SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2005

OR

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

For the Transition Period from            to

Commission file number 000-26679

ART TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		04-3141918 (I.R.S. Employer Identification Number)

25 First Street, Cambridge, Massachusetts
(Address of principal executive offices)

02141
(Zip Code)

(617) 386-1000
(Registrant’s telephone number, including area code)

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

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

     As of August 3, 2005 there were 109,561,722 shares of the Registrant’s common stock outstanding.

 

 

ART TECHNOLOGY GROUP, INC.
INDEX TO FORM 10-Q

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
• Unaudited Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004			3
• Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004			4
• Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004			5
• Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 5. Other Information			46
Item 6. Exhibits			46
SIGNATURE
Signature			47
EX-31.1 Certifications of Principal Executive Officer
EX-31.2 Certifications of Principal Financial Officer
EX-32.1 Section 906 PEO Certification
EX-32.2 Section 906 PFO Certification

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ART TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(UNAUDITED)

		June 30,				December 31,
		2005				2004
ASSETS
Current Assets:
Cash and cash equivalents		$	19,097			$	21,310
Marketable securities			9,616				5,197
Accounts receivable, net of reserves of $560 ($680 in 2004)			19,196				24,430
Prepaid expenses and other current assets			2,992				1,694
Total current assets			50,901				52,631
Property and equipment, net			2,280				3,120
Long term marketable securities			—				4,001
Goodwill			27,458				27,458
Intangible assets, net			6,018				7,177
Other assets			1,744				3,416
		$	88,401			$	97,803
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	2,918			$	5,186
Accrued expenses			11,759				13,156
Capital lease obligations, current portion			56				56
Notes payable			235				595
Deferred revenue			21,853				25,355
Accrued restructuring, short-term			4,207				6,095
Total current liabilities			41,028				50,443
Capital lease obligations, less current portion			84				112
Accrued restructuring, less current portion			2,860				5,063
Commitments and contingencies (Notes 11 and 13)
Stockholders’ Equity:
Preferred stock, $0.01 par value authorized — 10,000,000 shares issued and outstanding — no shares			—				—
Common stock, $0.01 par value authorized — 200,000,000 shares issued and outstanding — 109,545,656 shares and 108,141,966 shares at June 30, 2005 and December 31, 2004, respectively			1,095				1,081
Additional paid-in capital			250,527				249,465
Accumulated deficit			(204,154	)			(205,235	)
Accumulated other comprehensive loss			(3,039	)			(3,126	)
Total stockholders’ equity			44,429				42,185
		$	88,401			$	97,803

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

ART TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues:
Product licenses		$	5,319			$	3,144			$	12,702			$	9,508
Services			14,942				11,188				29,553				21,634
Total revenues			20,261				14,332				42,255				31,142
Cost of Revenues:
Product licenses			378				331				942				730
Services			5,367				5,125				10,806				9,910
Total cost of revenues			5,745				5,456				11,748				10,640
Gross Profit			14,516				8,876				30,507				20,502
Operating Expenses:
Research and development			4,548				4,150				9,137				8,280
Sales and marketing			6,996				7,231				13,796				14,572
General and administrative			2,704				1,739				5,692				3,669
Restructuring charges			671				—				875				—
Total operating expenses			14,919				13,120				29,500				26,521
Income (loss) from operations			(403	)			(4,244	)			1,007				(6,019	)
Interest and other income, net			89				64				100				17
Income (loss) before provision for income taxes			(314	)			(4,180	)			1,107				(6,002	)
Provision for income taxes			13				67				26				32
Net income (loss)		$	(327	)		$	(4,247	)		$	1,081			$	(6,034	)
Basic net income (loss) per share		$	(0.00	)		$	(0.06	)		$	0.01			$	(0.08	)
Diluted net income (loss) per share		$	(0.00	)		$	(0.06	)		$	0.01			$	(0.08	)
Basic weighted average common shares outstanding			109,218				73,524				108,950				73,289
Diluted weighted average common shares outstanding			109,218				73,524				110,739				73,289

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

ART TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

		Six months ended June 30,
		2005				2004
Cash Flows from Operating Activities:
Net income (loss)		$	1,081			$	(6,034	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation			—				11
Depreciation and amortization			2,097				1,039
Non-cash restructuring charge			1,167				—
Loss on disposal of fixed assets, net			—				100
Changes in current assets and liabilities:
Accounts receivable, net			5,234				4,467
Prepaid expenses and other current assets			(1,298	)			(684	)
Deferred rent			382				404
Accounts payable			(1,258	)			787
Accrued expenses			(1,397	)			(1,980	)
Deferred revenues			(3,502	)			(719	)
Accrued restructuring			(4,091	)			(6,700	)
Net cash used in operating activities			(1,585	)			(9,309	)
Cash Flows from Investing Activities:
Purchases of marketable securities			(2,908	)			(9,313	)
Maturities of marketable securities			2,490				8,743
Purchases of property and equipment			(271	)			(345	)
Payment of acquisition costs			(1,010	)			—
Decrease in other assets			241				4
Net cash used in investing activities			(1,458	)			(911	)
Cash Flows from Financing Activities:
Proceeds from exercise of stock options			683				332
Proceeds from employee stock purchase plan			393				515
Principal payments on notes payable			(360	)			—
Payments on capital leases			(28	)			—
Net cash provided by financing activities			688				847
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents			142				(28	)
Net Decrease in Cash and Cash Equivalents			(2,213	)			(9,401	)
Cash and Cash Equivalents, Beginning of Period			21,310				31,934
Cash and Cash Equivalents, End of Period		$	19,097			$	22,533

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

ART TECHNOLOGY GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND BASIS OF PRESENTATION

     Art Technology Group, Inc. (ATG or the Company) offers an integrated suite of Internet online marketing, sales and service applications, as well as related application development, integration and support services.

     ATG delivers software solutions to help consumer-facing organizations create an interactive experience for their customers and partners via the Internet and other channels. The Company’s software helps its clients market, sell and provide self-service opportunities to their customers and partners, which can enhance clients’ revenues, reduce their costs and improve their customers’ satisfaction. The Company also offers related services, including support, education, professional services and application hosting services.

     The accompanying unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q. The disclosures do not include all of the information and footnotes required by accounting principles generally accepted in the United States, and while the Company believes that the disclosures presented are adequate to make information not misleading, these financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s 2004 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes contain all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods indicated. Certain prior period amounts have been reclassified to conform to current period presentation, including classification of cost of revenues. The operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005.

     On November 1, 2004, ATG acquired all of the shares of outstanding common stock of Primus Knowledge Solutions, Inc. (“Primus”). Primus is a provider of software solutions that enable companies to deliver a superior customer experience via contact centers, information technology help desks, web (intranet and internet) self-service and electronic communication channels.

     The accompanying consolidated financial statements include the accounts of ATG and its wholly owned subsidiaries, including Primus. All significant intercompany balances have been eliminated in consolidation.

(2) STOCKHOLDERS’ EQUITY

     Stock-Based Compensation

     ATG grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. ATG accounts for stock-based compensation for employees in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, and follows the disclosure-only alternative under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation.

     Had compensation expense for ATG’s stock plans been determined consistent with SFAS 123, the pro forma net loss and net loss per share would have been as follows (in thousands, except per share amounts):

		Three months ended June 30,								Six months ended June 30,
		2005				2004				2005				2004
Net income (loss) as reported		$	(327	)		$	(4,247	)		$	1,081			$	(6,034	)
Add: Stock-based compensation expense included in reported net income (loss)			—				—				—				11
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards			(469	)			(4,522	)			(1,927	)			(10,958	)
Pro forma net loss		$	(796	)		$	(8,769	)		$	(846	)		$	(16,981	)
Basic and diluted net income (loss) per share —
As reported		$	(0.00	)		$	(0.06	)		$	0.01			$	(0.08	)
Pro forma		$	(0.01	)		$	(0.12	)		$	(0.01	)		$	(0.23	)

(3) NET INCOME (LOSS) PER SHARE

     Net income (loss) per share is computed in accordance with SFAS No. 128, Earnings Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of common stock equivalents, which consists of stock options, using the treasury stock method.

     The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per-share amounts):

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income (loss)		$	(327	)		$	(4,247	)		$	1,081			$	(6,034	)
Weighted average common shares outstanding			109,218				73,524				108,950				73,289
Weighted average common stock equivalents outstanding:
Employee stock options			—				—				1,789				—
Total weighted average common stock and common stock equivalents			109,218				73,524				110,739				73,289
Basic net income (loss) per share		$	(0.00	)		$	(0.06	)		$	0.01			$	(0.08	)
Diluted net income (loss) per share		$	(0.00	)		$	(0.06	)		$	0.01			$	(0.08	)

(4) REVENUE RECOGNITION

     ATG recognizes product license revenues from licensing the rights to use its software to end-users. ATG also generates service revenues from integrating its software with its customers’ operating environments, the sale of maintenance services, the sale of certain other consulting and development services and application and managed hosting services. ATG generally has separate agreements with its customers that govern the terms and conditions of its software licenses, consulting, hosting and support and maintenance services. These separate agreements, along with ATG’s business practices of selling services separately, provide the basis for establishing vendor-specific objective evidence of fair value. This allows ATG to allocate revenue among the undelivered elements in an arrangement and apply the residual method under Statement of Position (SOP) No. 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.

