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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

OR

Commission File Number: 000-25375

VIGNETTE CORPORATION

(Exact name of registrant as specified in its charter)

1601 South MoPac Expressway

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. Yes x No ¨

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

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

As of June 30, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $353,608,605.

As of February 28, 2003, 252,367,358 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held May 15, 2003 are incorporated by reference in Part III of this Annual Report on Form 10-K.

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VIGNETTE CORPORATION

ANNUAL REPORT ON FORM 10–K

For the year ended December 31, 2002

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FORWARD-LOOKING STATEMENTS

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

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

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

PART I.

ITEM 1. BUSINESS

Overview

Our content management and portal solutions enable organizations to rapidly build, manage and deploy Web applications for the real-time enterprise. We give organizations the capability to actively manage electronic assets across their enterprise, to associate meaning and value to that information, and to deliver it to the right audience at the right time through portals and Web applications. We provide a broad set of software products to manage both information and the portals through which information is delivered.

Our integrated products can reduce Web deployment time, costs and risks by eliminating the need to combine products from multiple vendors. Our products also offer an integrated system for measuring the effectiveness of Web applications and online interactions. This allows organizations to measure the success of their Web initiatives, and to dynamically adapt their initiatives to enhance their efficiency and productivity. Competitive, performance-based organizations that strive to operate in real-time can use this insight to help improve their business processes and customer service levels.

To meet the information technology needs of enterprises of all sizes, our products were developed on open standards and support the major technology platforms. We package our products in convenient suites to enable seamless deployments, regardless of the size of the business or the scope of the project. The suites are designed to work together, and are packaged in two distinct categories:

Content Management allows organizations to streamline the creation and management of information, regardless of where it is stored in the organization. Our products provide out-of-the-box features for managing content, and integrate with most enterprise software applications such as ERP, CRM, and databases.

Portal Management enables organizations to quickly configure, deploy and manage multiple portals for various audiences. These portals are managed through a single console to consolidate administration responsibilities.

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Our products are supported by our professional services organization, Vignette Professional Services ^™ (“VPS”). VPS offers pre-packaged and custom services, along with documented best practices, to help organizations define their on line business objectives and deploy their content management and portal applications. Our education, consulting and customer care teams give customers the benefit of our experience with thousands of customer implementations. We partner with a number of leading system integrators such as Accenture, EDS and Deloitte Consulting to implement our content and portal management software for their clients. In many cases, we work in blended teams to jointly implement solutions. To ensure that we provide support to our customers on their chosen platform and infrastructure, we have long-standing relationships with key technology providers such as BEA Systems, IBM and Sun Microsystems.

Products

Our content management and portal solutions enable organizations to rapidly build, manage and deploy Web applications for the real-time enterprise. We support a dynamic model to assemble Enterprise Web Applications, allowing organizations to manage current and future growth demands and strategies to reflect the real-time enterprise for their customers, suppliers, partners and employees. Our solutions help our customers:

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

Vignette^® V7 In October 2002, we announced Vignette V7, an integrated service delivery foundation to create and manage information, business processes, portals and applications. Vignette Content Management and Vignette Application Portal form the core of the Vignette V7 product family, and afford users the ability to manage information and interaction in an integrated fashion. Vignette V7 also includes products that deliver a set of new market defining technologies that our customers can use to further expand the flexibility and functionality of their Vignette V7 implementation.

To address the particular size and requirements of our customers, we deliver our products in various suites: group, business and enterprise. Additionally, we allow organizations the flexibility to purchase products individually. The Vignette V7 Service Delivery Foundation is a framework that describes our products covering six application services: content, portal, process, collaboration, integration and analysis. Organizations may purchase products individually from these six service categories or pre-bundled in suites to meet their specific needs. Following is a listing of our Vignette V7 products.

Content Services—Robust content management services including library services, content type modeling, workflow, taxonomy, and search.

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processes, users can share knowledge and collaborate on virtually any tasks, using e-mail, desktop applications and Web-based workspaces. We also offer a variety of additional specialized products to enhance our content manager.

Portal Services—A powerful portal application, added through the Epicentric, Inc. acquisition, that provides both a highly function portal framework and a business user-friendly development environment for assembling portlets.

