VIGNETTE CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	*QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934*

For the quarter ended March 31, 2005

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

Commission File Number: 000-25375

VIGNETTE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

74-2769415

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1301 South MoPac Expressway

Austin, Texas 78746

(Address of principal executive offices)

(512) 741-4300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x No ¨

As of April 30, 2005, there were 290,984,936 shares of the registrant’s common stock outstanding.

VIGNETTE CORPORATION

FORM 10–Q QUARTERLY REPORT

For the quarter ended March 31, 2005

TABLE OF CONTENTS


		Page
Part I. Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	49

Part II. Other Information

Item 1.	Legal Proceedings	49

Item 6.	Exhibits	51

SIGNATURES		52

CERTIFICATIONS

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

VIGNETTE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

in thousands


	March 31, 2005		December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	78,032	$	63,781
Short-term investments		95,117		100,582
Accounts receivable, net		30,482		41,569
Prepaid expenses and other current assets		9,767		5,424

Total current assets		213,398		211,356
Property and equipment, net		8,791		9,764
Investments		11,925		12,400
Goodwill		120,753		123,912
Other intangibles, net		42,623		45,906
Other assets		1,435		2,118

Total assets	$	398,925	$	405,456

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	35,062	$	42,155
Deferred revenue		35,050		33,444
Other current liabilities		7,453		9,351

Total current liabilities		77,565		84,950
Deferred revenue, less current portion		2,879		3,356
Other long-term liabilities, less current portion		7,798		10,332

Total liabilities		88,242		98,638
Stockholders’ equity		310,683		306,818

Total liabilities and stockholders’ equity	$	398,925	$	405,456

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

VIGNETTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

in thousands, except per share data


	Three Months Ended March 31,
	2005			2004
Revenue:
Product license	$	16,290		$	14,679
Services		29,356			25,001

Total revenue		45,646			39,680
Cost of revenue:
Product license		792			1,121
Amortization of acquired technology		2,004			1,968
Services		12,992			11,306

Total cost of revenue		15,788			14,395

Gross profit		29,858			25,285
Operating expenses:
Research and development (1)		8,670			10,149
Sales and marketing (1)		15,936			19,212
General and administrative (1)		4,960			4,795
Purchased in-process research and development, acquisition-related and other charges		270			5,923
Business restructuring charges (benefit)		(2,154	)		9,179
Amortization of deferred stock compensation		132			156
Amortization of other intangibles		1,279			815

Total operating expenses		29,093			50,229

Income (Loss) from operations		765			(24,944	)
Other income, net		2,451			509

Income (Loss) before provision for income taxes		3,216			(24,435	)
Provision for income taxes		(498	)		(230	)

Net Income (Loss)	$	2,718		$	(24,665	)

Basic net income (loss) per common share	$	0.01		$	(0.09	)

Diluted net income (loss) per common share	$	0.01			(N/A	)

Shares used in computing net income (loss) per common share

Basic		289,824			269,423
Diluted		295,057			269,423
(1) Excludes amortization of deferred stock compensation as follows:

	Three months ended March 31,
	2005			2004
Research and development	$	(16	)	$	47
Sales and marketing		12			(48	)
General and administrative		136			157

	$	132		$	156

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

VIGNETTE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

in thousands


	Three Months Ended March 31,
	2005			2004
Operating activities:
Net income (loss)	$	2,718		$	(24,665	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		1,695			2,683
Non-cash compensation expense		132			156
Amortization of intangible assets		3,283			2,900
Non-cash restructuring charges		—			2,331
Income on restricted investments		(1,480	)		—
Gain on disposal of fixed assets		(105	)		—
Other charges		210			5,923
Changes in operating assets and liabilities		682			545

Net cash provided by (used in) operating activities		7,135			(10,127	)

Investing activities:
Purchase of property and equipment		(774	)		(1,640	)
Purchase of business, net of cash acquired		—			(37,779	)
Maturity of short-term investments, net		5,465			57,493
Sale of restricted investments		395			(85	)
Proceeds from sale of equity securities		1,480			780
Purchase of equity securities		(45	)		(111	)
Other		135			30

Net cash provided by investing activities		6,656			18,688

Financing activities:
Payments on capital lease obligations		—			(68	)
Proceeds from exercise of stock options and purchase of employee stock purchase plan shares		941			1,997
Payments for unvested common stock		—			(26	)

Net cash provided by financing activities		941			1,903
Effect of exchange rate changes on cash and cash equivalents		(481	)		65

Net change in cash and cash equivalents		14,251			10,529
Cash and cash equivalents at beginning of period		63,781			39,639

Cash and cash equivalents at end of period	$	78,032		$	50,168

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

VIGNETTE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2005

NOTE 1 — General and Basis of Financial Statements

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

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

The unaudited interim condensed consolidated financial statements include the accounts of Vignette Corporation and its wholly-owned subsidiaries (collectively, the “Company” or “Vignette”). All material intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and are presented in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. Accordingly, certain footnote disclosures have been condensed or omitted. In the Company’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto filed with the United States Securities and Exchange Commission in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The results of operations for the three-month period ended March 31, 2005 and 2004 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

The balance sheet at December 31, 2004 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the Company’s accruals for facility lease commitments vacated as a result of both its business restructuring and recent acquisitions. It is reasonably possible that such sublease assumptions could change in the near term, requiring adjustments to future income.

NOTE 2 — Stock-based Compensation

At March 31, 2005, the Company has five stock-based compensation plans. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), prescribes accounting and reporting

standards for all stock-based compensation plans, including employee stock options. As allowed by Statement 123, the Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. When the Company issues options or its stock to its employees at an exercise price equal to the market value of the underlying common stock on the date of grant, no stock-based compensation costs are recorded. In the event that options are granted or restricted shares are issued at an exercise price that is less than the market value of the underlying common stock on the date of grant or issuance, the Company records deferred compensation expense in an amount equivalent to the difference between the market value and the exercise price of the respective option or restricted stock. Deferred stock compensation is amortized on an accelerated basis over the options and restricted stocks’ respective vesting periods, and is recorded as “Amortization of deferred stock compensation” in the Condensed Consolidated Statements of Operations.

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


	Three Months Ended March 31,
	2005			2004
Net income (loss):
Reported net income (loss)	$	2,718		$	(24,665	)
Add: Total stock-based employee compensation expense included in the determination of net income (loss) as reported, net of related tax effects		132			156
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,296	)		(5,526	)

Pro forma net income (loss)	$	554		$	(30,035	)

Basic net income (loss) per share:
Reported net income (loss) per share	$	0.01		$	(0.09	)

Pro-forma net income (loss) per share	$	0.00		$	(0.11	)

Diluted net income (loss) per share:
Reported net income (loss) per share	$	0.01		$	(0.09	)

Pro-forma net income (loss) per share	$	0.00		$	(0.11	)

Equity instruments issued to non-employees are recorded at their fair value in accordance with Statement 123 and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

On January 18, 2005, the Compensation Committee of the Board of Directors implemented a retention program for certain executive officers and other key employees. Under the program, 178,568 restricted shares valued at $225,000 were granted pursuant to the 1999 Equity Incentive Plan. Deferred stock-based compensation expense was recorded for the value of the grant and is being amortized over a sixteen month vesting period.

During the three months ended March 31, 2005 and 2004 the company recorded amortization expense related to its equity compensation plans of $132,000 and $156,000, respectively. At March 31, 2005, the Company had an aggregate of $550,000 of deferred stock-based compensation remaining to be amortized.

Stock-Based Compensation Plans

A summary of the activity related to the Company’s stock options is presented below:


	Three Months Ended March 31, 2005
	Number of Options		Weighted- Average Exercise Price
Outstanding at beginning of period	35,874,120
Granted	4,539,167		$	1.26
Exercised	(509,312	)	$	0.81
Forfeited	(2,929,471	)	$	2.70

Outstanding at end of period	36,974,504		$	2.96

Exercisable at end of period	20,530,320		$	4.00

The following table summarizes information about stock options outstanding as of March 31, 2005:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted- Average Remaining Contractual Life (years)	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$ 0.01 - $ 0.75	2,824,758	3.14	$	0.18	2,824,758	$	0.18
$ 0.76 - $ 1.50	14,587,475	5.82	$	1.13	4,854,247	$	1.01
$ 1.51 - $ 3.00	9,304,230	6.61	$	2.19	3,267,010	$	2.27
$ 3.01 - $ 5.00	5,642,592	4.24	$	3.88	5,104,412	$	3.88
$ 5.01 - $ 7.50	3,214,975	2.69	$	6.05	3,080,576	$	6.07
$ 7.51 - $15.00	910,794	3.27	$	8.72	909,637	$	8.72
$15.01 - $25.00	18,290	3.59	$	18.86	18,290	$	18.86
$25.01 - $99.00	471,390	4.08	$	47.58	471,390	$	47.58

	36,974,504	5.21	$	2.96	20,530,320	$	4.00

NOTE 3 — Business Combinations

Acquisition of Tower Technology Pty Ltd

On March 1, 2004 the Company acquired all issued and outstanding shares of Tower Technology Pty Limited (“Tower Technology”), a privately held Australian company and leading provider of enterprise document and records management solutions. The consideration paid to the Tower Technology stockholders was comprised of approximately 27.2 million shares of our stock and $49.8 million in cash, including a $3.8 million payment made in July 2004 in lieu of issuing additional shares. In addition, we incurred approximately $7.4 million in transaction costs. The results of Tower Technology’s operations have been included with ours for the period subsequent to the acquisition date. The Company’s consolidated financial statements include Tower Technology’s financial position and results of operations for the period subsequent to March 1, 2004.