     ATG recognizes revenue in accordance with SOP 97-2 and SOP 98-9. Revenues from software product license agreements are recognized upon execution of a license agreement and delivery of the software, provided that the fee is fixed or determinable and deemed collectible by management. If conditions for acceptance are required subsequent to delivery, revenues are recognized upon customer acceptance if such acceptance is not deemed to be perfunctory. In multiple element arrangements, ATG uses the residual value method in accordance with SOP 97-2 and SOP 98-9. Revenue earned on software arrangements involving multiple elements that qualify for separate element accounting treatment is allocated to each undelivered element using the relative fair values of those elements based on vendor-specific objective evidence with the remaining value assigned to the delivered element, the software license. Typically, the Company’s software licenses do not include significant post-delivery obligations to be fulfilled by the Company and payments are due within a three-month period from the date of delivery. Consequently, product license revenue is generally recognized when the product is shipped. Revenues from software maintenance or application hosting agreements are recognized ratably over the term of the support and maintenance or application hosting period, which for application hosting and support and maintenance is typically one year. Customers who have both purchased ATG’s product licenses and entered into an application hosting agreement typically have a contractual right to cancel the application hosting agreement with a minimum notice period. ATG enters into reseller arrangements that typically provide for sublicense fees payable to ATG based upon a percentage of ATG’s list price. Revenues are recognized under reseller agreements as earned for guaranteed minimum royalties, or based upon actual sales to the resellers. ATG does not grant its resellers the right of return or price protection.

     Revenues from professional service arrangements are recognized on either a time-and-materials, proportional performance method or percentage-of-completion basis as the services are performed, provided that amounts due from customers are fixed or determinable and deemed collectible by management. From time to time the Company enters into fixed price service arrangements. In those circumstances in which services are essential to the functionality of the software, the Company applies the percentage-of-completion method, and in those situations when only professional services are provided, the Company applies the proportional performance method. Both of these methods require that the Company track the effort expended and the effort expected to complete a project. Amounts collected or billed prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue primarily consists of advance payments related to support and maintenance, service agreements and deferred product license revenues.

(5) INCOME TAXES

     ATG expects to have minimal or no Federal or foreign income taxes in 2005 due to the use of net operating loss carryforwards and the projection of a taxable loss in domestic and foreign locations in 2005. As a result of net operating losses incurred, and after evaluating its anticipated performance over its normal planning horizon, the Company has provided a full valuation allowance for its net operating loss carryforwards, research credit carryforwards and other net deferred tax assets. For the three months ended June 30, 2005 and 2004, the Company had no reversals of previously accrued taxes due to the closure of statutes of limitations in foreign locations. For the six months ended June 30, 2005 and 2004, the Company reversed previously accrued taxes of $0 and $105,000, respectively, due to the closure of statutes of limitations in foreign locations.

(6) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

     ATG accounts for investments in marketable securities under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS 115, investments for which ATG has the positive intent and the ability to hold to maturity, consisting of cash equivalents and marketable securities, are reported at amortized cost, which approximates fair market value. Cash equivalents are highly liquid investments with maturities at the date of acquisition of less than 90 days. Marketable securities are investment grade debt securities with maturities at the date of acquisition of greater than ninety days. At June 30, 2005 and December 31, 2004, all of ATG’s marketable securities were classified as held-to-maturity. The average maturity of ATG’s marketable securities was approximately 3.7 months and 9.6 months at June 30, 2005 and December 31, 2004, respectively. At June 30, 2005 all marketable securities were classified as short-term. At December 31, 2004, the average maturity of the marketable securities classified as long-term was 13.6 months. At June 30, 2005 and December 31, 2004, the difference between the amortized cost and market value of ATG’s marketable securities resulted in unrealized losses of approximately $56,000 and $77,000, respectively. At June 30, 2005 and December 31, 2004, ATG’s cash, cash equivalents and marketable securities consisted of the following (in thousands):

		June 30,				December 31,
		2005				2004
Cash and cash equivalents:
Cash		$	10,722			$	4,360
Money market accounts			4,838				13,529
Commercial paper			1,995				799
U.S. Treasury and Government Agency securities			1,542				2,622
Total cash and cash equivalents		$	19,097			$	21,310
Marketable securities—
Corporate debt securities		$	7,476			$	7,754
U.S. Treasury and Government Agency securities			946				648
Commercial paper			1,194				796
Total marketable securities		$	9,616			$	9,198

(7) GOODWILL

     In accordance with SFAS 141, Business Combinations, the company accounts for its business combinations using the purchase method. In accordance with SFAS 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill, but instead tests for impairment at least annually or more frequently upon the occurrence of certain events that may indicate that an impairment has occurred. Intangible assets acquired in conjunction with a business combination are required to be separately recognized if the benefit of the intangible asset obtained is through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

     The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value, which is determined by use of a discounted cash flow technique, of the reporting entity to its carrying value. If the fair value of the reporting entity exceeds the carrying value of the net assets of that entity, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting entity exceeds the fair value of that entity, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting entity’s goodwill. If the carrying value of a reporting entity’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.

     Determining the fair value of a reporting entity is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions may include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently subject to uncertainty. Actual future results may differ from those estimates. In addition, the Company may make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values of its reporting entities.

     The Company performs the annual impairment assessment as of December 1 of each year.

(8) LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS

     In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the carrying value of its long-lived assets, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets over their remaining economic life. If the undiscounted cash flows are not sufficient to recover the carrying value of such assets the assets are considered impaired, and the impairment loss is measured by comparing the fair value of the assets to their carrying values. Fair value is determined by either a quoted market price or a value determined by a discounted cash flow technique, whichever is more appropriate under the circumstances involved. Intangible assets with determinable lives are amortized over their useful lives, based upon the pattern in which the expected benefits will be realized. The Company has recorded impairment charges as discussed in Note 14.

(9) COMPREHENSIVE INCOME (LOSS)

     SFAS 130, Reporting Comprehensive Income, requires that a full set of general purpose financial statements include the reporting of comprehensive income (loss). Comprehensive income (loss) is comprised of two components, net income (loss) and other comprehensive income (loss). The following are the components of ATG’s comprehensive income (loss) (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2005				2004				2005				2004
Net income (loss)		$	(327	)		$	(4,247	)		$	1,081		$	(6,034	)
Foreign currency translation adjustment			34				68				87			30
Comprehensive income (loss)		$	(293	)		$	(4,179	)		$	1,168		$	(6,004	)

     The accumulated other comprehensive loss at June 30, 2005 and December 31, 2004 of $3.0 and $3.1 million, respectively, consisted entirely of the cumulative foreign currency translation adjustment.

(10) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

     SFAS 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker or decision-making group in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision-maker, as defined under SFAS 131, is its executive management team. To date, the Company has viewed its operations and manages its business as principally one segment with two product offerings: software licenses and services. The Company evaluates these product offerings based on their respective gross margins. As a result, the financial information disclosed in the consolidated financial statements represents all of the material financial information related to the Company’s principal operating segment.

Revenues from sources outside of the United States were approximately $4.5 million and $4.3 million for the three months ended June 30, 2005 and 2004, respectively, and $10.2 million and $10.8 million for the six months ended June 30, 2005 and 2004, respectively. ATG’s revenues from international sources were primarily generated from customers located in Europe and the Asia/Pacific region. All of ATG’s product license sales for the three and six months ended June 30, 2005 and 2004 were delivered from its headquarters located in the United States.

     The following table represents the percentage of total revenues by geographic region for the three and six months ended June 30, 2005 and 2004:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
United States			78	%			70	%			76	%			65	%
United Kingdom (UK)			11				8				11				17
Europe, Middle East and Africa (excluding UK)			10				20				12				13
Asia Pacific			1				—				1				—
Other			—				2				—				5
			100	%			100	%			100	%			100	%

(11) CREDIT FACILITY AND NOTES PAYABLE

     Credit Facility

     On June 13, 2002, ATG entered into a $15 million revolving line of credit with Silicon Valley Bank (the Bank) which provided for borrowings of up to the lesser of $15 million or 80% of eligible accounts receivable. Effective December 24, 2002 the revolving line of credit increased to $20 million. The line of credit bears interest at the Bank’s prime rate (6% at June 30, 2005). The line of credit is secured by all of the Company’s tangible and intangible intellectual and personal property and is subject to financial covenants including liquidity coverage and profitability. On December 24, 2004, the Company entered into the Seventh Loan Modification Agreement (the Seventh Amendment) with the Bank, which amended the Amended and Restated Loan and Security Agreement dated as of June 13, 2002. Under the Seventh Amendment, the profitability covenant was revised to allow for quarterly net losses not to exceed $500,000 for the second quarter of 2005 and, $1.5 million for the third quarter of 2005, and to require net profitability of at least $1.00 for the fourth quarter of 2005 and for each quarter thereafter. The Company is required to maintain unrestricted and unencumbered cash, which includes cash equivalents and marketable securities of $20 million at the end of each month.