Process Services—Powerful standards-based process workflow engine and graphical process modeler to build and deploy business processes across the enterprise application infrastructure.

Collaboration Services—Services to enable project-based collaboration including ad hoc process management and integration of communication and scheduling applications.

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

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Analysis Services—In-depth metrics and reporting based on Weblogs, content taxonomy and process to drive ROI through effective use of content and optimize user experience.

Open Architecture

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

Services

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

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

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

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Strategy

Our objective is to maintain and extend our leadership position as a global provider of applications and products that enable organizations to rapidly build, manage and deploy Web applications to enable a real-time enterprise. To achieve this objective, we will focus on expanding our customer base of Fortune 1000 and departmental enterprises, extending our technology and product leadership through investment in research and development, expanding our global sales capabilities, and extending our partnership alliances with leading technology and services companies.

Strategic Alliances

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

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

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

Business Combinations

We have completed five acquisitions since our inception. One acquisition occurred during 2002, three occurred during 2000 and one during 1999. All acquisitions were accounted for as purchase business combinations and therefore, the net assets acquired or net liabilities assumed were recorded at their estimated fair value at the respective dates of acquisition and the results of operations have been included with ours for the periods subsequent to the respective acquisition dates. Following is a listing of our significant acquisitions:

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

OnDisplay, Inc. Effective July 5, 2000, we acquired all of the outstanding stock and assumed all outstanding stock options of OnDisplay, Inc., a leading provider of e-business infrastructure software for powering e-business portals and e-marketplaces, in exchange for 42,016,975 shares of our common stock. The total purchase price, including transaction costs of $14.0 million, was approximately $1.5 billion.

Datasage, Inc. Effective February 15, 2000, we acquired all of the outstanding stock and assumed all outstanding stock options of DataSage, Inc., a leading provider of e-marketing and personalization applications, in exchange for 9,458,061 shares of our common stock. The total purchase price, including transaction costs of $1.1 million, was approximately $586.6 million.

In connection with our acquisitions, we incurred one-time acquisition costs and integration-related charges. Such charges relate to product integration, cross-training of employees, and other merger-related items. For four acquisitions, a portion of the purchase price was allocated to in-process research and development and was expensed upon the consummation of the respective transaction. These related acquisition, integration and in-process research and development charges totaled approximately $1.8 million, $1.9 million and $169.9 million during 2002, 2001 and 2000, respectively.

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Customers

As of December 31, 2002, we had served over 1,600 end-user customers. Our customer list includes successful organizations in the entertainment, financial services, government, healthcare, high technology, higher education, life sciences, manufacturing, new media and publishing, retail, telecom and travel industries.

Competition

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

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

Such competition could materially and adversely affect our ability to obtain revenues from either license or service fees from new or existing customers on terms favorable to us. Further, competitive pressures may require us to reduce the price of our software. In either case, our business, operating results and financial condition would be materially and adversely affected. There can be no assurance that we will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on our business, financial condition and operating results. See “Risk Factors that May Affect Future Results—Risks Related to Our Business—We Face Intense Competition from Other Software Companies, Which Could Make it Difficult to Acquire and Retain Customers 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 future extensions to our family of products. This development consists primarily of adding new competitive product features and additional tools and products.

Research and development expenditures, excluding acquired in-process research and development charges, for 2002, 2001 and 2000 were approximately $51.3 million, $64.9 million, $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 costs have been expensed as incurred.

The market for our products and services is characterized by rapid technological change, frequent new product introductions and enhancements, evolving industry standards, and rapidly changing customer requirements. The introduction of products incorporating new technologies and the emergence of new industry standards could render existing products obsolete and unmarketable. Our future success will

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depend in part on our ability to anticipate changes, enhance our current products, develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our customers. See “Risk Factors that May Affect Future Results—Risks Related to Our Business—If We are Unable to Meet the Rapid Changes in Software Technology, Our Existing Products Could Become Obsolete.”