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

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


Cash and cash equivalents		$	9,100
Accounts receivable			8,387
Prepaid expenses and other current assets			1,007
Property and equipment			404
Other assets			75
Intangible assets subject to amortization
Technology (6 year useful life)	30,100
Customer relationships (6 year useful life)	18,200
Non-compete (4 year useful life)	1,400
In-process research and development	4,800

Total intangible assets			54,500
Goodwill			82,023

Total assets acquired			155,496

Accounts payable			(710	)
Accrued exit costs			(3,146	)
Accrued severance			(1,426	)
Accrued other expenses			(9,252	)
Deferred revenue			(7,037	)

Total liabilities assumed			(21,571	)

Net assets acquired		$	133,925

Accrued exit costs of $3.1 million relate to lease obligations for excess office space that the Company has vacated or intends to vacate under the approved facilities exit plan. The total lease commitments include the estimated lease buyout fees or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to, brokerage commissions, legal fees, repairs, restoration costs, and sublease incentives, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and sublease income, were based on market information and trend analysis as estimated by the Company. It is reasonably possible that actual results could differ from these estimates in the near term, and such differences would result in adjustments to the purchase price allocation and, ultimately, the amount allocated to goodwill. The impacted sites are office space located in Slough, United Kingdom and New York City, New York and have lease commitments that expire as late as September 2007.

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

The following table summarizes activity for exit costs, employee severance, and relocation costs (in thousands) related to the Tower Technology Pty Ltd acquisition:


	Exit Costs			Severance and Relocation			Total
Initial accrual at March 1, 2004	$	3,146		$	1,426		$	4,572
Cash activity		(864	)		(1,400	)		(2,264	)
Adjustment to accrual		(866	)		(26	)		(892	)

Balance at December 31, 2004	$	1,416		$	—		$	1,416
Cash activity		(233	)		—			(233	)
Adjustment to accrual		–			—			152

Balance at March 31, 2005	$	1,335		$	—			1,335
Less: current portion								(647	)

Long-term exit costs and severance and relocation							$	688

Severance and relocation costs are included in “Other current liabilities” on the Consolidated Balance Sheets.

Acquisition of Intraspect

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

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

The following table summarizes activity for exit costs, employee severance, and relocation costs (in thousands) related to the Intraspect acquisition:


	Exit Costs			Severance and relocation			Total
Initial accrual at December 10, 2003	$	2,250		$	543		$	2,793
Adjustment to accrual		—			(30	)		(30	)

Cash activity		(67	)		(507	)		(574	)

Balance at December 31, 2003		2,183			6			2,189
Adjustment to accrual		21			148			169
Cash activity		(834	)		(154	)		(988	)

Balance at December 31, 2004		1,370			—			1,370
Adjustment to accrual		(38	)		—			(38	)
Cash activity		(200	)		—			(200	)

Balance at March 31, 2005	$	1,132		$	—		$	1,132

Less: current portion								(799	)

Long term exit costs and severance and relocation							$	333

Accrued exit costs of $2.3 million at acquisition date relate to lease obligations for excess office space that the Company has vacated under the approved facilities exit plan. The impacted site is office space located in Brisbane, California and has a lease commitment that expires in September 2006.

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

Acquisition of Epicentric

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

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

Accrued exit costs of $9.8 million at acquisition date relate to lease obligations for excess office space that the Company has vacated under the approved facilities exit plan. The total lease commitments include the estimated lease buyout fees, or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to, brokerage commissions, legal fees, repairs, restoration costs, and sublease incentives, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and sublease income, were based on market information and trend analysis as estimated by the Company. It is reasonably possible that actual results could differ from these estimates in the near term, and such differences would result in adjustments to the purchase price allocation and ultimately, the amount allocated to goodwill. Impacted sites include office space located in San Francisco, California; New York City, New York; Chicago, Illinois; and Austin, Texas. The maximum lease commitment of such vacated properties extends through December 2006.

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

The following table summarizes activity for exit costs, employee severance, and relocation costs (in thousands) related to the Epicentric acquisition:


	Exit Costs			Severance and Relocation			Total
Initial accrual at December 3, 2002	$	9,794		$	1,895		$	11,689

Cash activity		—			—			—

Balance at December 31, 2002	$	9,794		$	1,895		$	11,689
Adjustment to accrual		190			—			190
Cash activity		(3,692	)		(1,823	)		(5,515	)

Balance at December 31, 2003	$	6,292		$	72		$	6,364

Adjustment to accrual		(454	)		(72	)		(526	)
Cash activity		(2,360	)		—			(2,360	)

Balance at December 31, 2004	$	3,478		$	—		$	3,478
Adjustment to accrual		(774	)		—			(774	)
Cash activity		(441	)		—			(441	)

Balance at March 31, 2005	$	2,263		$	—			2,263

Less: current portion								(2,144	)

Long term exit costs and severance and relocation							$	119

Pro forma results of operations

The following presents the unaudited pro forma combined results of operations of the Company with Tower Technology for the three months ended March 31, 2005 and 2004, after giving effect to certain pro forma adjustments. These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2005 or of future results of operations of the consolidated entities (in thousands, except for per share data)


	Three months ended March 31,
	2005		2004
Revenue	$	45,646	$	44,914
Income (Loss) from operations		765		(22,826	)
Net Income (Loss)		2,718		(22,655	)
Basic Income (Loss) per share	$	0.01	$	(0.08	)

NOTE 4 — Intangible Assets

Intangible assets with indefinite lives

The changes in the carrying amount of goodwill, net of accumulated amortization and impairment charges, for the three months ended March 31, 2005, is as follows (in thousands):


	Goodwill
Balance at December 31, 2004	$	123,912
Purchase price adjustments		3,159

Balance at March 31, 2005	$	120,753

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

The purchase price adjustments in 2005 relate primarily to a $3.8 million claim filed in February 2005 against the escrow established in the acquisition of Tower Technology for certain pre-acquisition tax exposures. We are currently reviewing these issues with the former Tower shareholders, but we expect that substantially all payments related to these liabilities will be funded from the escrow. As a result, the reduction to goodwill relates primarily to a reduction in these tax liabilities related to the Tower Technology acquisition. Such reduction to goodwill was partially offset by miscellaneous adjustments to certain Tower Technology-related pre-acquisition accrual assumptions.

In accordance with Statement 142, the Company assesses its goodwill on October 1 of each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired.

Intangible assets with definite lives

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


	Three months ended March 31, 2005							Year ended December 31, 2004
	Gross Carrying Amount		Accumulated Amortization and Impairment			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization and Impairment			Net Carrying Amount
Intellectual property purchases:
Capitalized research and development	$	700	$	(700	)	$	—	$	700	$	(700	)	$	—
Business combinations:
Technology		77,101		(51,935	)		25,166		77,101		(49,931	)		27,170
Non-compete contracts		2,200		(1,179	)		1,021		2,200		(1,092	)		1,108
Customer relationships		23,400		(6,964	)		16,436		23,400		(5,772	)		17,628

Total	$	103,401	$	(60,778	)	$	42,623	$	103,401	$	(57,495	)	$	45,906

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

The Company’s intangible assets with definite lives are being amortized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives range from two to six years. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value or revised useful life. Total amortization expense for the three months ended March 31, 2005 and 2004 was $3.3 million and $2.9 million, respectively. Of these totals, $1.3 million and $0.9 million was

recorded as “Amortization of intangible assets” in operating expenses for the three months ended March 31, 2005 and 2004, respectively. The remaining $2.0 million and $2.0 million for the three months ended March 31, 2005 and 2004 was recorded as a cost of revenue.