     To avoid additional bank fees and expenses, the Company is required to maintain unrestricted cash, which includes cash equivalents and marketable securities, at the Bank in an amount equal to two times the amount of obligations outstanding, which includes letters of credit that have been issued but not drawn upon, under the loan agreement. In the event the Company’s cash balance at the Bank falls below this amount, the Company will be required to pay fees and expenses to compensate the Bank for lost income. At June 30, 2005, ATG was in compliance with all related financial covenants. In the event that ATG does not comply with any of the financial covenants within the line of credit or defaults on any of its provisions, the Bank’s significant remedies include: (1) declaring all obligations immediately due and payable, which could include requiring ATG to cash collateralize its outstanding letters of credit (LCs); (2) ceasing to advance money or extend credit for the Company’s benefit; (3) applying to the obligations any balances and deposits held by the Company or any amount held by the Bank owing to or for the credit or the account of ATG; and, (4) putting a hold on any deposit account held as collateral. If the agreement expires, or is not extended, the Bank will require outstanding LCs at that time to be cash secured on terms acceptable to the Bank. The revolving line of credit expires on December 24, 2005. While there were no outstanding borrowings under the facility at June 30, 2005, ATG has issued LCs totaling $7.6 million, which are supported by this facility. The LCs have been issued in favor of various landlords and equipment leasing companies to secure obligations under ATG’s facility leases pursuant to leases expiring from August 2006 through March 2009. As of June 30, 2005, approximately $12.4 million was available under the facility.

     Notes Payable

     In connection with the November 2004 acquisition of Primus, the Company assumed Primus’ outstanding obligation of $297,000 under a credit facility with a bank. The facility is payable in monthly installments of $11,000, including interest at the bank’s prime rate plus 2% (6.75% at June 30, 2005 and December 31, 2004), due June 2008. The facility is callable on demand. The loan is denominated in British pounds. At June 30, 2005 and December 31, 2004, the balance on the note was $235,000 and $295,000, respectively.

     On November 1, 2004, the Company entered into a settlement agreement with ServiceWare Technologies, Inc. (ServiceWare) related to their allegation that Primus had infringed certain patents owned by ServiceWare. As part of the settlement, the Company was required to make cash payments totaling $800,000, of which $500,000 was paid during 2004 and $300,000 was paid in January 2005 and was included in notes payable at December 31, 2004.

(12) ACQUISITION OF PRIMUS

     Effective November 1, 2004, the Company acquired all of the outstanding shares of common stock of Primus Knowledge Solutions, Inc. (“Primus”). Primus is a provider of software solutions that enable companies to deliver a superior customer experience via contact centers, information technology help desks, web (intranet and internet) self-service and electronic communication channels.

     The aggregate purchase price was approximately $31.7 million, which consisted of $28.1 million of the Company’s common stock, $1.3 million for the fair value of fully-vested stock options exchanged in the acquisition and $2.3 million of transaction costs, which primarily consisted of fees paid for financial advisory, legal and accounting services. The Company issued approximately 33.5 million shares of ATG Common Stock, the fair value of which was based upon a five-day average of the closing price two days before and two days after the terms of the acquisition were agreed to and publicly announced.

     The consolidated financial statements include the results of Primus from the date of acquisition. The purchase price has been allocated based on estimated fair values as of the acquisition date. After allocating the purchase price to the acquired net tangible and intangible assets, the Company recorded $27.5 million of goodwill. The allocation of the purchase price is preliminary and could be adjusted due to settlement of litigation (see Note 15) or other matters that were not identified at the acquisition date.

     Intangible assets, which are being amortized based on the pattern in which the economic benefits of the intangible assets are being utilized, consist of the following (in thousands):

		June 30, 2005												December 31, 2004
		Gross												Gross
		Carrying				Accumulated				Net Book				Carrying				Accumulated				Net Book
		Amount				Amortization				Value				Amount				Amortization				Value
Purchased technology		$	3,600			$	(850	)		$	2,750			$	3,600			$	(441	)		$	3,159
Customer relationships			4,200				(1,243	)			2,957				4,200				(559	)			3,641
Non-compete agreements			400				(89	)			311				400				(23	)			377
Total intangible assets, excluding goodwill		$	8,200			$	(2,182	)		$	6,018			$	8,200			$	(1,023	)		$	7,177

     Amortization expense from intangible assets was $580,000 and $1.2 million for the three and six months ended June 30, 2005, respectively. As of June 30, 2005, amortization expense on existing intangibles for the next five years is as follows (in thousands):

Remainder of 2005		$	1,159
2006			2,055
2007			1,740
2008			848
2009			216
Total		$	6,018

     In connection with the Primus acquisition, integration activities resulted in involuntary terminations and lease and contract terminations. As part of the purchase price of the acquisition, the Company recorded restructuring costs of $2.1 million for these activities comprised of $1.7 million for involuntary termination benefits and $400,000 for facility related costs. The liability for involuntary termination benefits is for 49 employees, primarily in general and administrative and research and development functions.

The Company expects to pay the remaining balance for involuntary termination benefits and facilities-related costs in 2005.

The following summarizes the obligations in connection with the Primus acquisition and activity to date (in thousands):

		Balance at								Balance at
Category		December 31, 2004				Payments				June 30, 2005
Involuntary termination benefits		$	1,218			$	(960	)		$	258
Facilities-related costs			279				(168	)			111
Total		$	1,497			$	(1,128	)		$	369

The balance of $369,000 in costs associated with the integration activities at June 30, 2005 is included in accrued expenses.

(13) COMMITMENTS AND CONTINGENCIES

     Leases

     ATG has offices, primarily for sales and support personnel, in five domestic locations as well as four foreign countries. At June 30, 2005, ATG had issued $7.6 million of LCs under its line of credit in favor of various landlords and equipment leasing companies to secure obligations under its leases, which expire from 2005 through 2009.

     The Company has both operating and capital lease obligations related to equipment leases. The obligations on these leases, which are included in the schedule of future minimum payments, represent the contractual minimum obligations. Certain equipment leases include purchase options at the end of the lease term.

     The future minimum payments of ATG’s facility leases and operating and capital lease obligations as of June 30, 2005, were as follows (in thousands):

		Leases
Remainder of 2005		$	4,158
2006			5,926
2007			2,997
2008			2,488
2009			704
Total future minimum lease payments		$	16,273

     Of the $16.3 million in future minimum lease payments, $11.0 million is included in the Company’s accrued restructuring charges. The $11.0 million is reduced to a $6.7 million restructuring accrual after taking into consideration estimated sublease income, contracted sublease income, vacancy periods and operating costs of the various subleased properties (see Note 14).

     Rent expense included in the accompanying statements of operations was approximately $857,000 million and $1.2 million for the three months ended June 30, 2005 and 2004, and $2.2 million and $2.4 million for the six months ended June 30, 2005 and 2004, respectively.

     Indemnification

     The Company frequently has agreed to indemnification provisions in software license agreements with customers and in its real estate leases in the ordinary course of its business.

     With respect to software license agreements, these indemnifications generally include provisions indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon the intellectual property of others. The software license agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the software license

agreements. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of June 30, 2005.

     With respect to real estate lease agreements or settlement agreements with landlords, these indemnifications typically apply to claims asserted against the landlord relating to personal injury and property damage at the leased premises or to certain breaches of the Company’s contractual obligations or representations and warranties included in the settlement agreements. These indemnification provisions generally survive the termination of the respective agreements, although the provision generally has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. The Company has purchased insurance that reduces its monetary exposure for landlord indemnifications. The Company has never paid any amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

(14) RESTRUCTURING

     During the quarter ended June 30, 2005, the Company recorded a net restructuring charge of $671,000, primarily due to a $1.8 million charge related to the relocation of its San Francisco office and other facility charges; offset by $1.1 million for adjustments in estimates related to sublease costs included in the 2001, 2002 and 2004 actions. During the quarter ended March 31, 2005, the Company recorded a net restructuring charge of approximately $204,000 due to adjustments in estimates related to the 2004 restructuring charge for employee severance benefits payable in international geographies. During the years ended 2004, 2003, 2002 and 2001, the Company recorded net restructuring charges/(benefits) of $3.6 million, $(10.5) million, $19.0 million and $75.6 million, respectively, as a result of the global slowdown in information technology spending. The significant drop in demand in 2001 for technology oriented products, particularly internet related technologies, caused management to significantly scale back the Company’s prior growth plans, resulting in a significant reduction in the Company’s workforce and consolidation of the Company’s facilities in 2001. Throughout 2002, the continued softness of demand for technology products, as well as near term revenue projections, caused management to further evaluate the Company’s marketing, sales and service resource capabilities as well as its overall general and administrative cost structure, which resulted in additional restructuring actions being taken in 2002. These actions resulted in a further reduction in headcount and consolidation of additional facilities. In 2003, as the Company continued to refine its business strategy and to consider future revenue opportunities, the Company took further restructuring actions to reduce costs, including product development costs, in order to help move the Company towards profitability. In 2004, the Company’s restructuring activities were undertaken to align the Company’s headcount more closely with management’s revenue projections and changing staff requirements as a result of strategic product realignments and the Company’s acquisition of Primus, and to eliminate facilities that were not needed in order to efficiently run the Company’s operations. The charges referred to above primarily pertain to the closure and consolidation of excess facilities, impairment of assets, employee severance benefits, and the settlement of certain contractual obligations. The 2005, 2004 and 2003 charges were recorded in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and Staff Accounting Bulletin (SAB) 100, “Restructuring and Impairment Charges.” The 2002 and 2001 charges were recorded in accordance with Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” SFAS 88 and SAB 100.