Sales and Marketing

We market our products primarily through our direct sales force; however, we intend to expand our indirect sales channel through additional relationships with systems integrators, value-added resellers and original equipment manufacturers. We generate leads from a variety of sources, including businesses seeking partners to develop Web-based applications. Initial sales activities typically include a demonstration of our product capabilities followed by one or more detailed technical reviews. As of December 31, 2002, the direct sales force consisted of 177 sales executives and related support personnel.

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

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

Proprietary Rights and Licensing

Our success and ability to compete is dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We presently own six patents and have a number of patent applications pending in the United States. We have six registered trademarks in the United States, five pending trademark applications in the United States, 65 registered trademarks in foreign countries, and 20 pending trademark applications in foreign countries. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to signed license or “shrink-wrap” agreements, which impose certain restrictions on the licensee’s ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.

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

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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., bridging solutions technology from Intrinsyc Software, Inc., browser-based Web editing software from Ektron, Inc., database access technology from Rogue Wave Software, Inc., chart and graphing software from Corda Technologies, concept and keyword search functionality from Autonomy, Inc., and other software that is integrated with internally developed software. To the extent we could not maintain licenses to some or all of this third-party software, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and financial condition.

Employees

As of December 31, 2002, we had 1,079 employees, including 360 in research and development, 290 in sales and marketing, 287 in professional services and customer support, and 142 in finance and administration. Subsequent to December 31, 2002, we terminated approximately 235 individuals in accordance with our expanded restructuring and Epicentric exit plans, both committed to in December 2002. As of February 28, 2003, we had 856 employees, including 257 in research and development, 221 in sales and marketing, 270 in professional services and customer support, and 108 in finance and administration. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. From time to time, we also employ independent contractors to support our professional services, product development, sales, marketing and finance organizations. 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.

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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Risks Related to Our Business

We Expect to Incur Future Losses

We have not achieved profitability and we expect to incur net operating losses in the coming quarter and potentially in future quarters. To date, we have primarily funded our operations from the sale of equity securities. We expect to continue to incur significant product development, sales and marketing, and administrative expenses and, as a result, we will need to generate significant revenues to achieve and subsequently maintain profitability. We cannot be certain 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 revenue and operating expenses based on our historical results. Accordingly, we base our expenses in part on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenues are lower than we had projected. Our ability to forecast accurately our quarterly revenue is limited because our software products have a long sales cycle that makes it difficult to predict the quarter in which sales will occur. We would expect our business, operating results and financial condition to be materially adversely affected if our revenues do not meet our projections and that net losses in a given quarter would be greater than expected.

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

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

Recent and Future Acquisitions, Including Our Acquisition of Epicentric, Inc., Could Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value and Adversely Affect Our Operating Results

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

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We Must Successfully Complete the Implementation of Our Business Restructuring Efforts

In accordance with our restructuring efforts announced during 2001 and subsequently expanded during 2002, most recently in December 2002, we are currently transitioning our business and realigning our strategic focus towards our core market, technologies and products. Internal changes resulting from our business restructuring announced during 2001 and 2002 are substantially complete, but many factors may negatively impact our ability to implement our strategic focus including our ability to manage the implementation, sustain the productivity of our workforce and retain key employees, manage our operating expenses and quickly respond to and recover from unforeseen events associated with the restructuring. Market conditions may require that we undertake additional restructuring efforts in the future. Our business, results of operations or financial condition could be materially adversely affected if we are unable to manage the implementation, sustain the productivity of our workforce and retain key employees, manage our operating expenses or quickly respond to and recover from unforeseen events associated with any future restructuring efforts.

In relation to our restructuring activities, we accrued remaining lease commitments for excess office space that we vacated or intend to vacate as a result of the restructuring plan. Total lease commitments include the remaining lease liabilities and brokerage commissions, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and any sublease income, were based on market information and trend analysis. It is reasonably possible that actual results could differ from these estimates in the near term, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the accrual for facility lease commitments

We Expect Our Quarterly Revenues and Operating Results to Fluctuate

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

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

We will continue to invest in our research and development, sales and marketing, professional services and general and administrative organizations. We expect such spending, in absolute dollars, will remain relatively constant as compared to recent periods; however, if our revenue expectations are not achieved, our business, operating results or financial condition could be materially adversely affected and net losses in a given quarter would be greater than expected.