Estimated annual amortization expense (in thousands) for the remaining nine months (remaining period) ending December 31, 2005 and the next five years is as follows:


For the remaining period ended December 31, 2005	$	7,986
For the year ended December 31, 2006	$	8,736
For the year ended December 31, 2007	$	8,400
For the year ended December 31, 2008	$	8,108
For the year ended December 31, 2009	$	8,050
For the year ended December 31, 2010	$	1,342

NOTE 5 — Long-term Investments

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


	March 31, 2005		December 31, 2004
Restricted investments (cost approximates fair value)	$	9,397	$	9,793
Equity investments:
Common stock		1,199		1,323
Limited partnership interest		1,329		1,284

Total long-term investments	$	11,925	$	12,400

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

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

During the quarter ended March 31, 2004, the Company received a cash distribution from its limited partner interest in the amount of approximately $0.8 million, which was recorded as a reduction in its carrying value. During the quarter ended March 31, 2005, the Company recognized $1.5 million in realized gains in “Other income, net” for the sale of an equity security in a privately-held technology company.

The Company periodically analyzes its long-term investments for impairments considered other than temporary. In performing this analysis, the Company evaluates whether general market conditions which reflect prospects for the economy as a whole or information pertaining to the specific investment’s industry, or that individual company, indicates that an other than temporary decline in value has occurred. If so, the Company considers specific factors, including the financial condition and near-term prospect of each investment, any specific events that may affect the investee company, and the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. As a result of such review, the Company recognized no impairment charges during the three months ended March 31, 2005 and 2004. Such impairments are recorded in “Other income, net” on the Condensed Consolidated Statements of Operations.

NOTE 6 — Business Restructuring

During fiscal year 2001, the Company’s management approved a restructuring plan to reduce headcount and infrastructure and to consolidate operations. The Company expanded the restructuring plan during 2002, 2003 and 2004. Components of business restructuring charges and the remaining restructuring accruals as of March 31, 2005 are as follows (in thousands):


	Facility Lease Commitments			Asset Impairments			Employee Separation and Other Costs			Total
Balance at December 31, 2000	$	—		$	—		$	—		$	—
Total restructuring charge		55,150			33,683			32,102			120,935
Cash activity		(12,397	)		(878	)		(22,773	)		(36,048	)
Non-cash activity		(292	)		(32,805	)		(1,918	)		(35,015	)

Balance at December 31, 2001		42,461			—			7,411			49,872
Effect of expanded restructuring plan		6,518			8,730			11,118			26,366
Adjustment to accrual		9,538			463			(545	)		9,456
Cash activity		(21,959	)		—			(11,342	)		(33,301	)
Non-cash activity		—			(9,193	)		(36	)		(9,229	)

Balance at December 31, 2002		36,558			—			6,606			43,164
Effect of expanded restructuring plan		9			—			2,076			2,085
Adjustment to accrual		(13,422	)		—			(3,349	)		(16,771	)
Cash activity		(10,620	)		—			(4,961	)		(15,581	)

Balance at December 31, 2003		12,525			—			372			12,897
Effect of expanded restructuring plan		12,421			2,331			4,085			18,837
Adjustment to accrual		(780	)		—			(83	)		(863	)
Cash activity		(8,584	)		—			(3,404	)		(11,988	)
Non-cash activity		(869	)		(2,331	)		(8	)		(3,208	)

Balance at December 31, 2004		14,713			—			962			15,675
Adjustment to accrual		(1,282	)		—			(14	)		(1,296	)
Cash activity		(2,263	)		—			(400	)		(2,663	)

Balance at March 31, 2005	$	11,168		$	—		$	548		$	11,716
Less: current portion											(5,057	)

Accrued restructuring costs, less current portion										$	6,659

Remaining cash expenditures resulting from the restructuring are estimated to be $11.7 million and relate primarily to facility lease commitments, of which the remaining maximum lease commitment extends out to 2011. We have substantially implemented our restructuring efforts initiated in conjunction with this restructuring plan; however, there can be no assurance that the estimated costs of our restructuring efforts will not change. These are management’s best estimates based on currently available information and are subject to change.

Consolidation of excess facilities

analysis and by the needs of the business. It is reasonably possible that actual results could continue to differ from these estimates in the near term, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the Company’s accrual for facility lease commitments. The accrual adjustments recorded in the first quarter of 2005 relate to such differences, namely the buyout fees and sublease income of certain vacated properties were more favorable than we had anticipated. Facility lease commitments relate to the Company’s departure from certain office space in Austin, Texas; Brisbane and San Francisco, California; New York City, New York; Waltham and Boston, Massachusetts; Chicago, Illinois; Slough, United Kingdom; and Madrid, Spain. The maximum lease commitment of such vacated properties extends through December 2011.

Asset impairments

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

Employee separation and other costs

Employee separation and other costs include severance, related taxes, outplacement and other restructuring charges. As a result of the restructuring activities, the Company severed approximately 1,675 employees. Employee groups impacted by the restructuring efforts include personnel in positions throughout the sales, marketing, professional services, engineering and general and administrative functions in all geographies.

NOTE 7 — Commitments and Contingencies

On October 26, 2001, a class action lawsuit was filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York in an action captioned Leon Leybovich v. Vignette Corporation, et al., seeking unspecified damages on behalf of a purported class that purchased Vignette common stock between February 18, 1999 and December 6, 2000. Also named as defendants were four underwriters involved in the Company’s initial public offering of Vignette stock in February 1999 and the Company’s secondary public offering of Vignette stock in December 1999—Morgan Stanley Dean Witter, Inc., Hambrecht & Quist, LLC, Dain Rauscher Wessels and U.S. Bancorp Piper Jaffray, Inc. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on, among other things, claims that the four underwriters awarded material portions of the shares in the Company’s initial and secondary public offerings to certain customers in exchange for excessive commissions. The plaintiff also asserts that the underwriters engaged in “tie-in arrangements” whereby certain customers were allocated shares of Company stock sold in its initial and secondary public offerings in exchange for an agreement to purchase additional shares in the aftermarket at pre-determined prices. With respect to the Company, the complaint alleges that the Company and its officers and directors failed to disclose the existence of these purported excessive commissions and tie-in arrangements in the prospectus and registration statement for the Company’s initial public offering and the prospectus and registration statement for the Company’s secondary public offering. The action seeks damages in an unspecified amount.

existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and the company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by the Company. Even if material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company’s insurance carriers should arise, the Company’s maximum financial obligation to plaintiffs pursuant to the settlement agreement is less than $3.4 million. The settlement agreement has been submitted to the Court for approval. Approval by the Court cannot be assured. The Company cannot predict whether or when a settlement will occur or be finalized. If the settlement is not approved, the Company is unable to determine whether the outcome of the litigation will have a material impact on its results of operations or financial condition in any future period. The Company believes that this lawsuit is without merit and would continue to defend itself vigorously if the settlement is not approved.

On February 15, 2005, the court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. Judge Scheindlin ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement which provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the parties to the settlement will be able to agree to a revised settlement agreement consistent with the court’s opinion, or that the court will grant final approval to the settlement to the extent the parties reach agreement.

Litigation and Other Claims

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

Leases

The Company leases its office facilities and office equipment under various operating and capital lease agreements having expiration dates through 2011. Rent expense, excluding vacated properties, was $1.2 million and $1.6 million for the three months ended March 31, 2005 and 2004, respectively. Future minimum payments as of March 31, 2005 under these leases, including operating lease commitments for all vacated properties, are as follows (in thousands):


	Operating Leases		Sublease Income
2005	$	10,998	$	546
2006		6,199		690
2007		5,486		791
2008		4,435		652
2009		3,559		606
Thereafter		4,905		101

Total minimum lease payments	$	35,582

Total minimum sublease rentals			$	3,386

On March 31, 2005, Vignette agreed to amend and terminate the real estate lease agreement with TMG/One Market in San Francisco, California. On March 31, 2005, Vignette also terminated the agreement with a subtenant, Salesforce.com, and will forgo all future subleasing income from this party. This information has been reflected in the financial information presented in the table above. We do not have any significant contractual obligations other than those leases disclosed above.

Product warranties

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

Software license indemnifications

Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“Interpretation 45”), requires that the Company recognize the fair value for certain guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002. When the Company determines that a loss is probable, the estimated loss must be recognized as it relates to applicable guarantees and indemnifications. Some of the software licenses granted by the Company contain provisions that indemnify customers of the Company’s software from damages and costs resulting from claims alleging that the Company’s software infringes on the intellectual property rights of a third party. The Company records resulting costs as incurred and historically, such costs have not been material. Accordingly, the Company has not recorded a liability related to these indemnification provisions.

NOTE 8 — Comprehensive Income (Loss)

The Company’s comprehensive income (loss) is included as a component of stockholders’ equity and is composed of (i) net income (loss), (ii) foreign currency translation adjustments and (iii) unrealized gains and losses on investments designated as available-for-sale. The following table presents the calculation of comprehensive income (loss) (in thousands):


	Three Months Ended March 31,
	2005			2004
Net income (loss)	$	2,718		$	(24,665	)
Foreign currency translation adjustments		171			(32	)
Unrealized gain (loss) on investments		(97	)		76

Total comprehensive income (loss)	$	2,792		$	(24,621	)

NOTE 9 — Earnings Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period, excluding shares subject to repurchase or forfeiture.