2001 Actions

     Actions taken by the Company in 2001 included the consolidation and closure of excess facilities, a worldwide workforce reduction, the write-off of certain unrealizable assets and settling certain obligations that had no future benefit. In the second quarter of 2001, the Company recorded a restructuring charge of $44.2 million, and in the fourth quarter of 2001, the Company recorded a restructuring charge of $31.4 million. In connection with these actions, the Company also recorded an impairment charge in cost of product licenses for purchased software of $1.4 million. Total restructuring charges for 2001 totaled $75.6 million.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						2005
		Accrued				Adjustments								Accrued
		Restructuring				in Estimates								Restructuring
		Balance as of				Resulting in								Balance as of
		December 31, 2004				Reduced Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	6,254			$	(783	)		$	(1,359	)		$	4,112
Employee severance, benefits and related costs			57				—				(57	)			—
Total		$	6,311			$	(783	)		$	(1,416	)		$	4,112

Facilities-Related Costs and Impairments

     During 2001, the Company recorded facility-related charges of $59.4 million of which $38.1 million was recorded in the second quarter and $21.3 million was recorded in the fourth quarter. The facilities-related charges comprise excess rental space for offices worldwide, net of estimates for vacancy periods and sublease income based on the then-current real estate market data, and related write-offs of abandoned leasehold improvements and fixed assets of $7.7 million and $2.2 million, respectively, which were directly related to excess office facilities. The estimated sublease income was $25.9 million and based on rental rates ranging from $18 to $40 per square foot with estimated vacancy periods prior to the expected sublease income ranging from 10 to 15 months. During the fourth quarter of 2001, the Company recorded an adjustment to increase the facility-related costs for a change in estimate of the lease obligations for two leases by $9.7 million as a result of a market analysis indicating lower sublease rates and longer vacancy periods due to the continued weakening of the real estate market. The sublease income was adjusted by decreasing anticipated sublease rates from the range of $18 to $40 to the range of $18 to $35 per square foot and extending the initial vacancy periods by approximately 9 months. In addition, the Company reduced its lease accruals by $8.2 million for a lease settlement in consideration of a buy-out totaling $9.3 million, which is being paid ratably over 4.5 years.

     The leasehold improvements, which will continue to be in use, related to the facilities the Company vacated and is subleasing or attempting to sublease, were written down to their estimated fair value of zero because the estimated cash flows to be generated by sublease income at those locations are not and will not be sufficient to recover the carrying value of the assets. Furniture and fixtures were written down to their fair value based on the expected discounted cash flows they will generate over their remaining economic life. Because these assets ceased being used as of the end of the period in which the write-downs were recorded, the fair value of these assets was estimated to be zero. The assets were abandoned and disposed of at the time of the charge.

     During 2002, the Company recorded an adjustment to increase the facilities-related portion of the 2001 charge by an additional $2.2 million for changes to sublease and vacancy assumptions due to the continued weakening in the real estate market. The sublease income was adjusted by decreasing two anticipated sublease rates to $18 from $25 per square foot and extending the initial vacancy periods by 7 months. In addition, during 2002, the Company executed sublease agreements for two locations and recorded a reduction to its lease accruals of $853,000 due to favorable sublease terms compared to the Company’s original estimates.

     During 2003, the Company settled future lease obligations for five leases for aggregate payments of $17.1 million, resulting in an aggregate reduction to its lease accruals relating to its 2001 restructuring of $11.5 million, net of sublease and vacancy assumptions. The Company also recorded an additional charge of $2.8 million for facilities-related costs comprising $2.3 million for updated management assumptions of probable settlement outcomes based on the then-current negotiations and $450,000 for updated sublease assumptions based on current real estate market conditions extending the vacancy period to 33 months from 12 months.

     During 2004, the Company made adjustments in cost estimates related to space vacated in 2001. These adjustments resulted in an increase to the restructuring charge of $112,000.

     During 2005, the Company recorded an adjustment to its estimates of sublease costs related to the 2001 actions, resulting in a credit to the restructuring charge of $783,000. The change in estimate was primarily due to the Company’s continued evaluation of the financial condition of its subtenants and their ability to meet their financial obligations to the Company.

     Employee Severance, Benefits and Related Costs and Exchangeable Shares

     As part of the 2001 restructuring actions, the Company recorded charges of $7.9 million for employee severance. The Company terminated the employment of 530 employees, or 46% of the Company’s workforce, of which 249 were from sales and marketing, 117 from services, 101 from general and administrative and 63 from research and development. None of these employees remained employed as of June 30, 2002. In addition, the Company settled 11,762 exchangeable shares with an employee, who was terminated in connection with the restructuring action, and recorded $1.3 million as a charge to restructuring for this settlement. During 2003, the Company recorded additional charges of $229,000 for severance related to an employee terminated as part of the 2001 restructuring action.

     During 2004, the Company reached a final settlement with this employee resulting in a reduction to the restructuring charge of $172,000.

     Asset Impairments

     The asset impairment charges included the write-off of approximately $4.0 million of the remaining unamortized goodwill related to the two professional service organizations acquisitions completed in 2000. The Company had closed these operations and terminated the employees as part of the 2001 restructuring action, and as a result, the unamortized goodwill was impaired and had no future value. In addition, the Company recorded an impairment charge of approximately $1.4 million in cost of product license revenues related to purchased software to record the software at its net realizable value of zero due to the Company abandoning a certain product development strategy. The purchased software had no future use to the Company.

     Marketing Costs and Legal and Accounting

     The Company recorded charges of $851,000 to write-off certain prepaid costs for future marketing services to their fair value of zero due to changes in the Company’s product development strategy, as a result of which, the prepaid marketing cost had no future utility to the Company. During 2002, the Company unexpectedly was able to recoup $536,000 and recorded a credit for the amount received.

     During 2001, the Company also recorded $405,000 for legal and accounting services incurred in connection with the 2001 restructuring action.

     The 2001 actions were substantially completed by February 28, 2002.

2002 Actions

     Actions taken by the Company in 2002 included the consolidation and closure of excess facilities, a worldwide workforce reduction and the write-off of certain idle assets. In the fourth quarter of 2002, the Company recorded a restructuring charge of $18.2 million.

     A summary of the charges and related activity of the restructuring accruals related to the 2002 restructuring actions is as follows (in thousands):

						2005
		Accrued				Adjustments								Accrued
		Restructuring				in Estimates								Restructuring
		Balance as of				Resulting in								Balance as of
		December 31, 2004				Reduced Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	1,155			$	(36	)		$	(255	)		$	864

     Facilities-Related Costs and Impairments

     During 2002, the Company recorded facilities-related charges of $14.6 million, which included $12.0 million for operating lease obligations, net of assumptions for vacancy periods and sublease income based on the then-current real estate market data, related to office space that was either idle or vacated during the first quarter of 2003. This action was completed by January 31, 2003. This charge also included write-offs of leasehold improvements and furniture and fixtures associated with these facilities of $948,000 and $507,000, respectively, and computer equipment and software of $1.2 million. The lease charge was for office space the Company vacated and intends to sublease. The estimated sublease income was $4.8 million and based on rental rates ranging from $23 to $35 per square foot with estimated vacancy periods prior to the expected sublease income ranging from 12 to 21 months.

     As a result of this action and the actions taken in 2001, the Company wrote off certain computer equipment and software, aggregating $1.2 million, and furniture and fixtures, aggregating $507,000, which were no longer being used due to the reduction in personnel and office locations. These assets were abandoned and written down to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used either as of December 31, 2002 or in the first quarter of 2003 and were disposed of in the quarter ended March 31, 2003. In addition, the Company wrote off leasehold improvements which will continue to be in use related to the facilities it is attempting to sublease to their fair value of zero because the estimated cash flows to be generated by sublease income at those locations will not be sufficient to recover the carrying value of the assets.

     During 2003, the Company recorded an adjustment of $1.9 million primarily to increase its lease obligation accrual at two locations because of changes in the assumptions of the vacancy period and sublease income. The sublease income was adjusted by decreasing anticipated sublease rates from $23 to $18 per square foot for one facility and from $35 to $30 per square foot at the other location. The Company also extended the initial vacancy periods from 12 to 21 months to 24 to 42 months. These changes resulted in an estimated reduction of sublease income of $1.8 million. In addition, principally due to a favorable lease settlement relating to its 2002 restructuring activities, the Company reduced its lease obligations by $7.2 million. The settlement resulted in the Company terminating a future lease obligation for an aggregate payment of $3.3 million, which was paid in January 2004. As a result of this transaction, the Company recorded prepaid rent of $2.2 million increasing the accrual adjustments in 2003 to $4.1 million.

     During 2004, the Company recorded an adjustment to its estimates related to the 2002 actions, resulting in a credit to the restructuring charge of $242,000.

     The Company executed a sub-lease agreement during the three months ended June 30, 2005. As a result, the Company recorded an adjustment to its estimates of sublease costs related to the 2002 actions, resulting in a credit to the restructuring charge of $36,000.

     Employee Severance, Benefits and Related Costs

     As part of the 2002 restructuring action, the Company recorded a charge of $3.6 million for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 125 employees, or 23% of the Company’s workforce. Of the 125 employees, 53 of the employees were from sales and marketing, 45 from services, 19 from general and administrative and 8 from research and development. The Company accrued employee benefits pursuant to ongoing benefits plans and statutory minimum requirements in foreign locations. The Company began the termination process on January 6, 2003 and all employees had been terminated by June 30, 2003. During the second quarter of 2003, the Company recorded an adjustment to increase the severance accrual by $327,000 based on final severance settlements with certain employees at its foreign locations. During the fourth quarter of 2003, the Company reduced certain severance accruals by $86,000, primarily at its foreign locations, due to amounts being settled at less than the amount recorded as a result of foreign currency exchange movements.