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

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

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

Since our customers use our products for mission critical applications, errors, defects or other performance problems could result in financial or other damages to our customers. They could seek damages for losses from us, which, if successful, could have a material adverse effect on our business, operating results and financial condition. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate or alter such limitation of liability provisions. Such claims, if brought against us, even if not successful, would likely be time consuming and costly.

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 Continue to Strengthen Our Sales and Distribution Capabilities

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

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

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

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

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

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

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

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

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

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

We are actively supplementing the capabilities of our services organization by contracting with and educating third-party service providers and consultants to also provide these services to our customers. We may not be successful in attracting additional third-party providers or in educating or maintaining the interest of current third-party providers. In addition, these third parties may not devote sufficient resources to these activities to meet customers’ demand to adequately supplement our services.

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

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

We recorded 32% of our total revenue for the year ended December 31, 2002 through licenses and services sold to customers located outside of the United States. We expect international revenue to remain a large percentage of total revenue and we believe that we must continue to expand our international sales activities in order to be successful. Our international sales growth will be limited if we are unable to establish appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, customize products for local markets, develop relationships with international service providers and establish relationships with additional distributors and third-party integrators. In that case, our business, operating results and financial condition could be materially adversely affected. Even if we are able to successfully expand international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products.

To date, a majority of our international revenues and costs have been denominated in foreign currencies. We believe that 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 Future Growth, We May Need to Continue to Improve Our Operational Systems on a Timely Basis

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

We May Be Adversely Affected if We Lose Key Personnel

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

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

We currently derive a substantial portion of our revenues from the license and related upgrades, professional services and support of our Vignette V/Series software products. We expect that we will continue to depend on revenue related to our Vignette V6 product line for at least the next several quarters. We cannot be certain that we will successfully market and sell our new Vignette V7 offerings, announced in October 2002 and released in December 2002. If we do not continue to increase revenue related to our

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existing products or generate revenue from new products and services, our business, operating results and financial condition would be materially adversely affected.

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

We expect that our future financial performance will depend significantly on revenue from existing and future software products and the related tools that we plan to develop. There are significant risks inherent in a product introduction, such as our recently announced Vignette V7 software products and the recently acquired Epicentric products. Market acceptance of these and future products will depend on continued market development for Web applications and services and the commercial adoption of Vignette V7. 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 Software Technology, Our Existing Products Could Become Obsolete

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

We Face Intense Competition from Other Software Companies, Which Could Make it Difficult to Acquire and Retain Customers Now and in the Future

Our market is intensely competitive. Our customers’ requirements and the technology available to satisfy those requirements continually change. We expect competition to persist and intensify in the future.

Our principal competitors include: in-house development efforts by potential customers or partners; other vendors of software that directly address elements of Web-based applications; and developers of software that address only certain technology components of Web-based applications (e.g., content management, portal management, process, collaboration, integration or analytics).

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

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

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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.

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 our business, if we become a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of other’s intellectual property, we may be forced to do one or more of the following:

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

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

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

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

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

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

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

We May Incur Increased Costs in Response to Recently Enacted and Proposed Regulations

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

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

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

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Risks Related to the Software Industry

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

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

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

The market for Web-based applications software is rapidly evolving. We expect that we will continue to need intensive marketing and sales efforts to educate prospective customers about the uses and benefits of our products and services. Accordingly, we cannot be certain that a viable market for our products will emerge or be sustainable. Enterprises that have already invested substantial resources in other methods of conducting business may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. Similarly, individuals have established patterns of purchasing goods and services. They may be reluctant to alter those patterns. They may also resist providing the personal data necessary to support our existing and potential product uses. Any of these factors could inhibit the growth of online business generally and the market’s acceptance of our products and services in particular.