Pursuant to Statement of Financial Accounting Standards No. 128, Earnings Per Share, diluted net income (loss) per share has been presented for the quarter ended March 31, 2005, but diluted net loss per share has not been presented for the quarter ended March 31, 2004, as the effect of the assumed exercise of stock options and contingently issued shares is antidilutive. There were approximately 4.1 million and 9.5 million stock options and 0.6 million and 0.8 million restricted shares outstanding as of March 31, 2005 and 2004, respectively.

NOTE 10 — Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):


	March 31, 2005		December 31, 2004
Accounts payable	$	1,278	$	2,355
Accrued employee liabilities		11,456		13,916
Accrued restructuring charges		5,057		7,846
Accrued exit and severance costs		3,590		3,761
Accrued other charges		13,681		14,277
Deferred revenue		35,050		33,444
Current portion of capital lease obligation				—
Other current liabilities		7,453		9,351

Total current liabilities	$	77,565	$	84,950

NOTE 11 — Long-term Liabilities

Long-term liabilities consist of the following (in thousands):


	March 31, 2005		December 31, 2004
Accrued restructuring charges, net of current portion	$	6,659	$	7,829
Accrued exit and severance costs, net of current portion		1,139		2,503
Deferred revenue, less current portion		2,879		3,356

	$	10,677	$	13,688

NOTE 12 — Stockholders’ Equity

Stockholders’ equity consists of the following (in thousands):


	March 31, 2005			December 31, 2004
Common stock	$	2,910		$	2,899
Additional paid-in capital		2,748,889			2,747,767
Deferred stock compensation		(550	)		(491	)
Accumulated other comprehensive income		2,058			1,985
Accumulated deficit		(2,442,624	)		(2,445,342	)

	$	310,683		$	306,818

NOTE 13 — Subsequent Event

Reverse Stock Split

On April 7, 2005, Vignette announced that its board of directors authorized a one-for-ten reverse stock split of Vignette common stock. On a pre-split basis, Vignette had approximately 291 million basic shares of common stock outstanding as of the end of trading on Thursday, April 7, 2005. If the reverse stock split is approved, every 10 shares of common stock will be combined into one share of common stock and the total number of basic shares outstanding will be reduced to approximately 29.1 million. Vignette shareholders will be asked to approve the reverse stock split at Vignette’s annual shareholder meeting on May 27, 2005.

NOTE 14 — Recent Accounting Pronouncements

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

Statement 123R permits adoption using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning on the effective date based on the requirements of Statement 123R for all share-based payments granted after the effective date and based on Statement 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date or (2) a “modified retrospective” method which includes the requirements of the modified prospective method, but also permits entities to restate all periods presented or prior interim periods of the year of adoption based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures. Although we have not yet determined whether the adoption of Statement 123R will result in amounts that are similar to the current pro forma disclosures under Statement 123, we are evaluating the requirements under Statement 123R, including the adoption methods and expect the adoption to have a significant adverse impact on our consolidated statements of operations and net income (loss) per share. We expect to continue to grant stock-based compensation to employees.

In April 2005, the SEC deferred the deadline for adoption of Statement 123R’s provisions on share-based payment. Specifically, SEC registrants previously required to adopt Statement 123R’s provisions at the beginning of the first interim period after June 15, 2005 may now adopt the provisions at the beginning of their first annual period beginning after June 15, 2005, under the new SEC rule. As such, the Company intends to adopt Statement 123R on January 1, 2006.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

We offer the following solutions:

•

Public Web Site and Brand Management helps customers gain control of their brand Web sites, commercial information publishing and e-commerce initiatives

•

Employee Intranets optimize productivity by connecting employees with the shared information, applications and tools they need to perform their jobs

•

Customer Self-Service gives customers a personalized window into their back-office systems to help enhance service and lower support costs

•

Supplier and Channel Interaction streamlines operations and enhances communications across a diverse trading network of suppliers, partners and distributors

•

Standardization and Consolidation provides a common platform for customers’ information management and Web application needs

In addition, we have recently launched the following solution units that target specific horizontal and vertical applications:

•

Compliance and Governance efficiently manages and reliably reports on adherence to industry and government regulations

•

Case Management effectively captures and automates manual and paper-intensive business processes such as health and P&C claims, policy underwriting and post-close audits on loan applications so that organizations can realize dramatic efficiencies, reduce cycle times, eliminate errors, automate status updates and cut handling costs

•

eLearning provides a fast, powerful and cost-effective means to author, contribute, assemble, manage, publish, deliver, and personalize learning applications using a single integrated solution that quickly and easily connects learners to the appropriate content and accelerates readiness and increases their overall performance

To address the particular size and requirements of our customers, we deliver our products in various combinations. Additionally, we allow organizations the flexibility to purchase products individually. The Vignette V7 Application Services provide a framework that encompasses our six key areas of product capability: portal, integration, content, collaboration, process, and analysis. Organizations may purchase products individually from these six service categories or pre-bundled in suites to meet their specific needs.

Vignette V7 Portal Services enable organizations to configure, deploy and manage multiple portals for various audiences in a business user-friendly development environment. These portals are managed through a single console to consolidate administration responsibilities.

Vignette V7 Integration Services provide unique capabilities to connect a broad range of unstructured, semi-structured and structured data (including transactional) sources.

Vignette V7 Content Services include library services, content type modeling, workflow, taxonomy, and search. Document and records management solutions are also available to expand the ability to capture, manage, utilize, retain and dispose of an organization’s enterprise content. In addition, imaging and transactional “Web capture” functionality can effectively promote transitioning paper-based processes to digital processes, streamlining high-volume transaction processes and facilitating the centralized capture, storage and archival of an organization’s business content. This solution also effectively delivers risk and compliance management processes upon the breadth of an organization’s business content, documents, transactions, images, e-mails, rich media and Web transactions.

Vignette V7 Collaboration Services enhance the capability for knowledge-sharing for teams using workspaces. Our collaboration services also provide interaction management.

Vignette V7 Process Services provide a standards-based process workflow engine and graphical process modeler for building and deploying business processes across the enterprise application infrastructure.

Vignette V7 Analysis Services provide in-depth metrics and reporting based on Web logs, content delivery logs and process performance logs that drive return on investment through the analysis of content usage, Web site or application performance, and process performance.

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

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

Reconciliation of Non-GAAP Financial Measures

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

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

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


	Quarter ended March 31,
	2005			2004
GAAP operating income (loss)	$	765		$	(24,944	)
Less: Amortization of acquired technology		2,004			1,968
Purchased in-process research and development, acquisition-related and other charges		270			5,923
Business restructuring charges (benefits)		(2,154	)		9,179
Amortization of deferred stock compensation		132			156
Amortization of intangible assets		1,279			815

Adjusted operating income (loss)	$	2,296		$	(6,903	)

	Quarter ended March 31,
	2005			2004
GAAP net income (loss)	$	2,718		$	(24,665	)
Less: Realized gains of certain equity investments		(1,481	)		—
Amortization of acquired technology		2,004			1,968
Purchased in-process research and development, acquisition-related and other charges		270			5,923
Business restructuring charges (benefits)		(2,154	)		9,179
Amortization of deferred stock compensation		132			156
Amortization of intangible assets		1,279			815

Adjusted net income (loss)	$	2,768		$	(6,624	)

Recent Events

Reverse Stock Split

On April 7, 2005, we announced that our board of directors authorized a one-for-ten reverse stock split of Vignette common stock. On a pre-split basis, we had approximately 291 million basic shares of common stock outstanding as of the end of trading on Thursday, April 7, 2005. If the reverse stock split is approved, every 10 shares of common stock will be combined into one share of common stock and the total number of basic shares outstanding will be reduced to approximately 29.1 million. Vignette shareholders will be asked to approve the reverse stock split at our annual shareholder meeting on May 27, 2005, in Austin, Texas.

Overview of First Quarter Results

Our financial results for the quarter ended March 31, 2005 were in line with our expectations.

The expansion and ongoing integration of our suite of products through our Tower Technology acquisition in the first quarter of 2004 added to our software and services capabilities and contributed to an increase in our revenues. Our revenues were also favorably impacted by renewed interest in Enterprise Content Management software and our high levels of customer referenceability. Partially offsetting these positive factors was the continued difficult selling environment for enterprise software applications. In summary, these and other factors caused our revenues, as reported, to increase by 15% year-over-year to $45.6 million in the first quarter of 2005. On a pro forma basis (See Note 3), our revenues increased by 2% over the same periods. Relative to the fourth quarter of 2004, our revenues declined 7% due to sales seasonality we typically experience in the first quarter.