2003 Actions

     As a result of several reorganization decisions, the Company undertook plans to restructure operations in the second and third quarters of 2003. Actions taken by the Company included the closure of excess facilities, a worldwide workforce reduction and the write-off of certain idle assets.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						2005
		Accrued				Adjustments								Accrued
		Restructuring				in Estimates								Restructuring
		Balance as of				Resulting in								Balance as of
		December 31, 2004				Reduced Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	1,373			$	(24	)		$	(249	)		$	1,100

Second Quarter 2003 Actions

     During the quarter ended June 30, 2003, the Company recorded a restructuring charge of $2.0 million. The Company also recorded an impairment charge in cost of product licenses of $169,000 related to certain purchased software.

     Facilities-Related Costs and Impairments

     During the second quarter of 2003, the Company recorded facilities-related charges of $1.1 million comprising $866,000 for an operating lease related to idle office space, $144,000 of leasehold improvements and fixed assets written down to their fair value, and $61,000 for various office equipment leases. The lease charge was for office space the Company vacated and intends to sublease. The amount of the operating lease charge was based on assumptions from current real estate market data for sublease income rates and vacancy rates at the location. The estimated sublease income was $500,000 based on a rental rate of $35 per square foot with an estimated vacancy period prior to the expected sublease income of 24 months. In the fourth quarter of 2003, as result of updated market conditions, the estimated sublet rental rate was lowered from $35 per square foot to $30 per square foot and the vacancy period was extended to 36 months from 24 months resulting in an additional charge of $227,000. In accordance with SFAS 146, the Company has recorded the present value of the net lease obligation.

     As a result of a reduction of employees and closure of an office location, the Company wrote off computer and office equipment to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used by June 30, 2003 and were disposed of by September 30, 2003. In addition, the Company wrote off leasehold improvements which continue to be in use, related to the facility it is attempting to sublease to their fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

     Employee Severance, Benefits and Related Costs

     As part of the second quarter 2003 restructuring action, the Company recorded a charge of $927,000 for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 32 employees, or 7.4% of the Company’s workforce, consisting of 11 employees from sales and marketing, 3 from services, 3 from general and administrative and 15 from research and development. The Company accrued employee benefits pursuant to its ongoing benefit plans for domestic locations and under statutory minimum requirements in foreign locations. All employees were notified of their termination as of June 30, 2003. The termination process was completed during the fourth quarter of 2003. During the third quarter of 2003, the Company accrued an additional $69,000 for employees at its foreign locations based on management’s best estimate of the final payments for severance. During the fourth quarter of 2003, the Company reduced certain severance accruals by $84,000 at its international locations as a result of final settlements.

     Asset Impairments

     The Company recorded a charge in cost of product license revenues of $169,000 to reduce the carrying value of third-party software embedded into one of its products, which was a minor component of its suite of products, to its net realizable value of $210,000 based on management’s best estimate of future net cash flows to be generated from the sale of the software to customers. The Company discontinued marketing of this software and ceased future development work specifically related to this third-party software. However, the Company has not changed its overall product strategy for the purpose for which the software was acquired.

Third Quarter 2003 Actions

     During the third quarter of 2003, the Company recorded a restructuring charge of approximately $771,000.

     Facilities -Related Costs and Impairments

     The Company recorded facilities-related charges of $393,000 comprising $227,000 for an operating lease related to idle office space and $166,000 of leasehold improvements and fixed assets written down to their fair value. The lease charge was for office space the Company vacated and intends to sublease. The amount of the operating lease charge was based on assumptions from current real estate market data for sublease income rates and vacancy rates at the location. The estimated sublease income was $216,000 and based on a rental rate of $19 per square foot with an estimated vacancy period prior to the expected sublease income of 12 months. During the fourth quarter, as a result of updated market conditions, the Company determined that it is unlikely it will sublet this space before its lease expires resulting in an additional charge of $198,000. In accordance with SFAS 146, the Company has recorded the present value of the net lease obligation.

     As a result of a reduction of employees and the closure of one office location, the Company wrote off computer and office equipment to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used prior to September 30, 2003 and were disposed of by December 31, 2003. In addition, the Company wrote down leasehold improvements to their fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

     Employee Severance, Benefits and Related Costs

     The Company recorded a charge of $309,000 for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 16 employees, or 4.3% of the Company’s workforce, consisting of 7 employees from sales and marketing, 4 from services and 5 from research and development. The Company accrued employee benefits pursuant to its ongoing benefit plans. All employees were notified of their termination as of September 30, 2003. The termination process was completed during the fourth quarter of 2003.

     During 2004, the Company made adjustments in cost estimates related to space vacated in 2003 and employee severance estimates related to 2003 actions. These adjustments resulted in a net reduction to the restructuring charge of $77,000.

During 2005, the Company recorded an adjustment to its cost estimates related to the 2003 actions, resulting in a credit to the restructuring charge of $24,000.

2004 Actions

     During 2004, the Company recorded a restructuring charge of $3.6 million, comprised of new actions of $3.9 million and net credits resulting from changes in estimates related to prior actions of $379,000.

Facilities-Related Costs and Impairments

     During the fourth quarter of 2004, the Company recorded facilities-related charges of $1.5 million primarily comprised of $800,000 for an operating lease related to idle office space net of assumptions for vacancy period and sublease income based on the then current real estate market data, $200,000 of leasehold improvements written down to their fair value and $500,000 of prepaid rent related to the abandoned space, which was recorded as part of prior lease settlements. The lease charge was for office space the Company vacated before December 31, 2004 and intended to sublease. The estimated sublease income was $350,000 based on a rental rate of $13 per square foot with an estimated vacancy period prior to the expected sublease income of 6 months. In accordance with SFAS 146, the Company recorded the present value of the net lease obligation.

     As a result of a reduction of employees and the closure of office space, the Company wrote off $200,000 of leasehold improvements related to the vacated space to their estimated fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

Employee Severance, Benefits and Related Costs

     As part of the fourth quarter 2004 restructuring action, the Company recorded a charge of $2.5 million for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 56 employees, or 14% of the Company’s workforce, consisting of 27 employees from sales and marketing, 8 from services, 6 from general and administrative and 15 from research and development. The Company accrued employee benefits pursuant to its ongoing benefit plans for domestic locations and under statutory minimum requirements in foreign locations. All employees were notified of their termination as of December 31, 2004. As of December 31, 2004, 13 employees had been terminated. As of June 30, 2005 the termination process was completed.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						2005
						Adjustments
		Accrued				in Estimates								Accrued
		Restructuring				Resulting in								Restructuring
		Balance as of				Additional								Balance as of
		December 31, 2004				(Decreased) Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	750			$	(267	)		$	(239	)		$	244
Employee severance, benefits and related costs			1,569				168				(1,457	)			280
Total		$	2,319			$	(99	)		$	(1,696	)		$	524

     During the first quarter of 2005, the Company recorded a restructuring charge of $200,000, resulting from adjustments to estimates made in 2004 for employee severance benefits payable in international geographies, and a $4,000 charge to facilities related cost due to adjusting its estimates.

     During the second quarter of 2005, the Company recorded a credit of $32,000 to the employee severance costs, and a credit of $271,000 to the facilities related cost charge, due to adjusting its estimates of net sublease obligations as a result of executing a sub lease agreement for which the term began in the second quarter of 2005.

2005 Actions

     During 2005, the Company recorded net restructuring charges of $875,000, comprised of new actions of $1.8 million and net credits resulting from changes in estimates related to prior actions of $942,000.

Facilities-Related Costs and Impairments

     During the second quarter of 2005, the Company relocated its San Francisco office and reduced the amount of space it occupies in San Francisco. As a result of this action and the cessation of the use of this facility and other minor facilities charges, the Company recorded facilities-related charges of $1.8 million primarily comprised of $1.0 million of deferred rent related to the abandoned space, $118,000 of lease hold improvements written down to their fair value, and $557,000 for an operating lease related to idle office space vacated during the second quarter of 2005 net of assumptions for sublease income based on an executed sublease agreement. In accordance with SFAS 146, the Company recorded the net present value of the net lease obligation.