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

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

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

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Risks Related to the Securities Markets

Our Stock May Not Meet Market Listing Requirements

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

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

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:

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

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

We May Be Unable to Meet Our Future Capital Requirements

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

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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

Our principal research, development, sales, marketing and administrative headquarter offices are located in Austin, Texas. We own no real estate or facilities. As of December 31, 2002, we leased office space in: Austin, Texas; San Francisco, California; New York City, New York; Waltham, Massachusetts; Chicago, Illinois; Gaithersburg, Maryland; Maidenhead, England; Madrid, Spain; Sydney, Australia; and Singapore. Such leases have remaining terms of up to 8 years. All offices listed above support sales and services activity, and we have research and development activity in our Austin, Texas, San Francisco, California and Waltham, Massachusetts offices.

Additionally, we lease several full service managed suites and executive suites as small sales offices across the United States and around the world. These small offices generally have lease terms of less than one year, allowing us to adjust to changing business and customer support requirements. As of December 31, 2002, we leased office space in 15 countries outside of the United States.

Throughout 2001 and 2002, we consolidated our leased office portfolio. Some of the resulting excess lease space expired in 2002, or will expire in the near term, and we successfully negotiated early terminations of some leases, in part or in whole. We currently sublease some surplus office space in Austin, Texas; Boston, Massachusetts; and Singapore to unrelated third-parties. We are actively marketing and attempting to sublease or negotiate early terminations of our remaining surplus properties, including, but not limited to, space in Austin, Texas; San Francisco and San Ramon, California; Chicago, Illinois; Reston, Virginia; and New York City, New York for the respective remaining lease terms.

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ITEM 3. LEGAL PROCEEDINGS

Securities Class Action

On October 26, 2001, a class action lawsuit was filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York in an action captioned Leon Leybovich v. Vignette Corporation, et al., seeking unspecified damages on behalf of a purported class that purchased Vignette common stock between February 18, 1999 and December 6, 2000. Also named as defendants were four underwriters involved in the Company’s initial public offering of Vignette stock in February 1999 and the Company’s secondary public offering of Vignette stock in December 1999 – Morgan Stanley Dean Witter, Inc., Hambrecht & Quist, LLC, Dain Rauscher Wessels and U.S. Bancorp Piper Jaffray, Inc. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on, among other things, claims that the four underwriters awarded material portions of the shares in the Company’s initial and secondary public offerings to certain customers in exchange for excessive commissions. The plaintiff also asserts that the underwriters engaged in “tie-in arrangements” whereby certain customers were allocated shares of Company stock sold in its initial and secondary public offerings in exchange for an agreement to purchase additional shares in the aftermarket at pre-determined prices. With respect to the Company, the complaint alleges that the Company and its officers and directors failed to disclose the existence of these purported excessive commissions and tie-in arrangements in the prospectus and registration statement for the Company’s initial public offering and the prospectus and registration statement for the Company’s secondary public offering. The Company believes that this lawsuit is without merit and intends to continue to defend itself vigorously.

Litigation and Other Claims

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

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

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

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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

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

On October 14, 2002, we received a notice from the Nasdaq Qualifications Department. Such notice indicated that our common stock had closed for 30 consecutive trading days below the applicable minimum bid price of $1.00. In this instance, the Nasdaq affords a company 90 calendar days in which to demonstrate compliance with National Market Marketplace Rules; specifically, a company’s common stock must close at or above a bid price of $1.00 per share for a minimum of ten consecutive trading. On November 13, 2002, our stock closed at or above a bid price of $1.00 per share for ten consecutive trading days, demonstrating compliance with the National Market Marketplace Rules. To ensure continued listing on the Nasdaq National Market, we must maintain compliance with the minimum bid price requirements and other requirements.

At March 20, 2003, there were approximately 1,254 holders of record of our common stock and the closing price of our common stock was $1.61 per share.

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

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2002, 2001 and 2000 and the consolidated balance sheet data at December 31, 2002 and 2001 are derived from audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 1999 and 1998 and the consolidated balance sheet data at December 31, 2000, 1999 and 1998 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.

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

OPERATIONS

Overview

Our content management and portal solutions enable organizations to rapidly build, manage and deploy Web applications for the real-time enterprise. We give organizations the capability to actively manage electronic assets across their enterprise, to associate meaning and value to that information, and to deliver it to the right audience at the right time through portals and Web applications. We provide a broad set of software products to manage both information and the portals through which information is delivered.