More specifically, license revenues of $16.3 million in the first quarter of 2005 were up 11% and 8% from $14.7 million and $15.1 million on an as-reported and pro forma basis (see Note 3), respectively, as compared to 2004. Maintenance revenues of $19.1 million in the first quarter of 2005 were up 22% from $15.7 million on an as-reported basis and down 1% from $19.2 million on a pro forma basis as compared to 2004. Professional services revenues of $10.2 million in the first quarter of 2005 were up 10% from $9.3 million on an as-reported basis and down 4% from $10.6 million on a pro forma basis as compared to 2004. No single customer accounted for more than 10% of our quarterly revenues.

Total expenses, including both cost of revenue and operating expenses, for the first quarter of 2005 were $44.9 million and included $1.5 million for the following charges and benefits: business restructuring benefits, acquisition-related charges, amortization of acquired technology and intangibles and the amortization of deferred stock compensation. Most of these charges relate to our previous acquisitions and to favorable changes in our real estate lease commitments, mostly driven by better than expected outcomes with respect to certain lease buyout fees and sublease income. The remaining expenses of $43.4 million for the first quarter of 2005 were down 7% as compared to 2004 due primarily to our continued focus on cost controls.

The combination of revenue growth and our continued cost control efforts yielded non-GAAP profitability from operations of $2.3 million during the first quarter of 2005, excluding the $1.5 million in net charges described above. This compares to a non-GAAP loss of $6.9 million during the first quarter of 2004.

GAAP net income was $2.7 million, as compared to a net loss of $24.7 million during the first quarter of 2004. Excluding the charges totaling $1.5 million as described above and realized gains for certain equity investments totaling $1.5 million, non-GAAP net income for the first quarter of 2005 was $2.8 million. This compares to non-GAAP net losses of $6.6 million in the first quarter of 2004.

We generated $8.8 million in cash during the quarter, increasing our total cash and short-term investments balance to approximately $173.1 million as of March 31, 2005. We have no debt outstanding.

Our headcount at March 31, 2005 was approximately 704, a decrease of 4% from 730 at December 31, 2004 and a decrease of 24% from 921 at March 31, 2004. The decrease from March 31, 2004 was substantially the result of our business restructuring efforts.

Forward-looking Information

During our first quarter 2005 financial results conference call dated April 26, 2005, we provided the following forward-looking information. Such information is current as of that date and relates to the quarter ended March 31, 2005.

For the second quarter of 2005, we expect total revenue of approximately $44.5 million to $46.5 million, with license revenue accounting for approximately 36% to 39% of total revenue and services accounting for the remainder of revenue.

We expect a non-GAAP gross margin of approximately 68% to 70%, depending on the mix of business in the quarter.


	Range for quarter ended June 30, 2005
	(in millions)
GAAP gross profit	$	32.1		—	$	34.3
Less:
Amortization of acquired technology		(1.8	)	—		(1.8	)

Non-GAAP gross profit	$	30.3		—	$	32.5

Total Revenue	$	44.5		—	$	46.5

Gross Margin		68	%	—		70	%

In terms of operating expenses, we expect R&D to be approximately 18% to 20% of revenue, sales and marketing to be approximately 36% to 39% of revenue, and G&A to be approximately 9% to 10% of revenue. We expect other income for the quarter to be approximately $0.7 to $0.8 million, and we expect to report a tax provision in the range of approximately $0.4 million to $0.5 million.

In summary, we expect non-GAAP net income of approximately $1.5 to $2.5 million, resulting in non-GAAP diluted EPS of $0.01 per share, assuming 295 million diluted shares outstanding. If our planned 1 for 10 reverse split is approved and completed, this would translate to EPS of $0.05 to $0.08 per share, assuming 29.5 million post-split diluted shares outstanding.

These non-GAAP results are before charges of $1.8 million related to the amortization of acquired technology, $0.1 million related to business restructuring, $0.2 million related to the amortization of deferred stock compensation, and $1.3 million related to the amortization of intangible assets. We expect total charges of approximately $3.4 million in the second quarter of 2005. With these charges, we expect a GAAP EPS loss of $0.01 per share, assuming 291 million basic shares outstanding. This would translate to a post-split loss of $0.03 to $0.07 per share, assuming 29.1 million post-split basic shares outstanding.


	Range for quarter ended June 30, 2005
	(in millions)
GAAP net income (loss)	$	(1.9	)	—	$	(0.9	)
Less:
Amortization of acquired technology		1.8		—		1.8
Business restructuring charges (benefits)		0.1		—		0.1
Amortization of deferred stock compensation		0.2		—		0.2
Amortization of intangible assets		1.3		—		1.3

Adjusted net income (loss)	$	1.5		—	$	2.5
Diluted shares outstanding		295.0		—		295.0
Non-GAAP Diluted EPS	$	0.01		—	$	0.01

Outlook

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

We will continue to improve sales force and channel productivity. We will continue to encourage cross-functional team selling through enhanced team realignment around customer accounts and regions, and meet market-specific needs for designated solution areas through specialized teams with subject-matter expertise in areas such as claims processing and compliance. We will continue to focus on the indirect channel as a means to better distribute and expose our software and solutions to the marketplace. We will also continue to focus on realizing efficiencies and cost-savings across our business.

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

Critical Accounting Policies and Estimates

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

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

•

Revenue recognition;

•

Estimating the allowance for doubtful accounts;

•

Valuation of long-term investments;

•

Estimating business restructuring accruals; and

•

Valuation of goodwill and identifiable intangible assets.

Revenue 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 (“SAB”) 101, Revenue Recognition in Financial Statements as revised by SAB 104.

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

Revenue allocated to product license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant remaining obligations with regard to implementation are outstanding, and collection of a fixed or determinable fee is probable. We consider all payments outside our normal payment terms, including all amounts due in excess of one year, to not be fixed and determinable, and such amounts are recognized as revenue as they become due. If collectibility is not considered probable, revenue is recognized when the fee is collected. For software arrangements where we are obligated to perform professional services for implementation of the product, we evaluate whether delivery has occurred upon shipment of software or upon completion of services and if the customer payment is probable of collection. This evaluation is made based on various factors such as the nature of the services work, order type (e.g. initial vs. follow-on), customer’s payment history, etc. In the instances where delivery is deemed not to have occurred upon shipment based on the aforementioned factors, license revenue is taken when we have no significant remaining obligations with regard to the implementation.

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

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

Revenue allocated to training and consulting service elements is recognized as the services are performed. 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.

Business restructuring. We vacated excess leased facilities as a result of the restructuring plan we initiated in 2001 and subsequently expanded in 2002, 2003, 2004, and 2005. We recorded an accrual for the remaining lease liabilities of such vacated properties as well as brokerage commissions, partially offset by estimated sublease income. We estimated the costs of these excess leased facilities, including estimated costs to sublease and sublease income, based on market information and trend analysis. We continually assess our real estate portfolio and may vacate or occupy other leased space as dictated by our analysis. Actual results could differ from these estimates. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate our accrual for facility lease commitments.

Goodwill and identifiable intangible assets. We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”), on January 1, 2002. In accordance with Statement 142, we replaced the ratable amortization of goodwill and other indefinite-lived intangible assets with a periodic review and analysis for possible impairment. We assess our goodwill on October 1 of each year and during an interim period if facts or circumstances would more likely than not suggest that the fair value of an identified reporting unit is below its carrying value. There was no impairment charge related to goodwill or other intangible assets during the quarter ended March 31, 2005 or 2004.

Accounting Reclassification

Certain reclassifications have been made to conform prior period financial information to the current presentation. These reclassifications had no effect on reported net income (losses). The Consolidated Statements of Cash Flows for the quarters ended March 31, 2004 include the reclassification of auction rate securities from cash and cash equivalents to short-term investments.

Results of Operations

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


	Three Months Ended March 31,
	2005		2004
Revenue:
Product license	36	%	37	%
Services	64		63

Total revenue	100		100

Cost of revenue:
Product license	2		3
Amortization of acquired technology	4		5
Services	29		28

Total cost of revenue	35		36

Gross profit	65		64

Operating expenses:
Research and development	19		27
Sales and marketing	35		48
General and administrative	11		12
Purchased in-process research and development, acquisition-related and other charges	1		15
Business restructuring charges (benefits)	(5	)	23
Amortization of deferred stock compensation	—		—
Amortization of intangible assets	3		2

Total operating expenses	64		127

Income (loss) from operations	1		(63	)
Other income, net	5		1

Income (loss) before provision for income taxes	6		(62	)
Provision for income taxes	(1	)	—

Net income (loss)	5	%	(62	)%

Comparison of the three months ended March 31, 2005 to the three months ended March 31, 2004 (in thousands, unless otherwise noted)

Revenue


	Three Months Ended March 31,				2005 Compared to 2004
	2005		2004		2005 Compared to 2004
Product license		16,290	$	14,679	11	%

Maintenance and support		19,138		15,709	22	%
Professional services		10,218		9,292	10	%

Total services revenue		29,356		25,001	17	%

Total revenue	$	45,646	$	39,680	15	%

Total revenue increased 15% in the three months ended March 31, 2005, compared to the three months ended March 31, 2004. This increase is primarily attributable to sales associated with the document management products acquired in March 2004, as partially offset by the continued weakness in the software industry.