     A summary of the charges and related activity of the restructuring accruals is a as follows (in thousands):

						Write-Offs
		2005				and				Balance as of
		Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	1,817			$	(1,350	)		$	467

Abandoned Facilities Obligations

     At June 30, 2005, the Company had lease arrangements related to seven abandoned facilities. The lease arrangements with respect to six of these facilities are ongoing, and one is the subject of a lease settlement arrangement under which the Company is obligated to make payments through 2006. All locations for which the Company has recorded restructuring charges have been exited, and thus management’s plans with respect to these leases have been completed. A summary of the remaining facility locations and the timing of the remaining cash payments are as follows (in thousands):

Lease locations		2005				2006				2007				2008				2009				Total
Cambridge, MA*		$	1,035			$	1,035															$	2,070
Cambridge, MA			69				91																160
Cambridge, MA			200				400																600
Waltham, MA			696				1,452			$	1,452			$	1,452			$	363				5,415
Chicago, IL			319				427																746
San Francisco, CA			256				513				512												1,281
Reading, UK			285				570				570				570				142				2,137
Facility obligations, gross			2,860				4,488				2,534				2,022				505				12,409
Contracted and assumed sub-lease income			(1,026	)			(1,718	)			(1,467	)			(1,215	)			(304	)			(5,730	)
Net cash obligations		$	1,834			$	2,770			$	1,067			$	807			$	201			$	6,679
Assumed sub-lease income		$	—			$	135			$	270			$	270			$	67			$	742

(15) LITIGATION

     The Company and certain former officers have been named defendants in seven purported class action suits currently pending in the United States District Court for the District of Massachusetts. Each of these cases alleges that the Company and certain former officers have violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, which generally may subject issuers of securities and persons controlling those issuers to civil liabilities for fraudulent actions or defects in the public disclosure required by securities laws. Four of the cases were filed on various dates in October 2001 in the U.S. District Court for the District of Massachusetts. Three of the cases were initially filed in the Central District of California (the “California actions”) on various dates in August and September 2001. The California actions were consolidated and transferred to the District of Massachusetts on or about November 27, 2001. On December 13, 2001, the Court issued an Order of Consolidation in which it consolidated all actions filed against the Company and appointed certain individuals as Lead Plaintiffs in the consolidated action. It also appointed two

law firms as Co-Lead Counsel, and a third law firm as Liaison Counsel. Counsel for the plaintiffs has filed a Consolidated Amended Complaint applicable to all of the consolidated actions. On April 19, 2002, the Company filed a motion to dismiss the case. On September 4, 2003 the court issued a ruling dismissing all but one of the plaintiffs’ allegations. The remaining allegation is based on the veracity of a public statement made by a former officer of the Company and is the subject of a motion to dismiss and summary judgment filed by the Company on August 31, 2004 currently pending before the Court. Management continues to believe the remaining claim against the Company is without merit, and intends to defend the action vigorously. While management cannot predict with certainty the outcome of the litigation, management does not expect any material adverse impact to the Company’s business, or the results of its operations, from this matter.

     The Company’s wholly owned subsidiary Primus Knowledge Solutions, Inc. (Primus), an officer and former officer of Primus and FleetBoston Robertson Stephens, Inc., J.P. Morgan Securities Inc., U.S. Bancorp Piper Jaffray Inc., CIBC World Markets, Dain Rauscher, Inc. and Salomon Smith Barney Holdings Inc., the underwriters of Primus’ initial public offering, have been named as defendants in an action filed during December 2001 in the United States District Court for the Southern District of New York on behalf of persons who purchased Primus common stock during the period from June 30, 1999 through December 6, 2000, which was issued pursuant to the June 30, 1999 registration statement and prospectus for Primus initial public offering. This is one of a number of actions coordinated for pretrial purposes. Plaintiffs in the coordinated proceeding have brought claims under the federal securities laws against numerous underwriters, companies, and individuals, alleging generally that defendant underwriters engaged in improper and undisclosed activities concerning the allocation of shares in the IPOs of more than 300 companies during the period from late 1998 through 2000. Specifically, among other things, the plaintiffs allege that the prospectus pursuant to which shares of Primus common stock were sold in the IPO contained certain false and misleading statements regarding the practices of Primus’ underwriters with respect to their allocation of shares of common stock in Primus’ IPO to their customers and their receipt of commissions from those customers related to such allocations, and that such statements and omissions caused Primus’ post-IPO stock price to be artificially inflated. The individual defendants have been dismissed from the action without prejudice pursuant to a tolling agreement. In June 2003 the plaintiffs in this action announced a proposed settlement with the issuer defendants and their insurance carriers. Primus elected to participate in the settlement, which generally provides that plaintiffs will dismiss and release all claims against Primus and the individual defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the consolidated IPO cases, and for the assignment or release of certain potential claims that Primus may have against the underwriters. Primus will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement on Primus’ behalf exceeds the amount of the insurance coverage, a circumstance that management believes is not likely to occur. A stipulation of settlement of claims against the issuer defendants, including Primus, was submitted to the Court for preliminary approval in June 2004. On February 15, 2005, the Court preliminarily approved the settlement contingent on specified modifications. The settlement is subject to final Court approval, after proposed settlement class members have an opportunity to object, and a number of other conditions. If the settlement does not occur, and litigation against Primus continues, management believes the Company has meritorious defenses and intends to defend the case vigorously. While management cannot predict with certainty the outcome of the litigation or whether the settlement will be approved, management does not expect any material adverse impact to the Company’s business, or the results of its operations, from this matter.

     The Company is also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material effect on the Company’s business, financial condition or results of operations.

(16) CONCENTRATION OF CREDIT RISK

     ATG provides credit to customers in the normal course of business. Credit is extended to new customers based upon industry reputation and demonstrated financial stability. Credit is extended to existing customers based upon prior payment history and demonstrated financial stability. Credit risk associated with accounts receivable is limited due to the large number of customers and their dispersion over multiple industries and geographic areas. ATG maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. There were no customers at June 30, 2005 that accounted for greater than 10% of accounts receivable. At December 31, 2004 one customer accounted for 11% of accounts receivable.

(17) RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board issued SFAS 123R, “Share-Based Payment”, which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R on January 1, 2006.

     Public companies are required to adopt the new standard using a modified prospective method or may elect to restate prior periods using the modified retrospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively for the unvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. Under the modified

retrospective method, companies record compensation costs for prior periods retroactively through restatement of such periods using the exact pro forma amounts disclosed in the companies’ footnotes. Also, in the period of adoption and after, companies record compensation cost utilizing the modified prospective method. The Company has not yet determined the method of adoption it will use and the Company has not completed its evaluation of the effects of adopting SFAS 123R.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes contained in Item 1 of this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth below under the heading “Risk Factors that May Affect Results” and elsewhere in this report.

     Between December 1991, when we were founded, and 1995, we devoted our efforts principally to building, marketing and selling our professional services capabilities and to research and development activities related to our software products. Beginning in 1996, we began to focus on selling our software products. To date, we have enhanced and released several versions of our products. On November 1, 2004, we acquired all of the outstanding shares of common stock of Primus Knowledge Solutions, Inc. Primus provided software solutions that enabled companies to deliver a superior customer experience via contact centers, information technology help desks, web (intranet and internet) self-service and electronic communication channels. The consolidated financial statements include Primus’ financial results from the date of acquisition. We market and sell our products worldwide through our direct sales force, systems integrators, technology alliances and original equipment manufacturers.

     We derive our revenues from the sale of software product licenses and related services that are designed to help our clients market, sell and provide self-service opportunities to their customers and partners. Our software licenses are priced based on either the size of the customer implementation or site license terms. Services revenues are derived from fees for professional services, training, software maintenance and support and application hosting. Professional services include implementation, custom application development and project and technical consulting. We bill professional service fees primarily on a time and materials basis or in some cases, on a fixed-price schedule defined specifically in our contracts. Software maintenance and support arrangements are priced based on the level of services provided. Generally, customers are entitled to receive software updates, maintenance releases as well as on-line and telephone technical support for an annual maintenance fee. Training is billed as services are provided. Application hosting services are typically billed monthly as the services are provided.

     As of June 30, 2005 we had offices in the United States, United Kingdom, France, Spain and Northern Ireland with sales personnel in United States, United Kingdom, France, and Spain. Revenues from customers outside the United States accounted for 22% and 30% of our total revenues for the three months ended June 30, 2005 and 2004, and 24% and 35% of our total revenues for the six months ended June 30, 2005 and 2004, respectively.

Critical Accounting Policies and Estimates

     This management’s discussion of financial condition and results of operations analyzes our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

     We believe the following critical accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, the allowance for doubtful accounts, research and development costs, restructuring expenses, the impairment of long-lived assets and income taxes. Management bases its estimates and judgments on historical experience, known trends or events and various other factors 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. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment.

Revenue Recognition

     Not only is revenue recognition a key component of our results of operations, the timing of our revenue recognition also determines the timing of certain expenses, such as commissions. In measuring revenues, we follow the specific guidelines of Statement of Position, or SOP, 97-2 , Software Revenue Recognition and SOP 98-9 , Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. SOP 97-2 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists via a signed license agreement; (2) physical or electronic delivery has occurred including the availability of license keys or services rendered; (3) the fee is fixed or determinable representing amounts that are due unconditionally with no future obligations under customary payment terms; and (4) collection is probable. In addition, revenue results are difficult to predict and any shortfall or delay in recognizing revenue could cause our operational results to vary significantly from quarter to quarter and could result in future operating losses.

     In accordance with SOP 97-2 and SOP 98-9, revenues from software product license agreements are recognized upon execution of a license agreement and delivery of the software, provided that the fee is fixed or determinable and deemed collectible by management. If conditions for acceptance are required subsequent to delivery, revenues are recognized upon customer acceptance if such acceptance is not deemed to be perfunctory. In multiple element arrangements, we use the residual value method in accordance with SOP 97-2 and SOP 98-9. Revenue earned on software arrangements involving multiple elements which qualify for separate element accounting treatment is allocated to each undelivered element using the relative fair values of those elements based on vendor specific objective evidence with the remaining value assigned to the delivered element, the software license. Typically our software licenses do not include significant post-delivery obligations to be fulfilled by us and payments are due within a three-month period from the date of delivery. Consequently, license fee revenue is generally recognized when the product is shipped. Revenues from software maintenance or hosting agreements are recognized ratably over the term of the maintenance or hosting period, which for application hosting and support and maintenance is typically one year. Customers who have purchased our product licenses and have also entered into a hosting agreement typically have a contractual right to cancel the hosting agreement with a minimum notice period. We enter into reseller arrangements that typically provide for sublicense fees payable to us based upon a percentage of our list price. Revenues are recognized under reseller agreements as earned for guaranteed minimum royalties, or based upon actual sales to the resellers. We do not grant our resellers the right of return or price protection.

