assets:
              Depreciable assets................................................             413           1,477
              Deferred revenue..................................................           6,773          15,046
              Tax carryforwards.................................................          49,025         149,488
              Accrued liabilities and other.....................................           1,208           6,071
                                                                                       ---------       ---------
                                                                                          57,419         172,082
                                                                                       ---------       ---------
          Net deferred tax assets...............................................          54,999         154,354
          Valuation allowance for net deferred tax assets.......................         (54,999)       (154,354)
                                                                                       ---------       ---------
          Net deferred taxes....................................................        $     --       $      --
                                                                                       =========       =========
</TABLE>

  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, 2000, the
valuation allowance includes approximately $27.5 million related to the
acquisition of Diffusion, Engine 5, DataSage and OnDisplay net deferred tax
assets. The initial recognition of these acquired deferred tax asset items will
first reduce goodwill, then other non-current intangible assets of the acquired
entity. Approximately $103.1 million of the valuation allowance relates to tax
benefits for stock option deductions included in the net operating loss
carryforward, which when realized, will be allocated directly to contributed
capital to the extent the benefits exceed amounts attributable to deferred
compensation expense.

  Undistributed earnings of the Company's foreign subsidiary were immaterial as
of December 31, 1999 and 2000. Those earnings are considered to be permanently
reinvested and, accordingly, no provision for U.S. federal and/or state income
taxes has been provided thereon.

                                      F-19
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

  The Company's provision for income taxes for the year ended December 31, 2000
consists primarily of 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:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                         -----------------------------------------
                                                                            1998           1999             2000
                                                                         ---------       --------         --------
     <S>                                                                 <C>             <C>              <C>
     Federal statutory rate...........................................     (34.0)%         (34.0)%         (34.0)%
     State taxes, net of federal benefit..............................      (2.7)           (1.4)            (.1)
     Non-deductible goodwill amortization.............................        --              .9            20.5
     In-process research and development..............................       2.7            12.7            10.5
     Stock compensation...............................................        --             4.3             2.2
     Foreign taxes at different rates.................................        --              --             (.3)
     Change in deferred tax items.....................................      34.8            17.6              .8
     Other............................................................       (.8)            (.1)             .1
                                                                           -----          ------           -----
                                                                              --%             --%            (.3)%
                                                                           =====          ======           =====
</TABLE>

7.  Employee 401(k) Plan

     In 1997, the Company established a voluntary defined contribution
retirement plan qualifying under Section 401(k) of the Internal Revenue Code of
1986. The Company made no contributions in the years ended December 31, 1998,
1999, and 2000.

8.  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):

<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                      -----------------------------------------------------
                                                                        1998                   1999                 2000
                                                                      ---------             ----------           ----------
     <S>                                                              <C>                   <C>                 <C>
     Revenue:
         Americas
             United States.......................................      $ 12,471             $ 76,037             $  270,091
             Other...............................................           522                  ---                    ---
                                                                       --------             --------             ----------
                 Total Americas..................................        12,993               76,037                270,091
         Europe and Asia Pacific.................................         3,212               13,148                 96,570
                                                                       --------             --------             ----------
                 Total revenue...................................      $ 16,205             $ 89,185             $  366,661
                                                                       ========             ========             ==========
     Net loss:
         Americas
             United States.......................................      $(25,756)            $(38,953)            $ (544,844)
             Other...............................................            --                   --                   (743)
                                                                       --------             --------             ----------
                 Total Americas..................................       (25,756)             (38,953)              (545,587)
         Europe and Asia Pacific.................................          (441)              (3,524)                13,362
                                                                       --------             --------             ----------
                 Total...........................................      $(26,197)            $(42,477)            $ (532,225)
                                                                       ========             ========             ==========
     Identifiable assets:
         Americas
             Domestic............................................      $ 19,249             $488,572             $2,112,981
             Other...............................................           ---                  ---                  3,037
                                                                       --------             --------             ----------
                 Total Americas..................................        19,249              488,572              2,116,018
         Europe and Asia Pacific.................................         2,100                9,594                 74,936
                                                                       --------             --------             ----------
                 Total...........................................      $ 21,349             $498,166             $2,190,954
                                                                       ========             ========             ==========
</TABLE>

9.  Subsequent Events (Unaudited)

     On January 17, 2001, Vignette announced a business restructuring plan that
involves a workforce reduction of approximately 15% and consolidation of certain
Company facilities. These restructuring activities are in response to changes in
the information technology spending environment and customer hesitancy to make
large capital expenditures. The Company expects to incur restructuring and other
related charges of approximately $45.0 to $55.0 million in 2001.

     In February 2001, the Company issued approximately 2.4 million restricted
shares to certain employees who elected to participate in the Company's stock
option exchange program, a program that was designed to provide its employees

                                      F-20
<PAGE>

                             VIGNETTE CORPORATION

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

with a long-term incentive for maximizing shareholder value.  As a result of
this transaction, deferred compensation will be recorded for the deemed market
value of the restricted shares issued as of the grant date in the amount of
approximately $14.8 million. Beginning on or about May 15, 2001, such amount
will be amortized to expense over the one-year vesting period.

     Also under the same option exchange program, the Company canceled
approximately 19.2 million stock options previously granted to those employees
who voluntarily participated in the program in exchange for new options that
will be granted on or after August 15, 2001.  The number of new options to be
granted will be dependent on the closing price of the Company's common stock on
the grant date and will range from 52.5% to 87.5% of the total options canceled.
The exercise price of these new options will be equal to the fair market value
of the Company's common stock on the grant date.  The program has been organized
to comply with FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, and is not expected to result in any additional
compensation charges or variable plan accounting.

                                      F-21