Product license. Product license revenue increased 11% during the three months ended March 31, 2005 primarily due to sales of document management products acquired in our March 2004 acquisition, partially offset by the continued difficult selling environment for enterprise software applications.

Services. Services revenue increased 17% in the three months ended March 31, 2005. This increase in maintenance and support and professional services revenue was attributable to our acquisition of Tower Technology in March 2004.

During the comparative three months ended March 31, 2005 and 2004, no single customer accounted for more than 10% of our total revenues. International revenue was $18.7 million and $12.2 million, or 41% and 31% of total revenues in the three months ended March 31, 2005 and 2004, 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.

Cost of revenue amounts and percentages are as follows:


	Three Months Ended March 31,
	2005		2004		Fluctuation
Product license	$	792	$	1,121	(29	)%
Amortization of acquired technology		2,004		1,968	2	%
Professional services		12,992		11,306	15	%

Total cost of revenue		15,788		14,395	10	%

Gross profit	$	29,858	$	25,285	18	%

As a percent of sales, gross profit represented 65% and 64% for the three months ended March 31, 2005 and March 31, 2004, respectively.

Operating expenses


	Three Months Ended March 31,					2005 Compared to 2004
	2005			2004		2005 Compared to 2004
Research and development	$	8,670		$	10,149	(15	)%
Sales and marketing		15,936			19,212	(17	)%
General and administrative		4,960			4,795	3	%
Purchased in-process research and development, acquisition-related and other charges		270			5,923	(95	)%
Business restructuring charges		(2,154	)		9,179	(123	)%
Amortization of deferred stock compensation		132			156	15	%
Amortization of intangible assets		1,279			815	57	%

Total operating expenses	$	29,093		$	50,229	(42	)%

Research and development. Research and development expenses consist primarily of personnel costs to support product development. Research and development expenses decreased 15% in the three months ended March 31, 2005. The quarter-over-quarter decrease relates primarily to our restructuring efforts via reduced engineering headcount, lower facilities expenses and other cost-saving measures such as the consolidation of product development facilities and the transition of more of these activities to an offshore operations model. We continue to believe that continued investment in research and development is critical to attaining our strategic objectives. We, therefore, expect to devote resources to our product development efforts. Further, in light of our objective of profitable growth, we expect to balance those future research and development investments with potential cost-saving measures, including the restructuring, or consolidation of product development facilities and the potential transition of a number of these positions overseas to labor markets with lower cost structures.

Software development costs that were eligible for capitalization in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, were insignificant during the periods presented. Accordingly, such development costs have been expensed in the period incurred.

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 17% in the three months ended March 31, 2005. The decrease for the three months ended March 31, 2005 compared to the same period in 2004 is attributable to reduced bad debt charges and lower marketing and headcount costs resulting from restructuring and budget cuts. We expect sales and marketing expenses to continue to fluctuate as a percentage of total revenue from period to period due to the timing of new product releases and entry into new market areas, investment in marketing efforts and the timing of domestic and international conferences and trade shows.

General and administrative. General and administrative expenses consist primarily of salaries and other related costs for human resources, finance, accounting, facilities, information technology and legal employees. General and administrative expenses increased 3% in the three months ended March 31, 2005. The increase in absolute dollars is due primarily to increased costs associated with the growth of our business and increased costs of meeting regulatory reporting requirements. We expect general and administrative expenses in future periods to fluctuate as a percentage of total revenue from period to period based on regulatory requirements, legal proceedings and fees paid to outside professional service providers, particularly related to Sarbanes-Oxley compliance activities.

Purchased in-process research and development, acquisition-related and other charges. Acquisition-related and other charges include costs incurred for employees and consultants and relate to product integration and cross training, other employee-related charges and contingent compensation arrangements. The following table presents acquisition-related and other charges for the three months ended March 31, 2005 and 2004 (in thousands):


	Three Months Ended March 31,
	2005		2004
Purchased in-process research and development	$	—	$	4,800
Cross-training, product integration and other		—		796
Other employee-related charges		—		327
Contingent compensation		270		—

	$	270	$	5,923

Included in the acquired net assets of Tower Technology Pty Limited was purchased in-process research and development (“IPR&D”) efforts that we intended to substantially rework before integrating into our products (in thousands):

Acquired Company

Acquired IPR&D –

Project Description

Estimated Fair Value

Current Status at March 31, 2005

Tower Technology Pty Limited (2004)

Tower IDM 20.0^™— Collaborative document management functionality with process automation solutions and decentralization of configuration. Tower Seraph 4.4^™— provides document review workflows, case management and Section 508 compliance of configuration.

$4,800

Application from this project is being reworked and is expected to be integrated into our product line within 7 months.

The amounts allocated to IPR&D were based on discounted cash flow models that employed cash flow projections for revenue based on the projected incremental increase in revenue that the acquired company expected to receive from the completed IPR&D. Such assumptions were based on management’s estimates and the growth potential of the market. Revenue for the projection periods assumed an annual compound growth rate of 17.5%. Cost of revenue, selling, general and administrative expense, and research and development expense were estimated as a percent of revenue based on the acquired company’s historical results and industry averages. These estimated operating expenses as well as capital charges and applicable income taxes were deducted to arrive at an estimated after-tax cash flow. The after-tax cash flow projections were discounted using a risk-adjusted rate of return ranging from 20% to 22%. Such discount rates were based on the company’s weighted average cost of capital of 20%, as adjusted upwards for the additional risk related to each project’s development and success.

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

Business restructuring charges. In 2001, we initiated a restructuring program to align our expense and revenue levels and to better position us for growth and profitability. In 2002, 2003 and 2004, we expanded those restructuring efforts. Although we have substantially implemented our restructuring activities, there can be no assurance that the estimated costs of our restructuring efforts will not change. Components of business restructuring charges and the remaining restructuring accruals as of March 31, 2005 are as follows (in thousands):


	Facility Lease Commitments			Asset Impairments			Employee Separation and Other Costs			Total
Balance at December 31, 2000	$	—		$	—		$	—		$	—
Total restructuring charge		55,150			33,683			32,102			120,935
Cash activity		(12,397	)		(878	)		(22,773	)		(36,048	)
Non-cash activity		(292	)		(32,805	)		(1,918	)		(35,015	)

Balance at December 31, 2001		42,461			—			7,411			49,872
Effect of expanded restructuring plan		6,518			8,730			11,118			26,366
Adjustment to accrual		9,538			463			(545	)		9,456
Cash activity		(21,959	)		—			(11,342	)		(33,301	)
Non-cash activity		—			(9,193	)		(36	)		(9,229	)

Balance at December 31, 2002		36,558			—			6,606			43,164
Effect of expanded restructuring plan		9			—			2,076			2,085
Adjustment to accrual		(13,422	)		—			(3,349	)		(16,771	)
Cash activity		(10,620	)		—			(4,961	)		(15,581	)

Balance at December 31, 2003		12,525			—			372			12,897
Effect of expanded restructuring plan		12,421			2,331			4,085			18,837
Adjustment to accrual		(780	)		—			(83	)		(863	)
Cash activity		(8,584	)		—			(3,404	)		(11,988	)
Non-cash activity		(869	)		(2,331	)		(8	)		(3,208	)

Balance at December 31, 2004		14,713			—			962			15,675
Adjustment to accrual		(1,282	)		—			(14	)		(1,296	)
Cash activity		(2,263	)		—			(400	)		(2,663	)

Balance at March 31, 2005	$	11,168			—		$	548		$	11,716
Less: current portion											(5,057	)

Accrued restructuring costs, less current portion										$	6,659

Facility lease commitments relate to lease obligations for excess office space that the Company has vacated as a result of the restructuring plan. The Company continues to actively pursue mitigation strategies to dispose of all excess office space through subleasing and/or early termination negotiations where possible. The total lease commitments include the estimated lease buyout fees, or the remaining lease liabilities and estimated associated mitigation costs including, but not limited to, brokerage commissions, legal fees, repairs, restoration costs, and sublease incentives, offset by estimated sublease income. The estimated costs of vacating these leased facilities, including estimated costs to sublease and any resulting sublease income, were based on market information and trend analysis as estimated by the Company. The Company continually assesses its real estate portfolio and may vacate and/or occupy other leased space as dictated by its analysis and by the needs of the business. It is reasonably possible that actual results could continue to differ from these estimates in the near term, and such differences could be material to the financial statements. In particular, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the Company’s accrual for facility lease commitments. The accrual adjustments recorded in the first quarter of 2005 relate to such differences, namely the buyout fees and sublease income of certain vacated properties were more favorable than we had anticipated. Facility lease commitments relate to the Company’s departure from certain office space in Austin, Texas;

San Francisco, California; New York City, New York; Waltham, Massachusetts; Chicago, Illinois; Slough, United Kingdom; Madrid, Spain.; and Brisbane, Australia. The maximum lease commitment of such vacated properties extends through December 2011.