     Revenues from professional service arrangements are recognized as the services are performed, provided that amounts due from customers are fixed or determinable and deemed collectible by management. Amounts collected prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Unbilled services represent service revenues that have been earned by us in advance of billings. Deferred revenue primarily consists of advance payments related to support and maintenance, service agreements and deferred product license revenues.

     We principally recognize professional services revenues on a time-and-material basis. From time to time we enter into fixed-price service arrangements. In those circumstances in which services are essential to the functionality of the software, we apply the percentage-of-completion method, and in those situations when only professional services are provided, we apply the proportional performance method. Both of these methods require that we track the effort expended and the effort expected to complete a project. The most significant assumption by management in accounting for this type of arrangement is the estimated time to complete the project. Significant deviations in actual results from management’s estimates with respect to one or more projects could significantly impact the timing of revenue recognition and could result in significant losses on these projects. To date, our actual results in completing projects have not deviated significantly from management’s estimates of the time to complete those projects.

Accounts Receivable and Bad Debt

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We continuously monitor collections and payments from our customers and determine the allowance for doubtful accounts based upon historical experience and specific customer collection issues. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Research and Development Costs

     We account for research and development costs in accordance with SFAS 2, Accounting for Research and Development Costs, and SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, which specifies that costs incurred internally to develop computer software products should be charged to expense as incurred until technological feasibility is reached for the product. Once technological feasibility is reached, all software costs should be capitalized until the product is made available for general release to customers. Judgment is required in determining when technological feasibility is established. We believe that the time period from reaching technological feasibility until the time of general product release is very short. Costs incurred after technological feasibility is reached are not material, and accordingly, all such costs are charged to research and development expense as incurred.

Restructuring Expenses

     During the three and six months ended June 30, 2005, the Company recorded net restructuring charges of approximately $671,000 and $875,000, respectively. During

the years ended 2004, 2003, 2002 and 2001, the Company recorded net restructuring charges/ (benefits) of $3.6 million, $(10.5) million, $19.0 million and $75.6 million, respectively, pertaining to the closure and consolidation of excess facilities, impairment of assets as discussed below, employee severance benefits and settlement of certain contractual obligations. These charges and benefits were recorded in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and Staff Accounting Bulletin (SAB) No. 100 (SAB 100), Restructuring and Impairment Charges. The 2002 and 2001 charges were recorded in accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), SFAS 88, and SAB 100. In determining the charges to record, we made certain estimates and judgments surrounding the amounts ultimately to be paid for the actions we have taken. At June 30, 2005, we had recorded accruals for the costs to terminate employees and exit certain facilities and lease obligations, which may be adjusted periodically for resolution of contractual commitments or changes in estimates of severance payments, sublease income or the period of time the facilities will be vacant and subleased. Although we do not anticipate additional significant changes to our restructuring accruals, the actual costs may differ from those recorded in the event that the subleasing assumptions require adjustment due to changes in economic conditions in the real estate market or if we terminate our lease obligations prior to the scheduled termination dates. Such changes had a material impact to our operating results in the past and could have a material impact on our operating results in the future.

     To estimate the costs related to our restructuring efforts, management made its best estimates of the most likely expected outcomes of the significant actions to accomplish the restructuring. These estimates principally related to charges for excess facilities and included estimates of future sublease income, future net operating expenses of the facilities, brokerage commissions and other expenses. The most significant of these estimates related to the timing and extent of future sublease income that would reduce our lease obligations.

     Included in our accrued restructuring balance at June 30, 2005 was estimated sublease income of $742,000, net of adjustments. We based our estimates of sublease income on, among other things, (a) opinions of independent real estate experts, (b) current market conditions and rental rates, (c) an assessment of the time period over which reasonable estimates could be made, (d) the status of negotiations with potential subtenants and (e) the locations of the facilities. These estimates, together with other estimates made by us in connection with the restructuring actions, may vary significantly from the actual results, depending in part on factors beyond our control. For example, the actual results will depend on our success in negotiating with lessors, the time periods required for us to locate and contract suitable subleases and the market rental rates at the time of such subleases. Adjustments to the facilities reserve may be required if actual lease settlement costs or sublease income differ from the amounts previously estimated. We review the status of our restructuring activities on a quarterly basis and, if appropriate, record adjustments to our restructuring obligations in our financial statements for such quarter based on management’s then-current estimates. Additionally, we estimate the required severance accrual at foreign locations based on the minimum statutory requirements of each country. The amount of severance that ultimately is paid may differ from the amount we have accrued. In our history, we have not experienced significant variations between the amounts initially accrued for severance at foreign locations and the amounts ultimately paid out.

      Impairment or Disposal of Long Lived Assets, including Intangible Assets

     We review our long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair market value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, we may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater.

     As a result of our restructuring activities in 2005, 2004, 2003 and 2002, we evaluated the realizability of our long-lived assets including fixed assets and leasehold improvements related to our restructured facility leases and intangible assets consisting primarily of unamortized goodwill. In 2005, 2004, 2003 and 2002, we determined that $0, $0, $78,000 and $1.7 million, respectively, of furniture and fixtures, computer equipment and software were impaired as a result of our decision to abandon the assets because of the termination of employees and related closures of offices in our 2005, 2004, 2003 and 2002 restructuring plans. These assets are no longer being used or will not be used in the future upon completion of the restructuring activities. In addition, in 2005, 2004, 2003 and 2002 we deemed $118,000, $147,000, $232,000 and $909,000, respectively, of leasehold improvements to be impaired due to exiting certain office locations, and the estimated sublease income was not sufficient to recover the assets carrying value. In addition we determined that approximately $169,000 in 2003 of purchased software was impaired due to our revised product development strategy.

      Goodwill

     We account for goodwill under SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill not be amortized but instead tested for impairment annually and more frequently upon the occurrence of certain events which may indicate that impairment has occurred.

     The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value, which is determined by use of a discounted cash flow technique, of the reporting entity to its carrying value. If the fair value of the reporting entity exceeds the carrying value of the net assets of that entity, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting entity exceeds the fair value of that entity, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting entity’s goodwill. If the carrying value of a reporting entity’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

     Determining the fair value of a reporting entity is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions may include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. The estimates are based upon historical experience and projections of future activity, factoring in customer demand, changes in technology and a cost structure necessary to achieve the related revenues. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently subject to uncertainty. Actual future results may differ from those estimates. In addition, we may make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values of reporting entities.

     We perform the annual impairment assessment as of December 1 of each year.

Accounting for Income Taxes

     We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. We evaluate quarterly the realizability of our deferred tax assets and adjust the amount of such allowance, if necessary. At June 30, 2005 and December 31, 2004, we had provided a full valuation allowance against our net deferred tax assets due to the uncertainty of their realizability. If substantial changes in our ownership have occurred or should occur, as defined by Section 382 of the Internal Revenue Code, there could be annual limitations on the amount of net operating loss carryforwards that can be realized in future periods.

     In addition, we have provided for potential amounts due in various foreign tax jurisdictions. Judgment is required in determining our worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which such determination is made.

Results of Operations

     The following table sets forth statement of operations data as a percentage of total revenues for the periods indicated:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues:
Product license			26	%			22	%			30	%			31	%
Services			74				78				70				69
Total revenues			100				100				100				100
Cost of revenues:
Product license			2				2				2				2
Services			26				36				26				32
Total cost of revenues			28				38				28				34
Gross margin			72				62				72				66
Operating expenses:
Research and development			22				29				22				26
Sales and marketing			34				51				32				47
General and administrative			13				12				13				12
Restructuring charge			3				—				2				—
Total operating expenses			74				92				69				85
Income (loss) from operations			(2	)			(30	)			3				(19	)
Interest and other income (expense), net			—				—				—				—
Income (loss) before provision for income taxes			(2	)			(30	)			3				(19	)
Provision (benefit) for income taxes			—				—				—				—
Net income (loss)			(2	)%			(30	)%			3	%			(19	)%

     The following table sets forth, for the periods indicated, the cost of product license revenues as a percentage of product license revenues and the cost of services revenues as a percentage of services revenues and the related gross margins:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Cost of product license revenues			7	%			11	%			7	%			8	%
Gross margin on product license revenues			93	%			89	%			93	%			92	%
Cost of services revenues			36	%			46	%			37	%			46	%
Gross margin on services revenues			64	%			54	%			63	%			54	%

Three and six months ended June 30, 2005 and 2004

Revenues

     Total revenues increased 41% to $20.3 million for the three months ended June 30, 2005 from $14.3 million for the three months ended June 30, 2004 and increased 36% to $42.3 million for the six months ended June 30, 2005 from $31.1 million for the six months ended June 30, 2004. The increase was primarily attributable to our acquisition of Primus in November 2004 and the shift in the focus of our marketing and sales efforts from infrastructure products to application products. Since 2004 our focus has been on e-commerce and service applications, and through our Primus acquisition, solutions that enable our customers to deliver a superior customer experience via contact centers, information technology help desks, web (intranet and internet) self-service and electronic communication channels. The increase in revenues compared to the second quarter of 2004 was also partly attributable to our new application hosting service, which generated revenues of approximately $1.1 million for the three months ended June 30, 2005 and $2.4 million during the six months ended June 30, 2005.