Our integrated products can reduce Web deployment time, costs and risks by eliminating the need to combine products from multiple vendors. Our products also offer an integrated system for measuring the effectiveness of Web applications and online interactions. This allows organizations to measure the success of their Web initiatives, and to dynamically adapt their initiatives to enhance their efficiency and productivity. Competitive, performance-based organizations that strive to operate in real-time can use this insight to help improve their business processes and customer service levels.

To meet the information technology needs of enterprises of all sizes, our products were developed on open standards and support the major technology platforms. We package our products in convenient suites to enable seamless deployments, regardless of the size of the business or the scope of the project. The suites are designed to work together, and are packaged in two distinct categories:

Content Management allows organizations to streamline the creation and management of information, regardless of where it is stored in the organization. Our products provide out-of-the-box features for managing content and integrate with most enterprise software applications such as ERP, CRM, and databases.

Portal Management enables organizations to quickly configure, deploy and manage multiple portals for various audiences. These portals are managed through a single console to consolidate administration responsibilities.

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Our products are supported by Vignette Professional Services (“VPS”). VPS offers pre-packaged and custom services, along with documented best practices, to help organizations define their online business objectives and deploy their content management and portal applications. Our education, consulting and customer care teams give customers the benefit of our experience with thousands of customer implementations. We partner with a number of leading system integrators such as Accenture, EDS, and Deloitte Consulting to implement our content and portal management software for their clients. In many cases, we work in blended teams to jointly implement solutions. To ensure that we provide support to our customers on their chosen platform and infrastructure, we have long-standing relationships with key technology providers such as BEA Systems, IBM and Sun Microsystems.

We are headquartered in Austin, Texas, and operate satellite offices in other U.S. cities. In addition, we are located throughout the Americas, Europe, Asia and Australia. We had 1,079 full-time employees at December 31, 2002. Subsequent to December 31, 2002, we terminated approximately 235 individuals in accordance with our expanded restructuring and Epicentric exit plans, both committed to in December 2002. Due in large part to the restructuring plan we implemented in 2001, and subsequently expanded during 2002, headcount decreased from 1,321 at December 31, 2001.

Since our inception in December 1995, we have incurred substantial costs to develop our technology and products; market, sell and service these products; recruit and train personnel; and build a corporate infrastructure. As a result, we have incurred significant losses since our inception and, as of December 31, 2002, we had an accumulated deficit of approximately $2.4 billion. We believe our success depends on the continued development and acceptance of our products and services, the growth of our customer base as well as the overall growth in the Web applications market. Accordingly, we intend to invest in research and development, sales, marketing, professional services and to a lesser extent our operational and financial systems, as necessary. We expect to continue to incur operating losses in the near future, and we will require increases in revenues before we achieve and sustain profitability; however, we cannot assure that such increases in revenue will result in profitability.

2002 Highlights

Vignette V7 introduction In October 2002, we announced the new family of Vignette V7 content management and portal applications, Dialog, and the Vignette V7 Service Delivery Foundation, which includes an application architecture and a comprehensive set of application services that enable the rapid deployment of enterprise Web applications. The Vignette V7 content management and portal applications offer a mix of out-of-the-box and configurable capabilities that are designed to reduce the time and effort required to build and maintain Web sites and portals. Vignette V7 is packaged to provide customers a range of options to meet departmental through enterprise requirements.

Acquisition of Epicentric, Inc. In December 2002, we acquired all issued and outstanding shares of Epicentric, Inc. (“Epicentric”) for $29.1 million in cash, including $3.1 million in transaction costs. Epicentric was a leading provider of business portal solutions. By adding advanced portal and delivery management capabilities to our existing and future product suites, we have the capability to deliver real-time enterprise Web applications. In addition to the purchase price, we expect to pay $5.2 million, in cash and restricted stock, in acquisition-related employee retention payments over the next two years. This acquisition did not result in an additional segment.

Impairment of goodwill As a result of our annual goodwill impairment test performed as of October 1, 2002, we recorded a $147.0 million non-cash, goodwill impairment charge during the fourth quarter of 2002. Such goodwill originally arose in connection with our four business acquisitions completed in 1999 and 2000. These acquisitions were completed during a period when stock valuations for companies in the software sector were generally at much higher levels.