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

Employee separation and other costs include severance, related taxes, outplacement and other restructuring charges. As a result of the restructuring activities, we have severed over 1,675 employees during the past three years. Employee groups impacted by the restructuring efforts include personnel in positions throughout the sales, marketing, professional services, engineering and general and administrative functions in all geographies.

Amortization of deferred stock compensation. For stock options issued to employees and the Board of Directors, we record deferred compensation at the grant date if a difference exists between the exercise price and the market value of our common stock. For stock options issued to non-employee, non-director contractors, we record deferred compensation based on the fair value method. For restricted share issuances, we record deferred compensation equal to the market value on the issue date. Deferred stock compensation is amortized on an accelerated basis over the vesting periods of the applicable options and restricted share grants. Amortization of deferred stock compensation is attributable to the following cost categories (in thousands):


	Three Months Ended March 31,
	2005			2004
Research and development	$	(16	)	$	47
Sales and marketing		12			(48	)
General and administrative		136			157

	$	132		$	156

Amortization of intangible assets. Amortization of intangible assets includes amortization of customer relationships and non-compete contracts. Intangible amortization expense increased 57% in the three months ended March 31, 2005 (excluding amortization expenses related to deferred stock compensation and acquired technology). This increase related to amortization expense for assets assumed from the Tower Technology acquisition in March 2004. Amortization expense is recorded ratably over the estimated useful lives of the intangible assets, which range from two to six years.

Other income and expense

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


	Three Months Ended March 31,			2005 Compared to 2004
	2005	2004		2005 Compared to 2004
Other income, net	2,451	$	509	382	%

Other income increased in 2005 compared to 2004 primarily due to a $1.5 million gain recognized in the first quarter of 2005 related to the cash sale of an equity security in a privately-held technology company. Higher interest rates also contributed to the increase in other income.

At March 31, 2005, our unrestricted, long-term strategic investments totaled $ 2.5 million. Future adverse changes in market conditions or poor operating results of an investee could require future impairment charges.

Provision for income taxes

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


	Three Months Ended March 31,				2005 Compared to 2004
	2005		2004		2005 Compared to 2004
Provision for income taxes	$	498	$	230	116	%

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

We have not used an effective tax rate to forecast our income taxes for interim periods due to difficulty in forecasting taxable profits of our foreign subsidiaries primarily as a result of unpredictable product mix. As a result, we expect some volatility in our tax rate on a quarterly basis.

Liquidity and Capital Resources

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


	March 31, 2005		December 31, 2004
Cash and cash equivalents	$	78,032	$	63,781
Short-term investments	$	95,117	$	100,582
Working capital	$	135,833	$	126,406
Current ratio		2.8:1		2.5:1
Days of sales outstanding – for the quarter ended		61		77

At March 31, 2005, we had $173.1 million in cash, cash equivalents and short-term investments and no debt. We generally invest cash exceeding our operating requirements in short-term, investment-grade securities and classify these investments as available-for-sale.

Net cash provided by operating activities was $7.1 million and net cash used by operating activities was $10.1 million during the first three months of 2005 and 2004, respectively. The increase in cash inflows was due to the increase in net profits, excluding non-cash charges.

Net cash provided by investing activities was $6.7 million during the first three months of 2005, compared to net cash provided by investing activities of $18.7 million during the first three months of 2004. The decrease in investing outflows was primarily due to purchase consideration for our acquisition of Tower Technology in the first quarter of 2004. We expect that our future investing activities will generally consist of capital expenditures to support our future needs, investment in securities to maximize investment yields while preserving cash flow for operational purposes, and acquisition of intellectual property or complementary businesses to expand our market share.

Net cash provided by financing activities was $0.9 million and $2.0 million during the first three months of 2005 and 2004, respectively. Our financing activities consisted primarily of employee stock option exercises and purchases of employee stock purchase plan shares.

Our long-term investments are classified as available-for-sale and generally consist of common stock in publicly held technology companies, limited partnership interests in a technology incubator, and cash collateral pledged for certain lease obligations. At March 31, 2005, long-term investments totaled $11.9 million, compared to $12.4 million at December 31, 2004. We may continue to invest in companies strategic to our business; however, we do not expect future investments to significantly impact our liquidity position.

At March 31, 2005 and December 31, 2004, we had pledged $9.4 million and $9.8 million, respectively, as cash collateral for certain of our lease obligations. These investments will remain restricted to the extent that the security requirements exist.

We expect to fund our operations, capital expenditures and investments from internally generated funds and existing cash and investments. We believe that our existing balances will be sufficient to meet our working capital, capital expenditure and investment requirements for at least the next 12 months. We may require additional funds for other purposes and may seek to raise such additional funds through public and private equity financings or from other sources. However, there can be no assurance that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us or that any additional financing will not be dilutive.

Leases

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


	Operating Leases		Sublease Income
2005	$	10,998	$	546
2006		6,200		690
2007		5,486		791
2008		4,435		652
2009		3,559		606
Thereafter		4,905		101

Total minimum lease payments	$	35,582

Total minimum sublease rentals			$	3,386

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

Recent Accounting Pronouncements

See Note 14 in the Unaudited Notes to Condensed Financial Statements in the “Financial Statements” section above for a discussion of recently issued accounting pronouncements related to stock-based compensation.

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.

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

Risks Related to Our Business

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

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

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

As a result of the evolving nature of the market in which we compete, our revenue, license bookings, and earnings are difficult to forecast and are likely to fluctuate from quarter to quarter. We plan our operating expense based on our historical results, and in part, on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenues are lower than we had forecasted. Our ability to accurately forecast our quarterly revenue is limited because our software products have a long sales cycle that makes it difficult to predict the quarter in which sales will occur. We would expect our business, operating results and financial condition to be materially adversely affected if our revenues do not meet our projections and that net losses in a given quarter would be greater than expected.

We 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:

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demand for our products and services;

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the timing of sales of our products and services;

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the timing of customer orders and product implementations;

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seasonal fluctuations in information technology purchasing;

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unexpected delays in introducing new products and services;

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

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

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

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

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the mix of domestic and international sales;

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difficulties in collecting accounts receivable;

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costs related to possible acquisitions of technology or businesses;

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

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the general economic climate;

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changes to our licensing and pricing model; and

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difficulty in developing and maintaining an indirect sales channel.

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

We will continue to invest in our research and development, sales and marketing, professional services and general and administrative organizations. We expect such overall spending, in absolute dollars, will increase in future periods in anticipation of revenue growth. 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.

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

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

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

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

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

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expenses associated with customizing products for foreign countries;

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protectionist laws and business practices that favor local competition;

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changes in jurisdictional tax laws including laws regulating intercompany transactions;

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dependence on local vendors;

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multiple, conflicting and changing governmental laws and regulations;

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longer sales cycles;

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difficulties in collecting accounts receivable;

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seasonality of operations;

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difficulties in staffing and managing foreign operations;

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the need to localize our products;

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licenses, tariffs, and other trade barriers;

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

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foreign currency exchange rate fluctuations; and

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political and economic instability.

We recorded 41%, 38% and 26% of our total revenue for the quarter ended March 31, 2005 and the years ended December 31, 2004 and 2003, respectively, through licenses and services sold to customers located outside of the United States. We expect international revenue to remain a large percentage of total revenue and we believe that we must continue to expand our international sales activities to be successful. Historically, a majority of our international revenues and costs have been denominated in foreign currencies, and we expect future international revenues and costs will be denominated in foreign

currencies. Our international sales growth will be limited if we are unable to establish appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, customize products for local markets, develop relationships with international service providers and establish relationships with additional distributors and third-party integrators. In that case, our business, operating results and financial condition could be materially adversely affected. Even if we are able to successfully expand international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products.

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

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

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

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the potential difficulties of integrating international and domestic operations;

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

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the possibility that the business cultures will not be compatible;

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

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unanticipated expenses related to integration of operations;

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

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potential unknown liabilities associated with the acquired business and technology;

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

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

For such transactions to achieve their anticipated benefits, we must successfully combine and integrate products in a timely manner. Integrating can be a complex, time-consuming and expensive process and may result in revenue disruption and operational difficulties if not completed in a timely and efficient manner. We may be required to spend additional time or money on integration that would otherwise be spent on developing our business or on other matters. If we do not integrate our operations and technology smoothly or if management spends too much time on integration issues, it could harm our business, financial condition and results of operations and diminish the benefits of the acquisition as well as harm our content management business.

Prior to the acquisitions, each company operated independently, each with its own business, business culture, markets, clients, employees and systems. Following the acquisitions, we must operate as a combined organization, utilizing common information communication systems, operating procedures, financial controls and human resource practices, including benefits, training and professional development programs. There may be substantial difficulties, costs and delays involved in the integration. There can be no assurance that we will succeed in addressing these risks or any other problems encountered in connection with the acquisition.

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

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

The challenges involved in this integration include the following:

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coordinating and integrating international and domestic operations;

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combining product offerings and product lines quickly and effectively;

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

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

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retaining key alliances; and

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persuading our employees that our business cultures are compatible.

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

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

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

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deployment of the combined company’s products by enterprises; and

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

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

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

We completed our acquisition of Tower Technology in March 2004. 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 respective definitive merger agreements. Although, in each acquisition a portion of the Tower Technology purchase price was placed in escrow to cover such liabilities, substantially all amounts in escrow have been released except for amounts related to specific escrow claims. Further, it is possible that the actual amounts required to cover such liabilities will exceed the remaining escrow amount. Additionally, we may acquire other businesses in the future, which would complicate our management tasks. We may need to integrate widely dispersed operations that have different and unfamiliar corporate cultures. These integration efforts may not succeed or may distract management’s attention from existing business operations. Failure to successfully integrate acquisitions could seriously harm our business. Also, our existing stockholders would experience dilution if we financed subsequent acquisitions by issuing equity securities.

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

All of the 27.2 million shares of our common stock issued in connection with the acquisition were available for resale by the former shareholders of Tower Technology in varying amounts between July 13, 2004 and February 25, 2005. As a result, a substantial number of shares of our common stock may be sold into the public by the former shareholders of Tower Technology. A sale of a large number of shares of our common stock could result in a sharp decline in our stock price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Historically, services costs related to professional services have frequently exceeded or been substantially equal to professional services-related revenue. In this current economic climate, we make periodic capacity decisions based on estimates of future sales, anticipated existing customer needs, and general market conditions. Although we expect that our professional services-related revenue will continue to exceed professional services-related costs in future periods, we cannot be certain that this will occur.

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

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

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

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

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

We May Be Adversely Affected if We Lose Key Personnel

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

If We are Unable to Meet the Rapid Changes in Software Technology, Our Existing Products Could Become Obsolete

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

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

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

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

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

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

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We could incur substantial costs to prosecute or defend any such litigation. Although we are not involved in any such litigation that we believe is material to our business, if we become a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of other’s intellectual property, we may be forced to do one or more of the following:

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

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

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redesign those products or services that incorporate such technology; and

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

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

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

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

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authorizing the issuance of “blank check” preferred stock;

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

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prohibiting cumulative voting in the election of directors;

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

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limiting the persons who may call special meetings of stockholders;

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prohibiting stockholder action by written consent; and

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

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

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

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

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

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.

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

It is likely possible that future laws, rules or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method. We are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. For example, if we had accounted for stock-based compensation plans using the fair value method, our loss per share for the year ended December 31, 2004 would have been increased by $0.05 per share.

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

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

Our financial statements could be adversely impacted by our employees’ errant or improper actions. For instance, revenue recognition depends on, among other criteria, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to prevent and discourage such conduct, but there can be no assurance that such policies will be followed. For instance, in the event that our sales personnel have negotiated terms that do not appear in the contract and of which we are unaware, whether the additional terms are written or oral, we could be prevented from recognizing revenue in accordance with our plans.

Furthermore, depending on when we learn of unauthorized actions and the size of transactions involved, we may have to restate our financial statements for a previously reported period, which would seriously harm our business, operating results and financial condition.

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

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

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.

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:

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variations in quarterly operating results;

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changes in financial estimates by securities analysts;

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changes in market valuations of Internet software companies;

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

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

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additions or departures of key personnel;

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difficulties in collecting accounts receivable;

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large percentage of stock held by a few large shareholders;

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

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shareholder approval or disapproval of recently proposed reverse stock split.

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

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

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

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

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year beginning in 2004, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports beginning with this Report. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting.

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance

that all control issues and instances of fraud, if any, involving the company have been, or will be, detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Although our management has determined, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of December 31, 2004, we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price.

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

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

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

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

The majority of our operations are based in the United States of America and accordingly, the majority of our transactions are denominated in U.S. Dollars. We have operations throughout the Americas, Europe, Asia and Australia where transactions are denominated in the local currency of each location. As a result, our financial results could be affected by changes in foreign currency exchange rates. In the third quarter of 2004, we adopted a foreign exchange policy to reduce our exposure to significant foreign currency fluctuations. We utilize foreign currency forward contracts to hedge foreign currency-denominated payables and receivables. To date, we have not hedged forecasted transactions or firm commitments denominated in foreign currencies and therefore, financial reporting of our foreign operations are subject to foreign currency risk. Gains and losses on hedging contracts are reflected currently in other income and expense. We typically limit the duration of our foreign currency forward contracts to 90 days. We do not invest in contracts for speculative purposes. Our foreign exchange exposures are monitored regularly to ensure the overall effectiveness of our foreign currency hedge positions.

Interest Rate Risk

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

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

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investment grade state and local government obligations;

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

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

At March 31, 2005, our cash and cash equivalents consisted primarily of commercial paper. Our short-term investments will mature in less than one year from March 31, 2005 and were invested in corporate notes, corporate bonds and medium-term notes in large U.S. institutions and governmental agencies. These securities are classified as available-for-sale and are recorded at their estimated fair value.

Long-term investments. We invest in emerging technology companies considered strategic to our software business. At March 31, 2005, long-term investments consisted of common stock held in publicly-traded technology companies and a limited partnership interest in a technology incubator. We periodically analyze our long-term investments for impairments that could be considered other than temporary. Our investments in redeemable convertible preferred stock in privately-held technology companies were fully impaired as of June 30, 2002. Fair values were based on quoted market prices where available. If quoted market prices were not available, we use a composite of quoted market prices of companies that are comparable in size and industry classification to our portfolio. We classify our long-term investments as available-for-sale and recorded a cumulative net unrealized gain of approximately $0.9 million related to these securities as of March 31, 2005.

In addition to strategic investments, we held $9.4 million and $9.8 million in restricted investments at March 31, 2005 and December 31, 2004, respectively. At March 31, 2005, restricted investments were composed of a certificate of deposit and investment grade securities placed with a high credit quality financial institution. Such restricted investments collateralize letters of credit related to certain leased office space security deposits. These investments will remain restricted to the extent that the security requirements exist. All restricted investments mature in 2005 and the average yield of these investments is approximately 2.4%.

ITEM 4 — CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Bancorp Piper Jaffray, Inc. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on, among other things, claims that the four underwriters awarded material portions of the shares in the Company’s initial and secondary public offerings to certain customers in exchange for excessive commissions. The plaintiff also asserts that the underwriters engaged in “tie-in arrangements” whereby certain customers were allocated shares of Company stock sold in its initial and secondary public offerings in exchange for an agreement to purchase additional shares in the aftermarket at pre-determined prices. With respect to the Company, the complaint alleges that the Company and its officers and directors failed to disclose the existence of these purported excessive commissions and tie-in arrangements in the prospectus and registration statement for the Company’s initial public offering and the prospectus and registration statement for the Company’s secondary public offering. The action seeks damages in an unspecified amount.

The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied a motion to dismiss the complaint against the Company. On October 13, 2004, the Court certified a class in six of the other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Company’s case. The Company has approved a settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other issuer defendants. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and the company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by the Company. Even if material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Company’s insurance carriers should arise, the Company’s maximum financial obligation to plaintiffs pursuant to the settlement agreement is less than $3.4 million. The settlement agreement has been submitted to the Court for approval. Approval by the Court cannot be assured. The Company cannot predict whether or when a settlement will occur or be finalized. If the settlement is not approved, the Company is unable to determine whether the outcome of the litigation will have a material impact on its results of operations or financial condition in any future period. The Company believes that this lawsuit is without merit and would continue to defend itself vigorously if the settlement is not approved.

Litigation and Other Claims

ITEM 6 — EXHIBITS

Exhibits:


Exhibit Number		Description
31.1		Certification to the Securities and Exchange Commission by Registrant’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification to the Securities and Exchange Commission by Registrant’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


		VIGNETTE CORPORATION

Date: May 9, 2005		/s/ Charles W. Sansbury
		Charles W. Sansbury
		*Chief Financial Officer*
		(Duly Authorized Officer and Principal Financial Officer)