Expanded restructuring and cost-reduction efforts Throughout 2002, we expanded our plan to align costs with current and anticipated economic and industry conditions. These actions included: a voluntary, six-month employee salary reduction; headcount reductions; and facilities consolidation.

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We issued approximately one million stock options to certain employees and executives who voluntarily participated in a six-month salary exchange program. In connection with this program, we recorded deferred compensation of approximately $600,000 for the intrinsic value of the stock options as of the grant date. Such amount is being amortized to expense over these options’ one-year vesting period.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.

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

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

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

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

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

Revenue allocated to product license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, we have no significant remaining obligations with regard to implementation, and collection of a fixed or determinable fee is probable. We consider all payments outside our normal payment terms, including all amounts due in excess of one year, to not be fixed and determinable, and such amounts are recognized as revenue as they become due. If collectibility is not

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considered probable, revenue is recognized when the fee is collected. For software arrangements where we are obligated to perform professional services for implementation, we do not consider delivery to have occurred or customer payment to be probable of collection until no significant obligations with regard to implementation remain. Generally, this would occur when substantially all service work has been completed in accordance with the terms and conditions of the customer’s implementation requirements but may vary depending on factors such as an individual customer’s payment history or order type (e.g., initial versus follow-on).

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

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

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

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

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

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

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

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

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

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

We performed the required transitional impairment test of goodwill during the first quarter of 2002 and determined that we did not have a transitional impairment of goodwill. Subsequent to the transitional impairment test, we must assess goodwill for impairment at least annually. We assess our goodwill on October 1 of each year and during an interim period if facts or circumstances would more likely than not suggest that the fair value of an identified reporting unit is below its carrying value. Such periodic assessment of goodwill resulted in a significant goodwill impairment charge during the quarter ended December 31, 2002.

Accounting Reclassification and Change in Accounting Estimate

Effective December 31, 2001, we report all bad debt expense in the operating expense cost category, “Sales and marketing”. Prior to December 31, 2001, we reported a portion of bad debt expense in “Cost of revenue – services”. Bad debt expense reported in “Cost of revenue – services” for the prior periods presented in this Report have been reclassified to conform to the current period presentation. Such reclassification had no impact on the reported net loss, net loss per share or stockholders’ equity. Bad debt expense reclassified from “Cost of revenue – services” to “Sales and marketing” was $5.7 million and $2.4 million in 2001 and 2000, respectively. This reclassification increased gross margin by approximately 2% and 0% in 2001 and 2000, respectively, and increased “Sales and marketing” as a percentage of sales by a comparable amount.

We reclassified $6.1 million in deferred revenue at December 31, 2001 from current liabilities to non-current liabilities to conform to our current year presentation. This reclassification did not affect total liabilities, but increased working capital by the amount reclassified, or 2%.

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

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Results of Operations

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

Comparison of fiscal years ended December 31, 2002, 2001 and 2000 (in thousands, unless otherwise noted)

Revenue

Total revenue decreased 48% in 2002 and 19% in 2001. These successive decreases relate primarily to the sustained global economic slowdown that originated in late 2000. The weakened economy substantially curtailed corporate information technology spending. As a result, we experienced a longer sales cycle and fewer new customers. We believe that continued economic uncertainty will challenge our business; however, we expect that total revenue will increase during 2003, as compared to 2002.

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Product license. Product license revenue decreased 60% in 2002 and 29% in 2001. These successive decreases relate to a sustained reduction and delay in corporate information technology spending.

Services. Services revenue decreased 35% in 2002 and 5% in 2001. These successive decreases relate primarily to decreased professional services revenue, which decreased 54% in 2002 and 25% in 2001. Professional services revenue was impacted by fewer new product engagements, lower billing rates and to a lesser extent, transition of consulting and implementation engagements to our partners and other third-party integrators. Maintenance and support revenue decreased 6% in 2002 and increased 56% in 2001. The decrease in 2002 relates to fewer new product engagements, offset by consistent levels of maintenance renewals. The increase in 2001 relates to the purchase and renewal of maintenance and support agreements by our customers.

During 2002, 2001 and 2000, no single customer accounted for more than 10% of our total revenues. International revenue was $50.3 million, $106.1 million and $96.6 million, or 32%, 36% and 26% of total revenues, in 2002, 2001, and 2000, respectively.

Cost of revenue

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

Product license and amortization of acquired technology. Product license costs decreased 54% in 2002 and 31% in 2001. The successive decreases result primarily from the decline in overall product license revenue. Through our December 2002 purchase of Epicentric, Inc., we acquired certain technological intangible assets having an estimated fair value of $6.4 million and an estimated useful life of two years. The amortization of these intangible assets is recorded as a cost of revenue. We expect license costs to increase as license revenues increase.

Services. Services costs decreased 44% in 2002 and 28% in 2001. These successive decreases in absolute dollars relate primarily to our restructuring efforts via headcount reductions and other cost-saving measures. The overall improvement in services gross profit in both 2002 and 2001 relates to an increased mix of maintenance and support revenue, in relation to total services revenue. Professional services costs decreased 49% in 2002 and 30% in 2001. Maintenance and support costs increased 5% in 2002 and decreased 7% in 2001. We expect our services costs, in absolute dollars, to increase slightly in the near future. We expect services costs as a percentage of services revenue to remain stable over time, but may 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 of our services personnel.

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Operating expenses

Research and development. Research and development expenses consist primarily of personnel costs to support product development. Research and development expenses decreased 21% in 2002 and increased 11% in 2001. In 2002, the decrease in absolute dollars relates primarily to our restructuring efforts via reduced engineering headcount and other cost-saving measures. The increase as a percentage of revenue resulted from a decrease in total revenue. In 2001, the increase relates primarily to the timing of the OnDisplay acquisition in July 2000. This acquisition necessitated greater staffing to support our expanded product offering. We believe that continued investment in research and development is critical to attaining our strategic objectives and, therefore, expect that spending on research and development will remain relatively stable in the near term; however, these expenses may increase over the longer term.

Software development costs that were capitalized in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, totaled $0.7 million, $0.7 million and $1.9 million in 2002, 2001 and 2000, respectively. In connection with the restructuring plan implemented during 2001, we decided to no longer sell or support certain software products, resulting in an impairment of $1.9 million of previously capitalized software.

Sales and marketing. Sales and marketing expenses consist primarily of salaries and other related costs for sales, marketing and customer care personnel, sales commissions, public relations, marketing materials and tradeshows as well as bad debt charges. Sales and marketing expenses decreased 52% in 2002 and increased 1% in 2001. In 2002, the decrease in absolute dollars and as a percentage of revenue relates primarily to our restructuring efforts via reduced headcount and other cost-saving measures, lower commissions due to lower product sales, as well as reduced bad debt charges. In 2001, the increase in absolute dollars relates primarily to expanding our customer care organization and increased bad debt charges recognized during the first quarter of 2001, partially offset by a decrease in earned commissions, due to lower product sales, and cost savings from our 2001 restructuring activities. The bad debt charges recognized during the first quarter of 2001 related to the unfavorable financial impacts the economic downturn had on many of our early-stage customers. The increase in sales and marketing expenses in 2001, as a percentage of total revenue, resulted from a decrease in total revenues. We anticipate sales and marketing expenses to decrease slightly in the near term; however, these expenses may increase over the longer term. 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 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 human resources, finance, accounting, facilities, information technology and legal employees. General and administrative expenses decreased 29% in 2002 and 23% in 2001. The successive decreases in absolute dollars relates primarily to our restructuring efforts via reduced headcount and other cost-saving measures. In 2002, the increase as a percentage of revenue resulted from a decrease in total revenue. We anticipate general and administrative expenses to decrease slightly in the near term; however,

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these expenses may increase over the longer term. We also anticipate that general and administrative expenses may fluctuate as a percentage of total revenue from period to period.

Purchased in-process research and development, acquisition-related and other charges. During the three years ended December 31, 2002, we acquired a series of complementary businesses. The following table summarizes costs related to our business combinations (in thousands):