     Revenues generated from international customers increased to $4.5 million, or 22% of total revenues, for the three months ended June 30, 2005, from $4.3 million, or 30% of total revenues, for the three months ended June 30, 2004, and decreased to $10.2 million, or 24% of total revenues for the six months ended June 30, 2005, from $10.8 million, or 35% of total revenues, for the six months ended June 30, 2004.

     We expect total revenues in 2005 in the range of $87 million to $93 million as we launch new products and continue to realize the benefits of our Primus acquisition.

     No customer accounted for more than 10% of our total revenues for the three or six months ended June 30, 2005 or June 30, 2004.

Product License Revenues

     Product license revenues increased 69% to $5.3 million for the three months ended June 30, 2005 from $3.1 million for the three months ended June 30, 2004 and increased 34% to $12.7 million for the six months ended June 30, 2005 from $9.5 million for the six months ended June 30, 2004. The increase was primarily attributable to our acquisition of Primus in November 2004 and the shift in the focus of our marketing and sales efforts from infrastructure products to application products.

     Product license revenues generated from international customers increased to $1.4 million for the three months ended June 30, 2005 from $927,000 for the three months ended June 30, 2004. The increase in international revenues was due primarily to timing of certain deals and the addition of the Primus product line. Product license revenues generated from international customers decreased to $3.3 million for the six months ended June 30, 2005 from $4.3 million for the six months ended June 30, 2004. The decrease in international revenues was due primarily to the timing of certain deals.

     Product license revenues as a percentage of total revenues for the three months ended June 30, 2005 and 2004 were 26% and 22%, respectively, and for the six months ended June 30, 2005 and 2004 were 30% and 31% respectively. We expect this percentage to be in the range of 30% to 35% for 2005.

     Our resellers generally receive a discount from our list prices. The extent of any discount is based on negotiated contractual agreements between us and the reseller. We do not grant our resellers the right of return or price protection. We rely upon resellers to market and sell our products to governmental entities and to customers in geographic regions where it is not cost effective for us to reach out to end users directly. We have approximately 22 active resellers. Reseller revenues and the percentage of revenues from resellers can vary significantly from period to period depending on the revenues from large deals, if any, closed through this channel during any period. No resellers accounted for more than 10% of our revenues for the quarter ended June 30, 2005 and 2004.

     The table below sets forth, for the periods indicated, product revenues recognized from reseller arrangements (dollar amounts in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Reseller revenues		$	22			$	122			$	782			$	1,018
Percentage of product revenues			—	%			4	%			6	%			11	%

Services Revenues

     Services revenues increased 34% to 15.0 million for the three months ended June 30, 2005 from $11.2 million for the three months ended June 30, 2004 and increased 37% to $29.6 million for the six months ended June 30, 2005 from $21.6 million for the six months ended June 30, 2004. The increase was primarily attributable to new services revenues from the acquisition of Primus, along with our new application hosting services offering, which generated revenues of $1.1 million and $2.4 million for the three and six months ended June 30, 2005, respectively. We expect services revenues to be higher in 2005 as compared to 2004.

     Support and maintenance revenues were 64% of total service revenues for the three months ended June 30, 2005, as compared to 61% for the three months ended June 30, 2004, and were 64% of total service revenues for the six months ended June 30, 2005 as compared to 65% for the six months ended June 30, 2004. Support and maintenance revenues, on a dollar value basis, were higher for the three and six months ended June 30, 2005 due primarily to the addition of Primus’ active support and maintenance customer base, offset by a portion of existing customers electing not to renew their support coverage.

Table of Contents

Cost of Product License Revenues

     Cost of product license revenues includes salary and related benefits costs of fulfillment and engineering staff dedicated to maintenance of products that are in general release, the amortization of licenses purchased in support of and used in our products, royalties paid to vendors whose technology is incorporated into our products and amortization expense related to acquired developed technology.

     Cost of product license revenues increased 14% to $378,000 for the three months ended June 30, 2005 from $331,000 for the three months ended June 30, 2004 and increased 29% to $942,000 for the six months ended June 30, 2005 from $730,000 for the six months ended June 30, 2004. These increases were primarily related to amortization expense of $204,000 and $408,000 for the three and six months ended June 30, 2005 related to developed technology, an intangible asset recorded as part of the Primus acquisition.

     For the three and six months ended June 30, 2005 and 2004, cost of product license revenues as a percentage of total revenues was 2%. We anticipate the cost of product license revenues, as a percentage of total revenues, to be between 1% and 3% for 2005.

Gross Margin on Product License Revenues

     For the three months ended June 30, 2005 and 2004, gross margin on product license revenues was 93%, or $4.9 million, and 89%, or $2.8 million, respectively, and for the six months ended June 30, 2005 and 2004, gross margin on product license revenues was 93%, or $11.8 million, and 92%, or $8.8 million, respectively. The increase was primarily related to increased product license revenues primarily attributable to the acquisition of Primus.

Cost of Services Revenues

     Cost of services revenues includes salary and other related costs for our professional services and technical support staff, as well as third-party contractor expenses. Additionally cost of services revenues includes fees for hosting facilities, as well as equipment and related depreciation costs. Cost of services revenues varies significantly from period to period depending on the level of professional services staffing, the effective utilization rates of our professional services staff, the mix of services performed, including product license technical support services, the extent to which these services are performed by us or by third-party contractors, the level of third-party contractors’ fees, and the amount of equipment and hosting space required.

     Cost of services revenues increased 5% to $5.4 million for the three months ended June 30, 2005 from $5.1 million for the three months ended June 30, 2004, and increased 9% to $10.8 million for the six months ended June 30, 2005 from $9.9 million for the six months ended June 30, 2004. The increase was primarily attributable to an increase in salaries and benefits attributable to higher headcount and increased use of third party contractors. Our usage of outside professional services increased by $156,000 and $420,000 for the three and six months ended June 30, 2005 compared to the same period in 2004.

     For the three months ended June 30, 2005 and 2004, cost of services revenues as a percentage of total revenues was 26% and 36%, respectively, and for the six months ended June 30, 2005 and 2004, cost of services revenues as a percentage of total revenues was 26% and 32%, respectively. We anticipate the cost of services revenues, as a percentage of total revenues, to be between 25% and 30% for 2005.

Gross Margin on Services Revenues

     For the three months ended June 30, 2005 and 2004, gross margin on services revenues were 64%, or $9.6 million, and 54%, or $6.1 million, respectively, and for the six months ended June 30, 2005 and 2004, gross margin on services revenues were 63%, or $18.7 million, and 54%, or $11.7 million, respectively. The increase in gross margin and gross margin as a percentage of service revenues was primarily attributable to increased services revenues, including our new application hosting offering, which generated $1.1 million and $2.4 million in revenue during the three and six months ended June 30, 2005, respectively.

     We expect gross margin on services revenues for 2005 to be approximately 60% to 65% for 2005.

Research and Development Expenses

     Research and development expenses consist primarily of salary and related costs to support product development. To date, all software development costs have been expensed as research and development in the period incurred.

     Research and development expenses increased 10% to $4.5 million for the three months ended June 30, 2005 from $4.2 million for the three months ended June 30, 2004, and increased 10% to $9.1 million for the six months ended June 30, 2005 from $8.3 million for the six months ended June 30, 2004. The increase in spending was primarily attributable to an increase in our use of third party offshore contractors and to higher professional fees, which increased by $388,000 and $844,000 during the three and six months ended June 30, 2005 respectively.

     Research and development expenses as a percentage of total revenues were 22% and 29% for the three months ended June 30, 2005 and 2004 respectively and were 22% and 27% for the six months ended June 30, 2005 and 2004, respectively. We anticipate that research and development expenses as a percentage of total revenues will be in the range of 20% to 22% for 2005.

Sales and Marketing Expenses

     Sales and marketing expenses consist primarily of salaries, commissions and other related costs for sales and marketing personnel, travel, public relations and marketing materials and events.

     Sales and marketing expenses decreased 3% to $7.0 million for the three months ended June 30, 2005 from $7.2 million for the three months ended June 30, 2004 and decreased 5% to $13.8 million for the six months ended June 30, 2005 from $14.6 million for the six months ended June 30, 2004. The decrease is primarily attributable to cost saving initiatives that resulted from a reduction in the workforce of our sales and marketing groups, reduced recruitment fees and training costs, and a reduction in our spending on marketing programs, with the remainder of the net decrease caused by a decrease in operating expenses resulting from our restructuring efforts, offset in part by amortization of an intangible asset related to customer relationships from the Primus acquisition of $342,000 and $684,000 for the three and six months ended June 30, 2005, respectively.

For three months ended June 30, 2005 and 2004, sales and marketing expenses as a percentage of total revenues were 35% and 50%, respectively and for six months ended June 30, 2005 and 2004, sales and marketing expenses as a percentage of total revenues were 33% and 47%, respectively. We anticipate that sales and marketing expenses as a percentage of total revenues will be in the range of 35% to 40% for 2005.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries and other related costs for human resource, legal, operations and finance employees and legal and accounting fees.

     General and administrative expenses increased 55% to $2.7 million for the three months ended June 30, 2005 from $1.7 million for the three months ended June 30, 2004 and increased 55% to $5.7 million for the six months ended June 30, 2005 from $3.7 million for the six months ended June 30, 2004. Approximately 86% of the increase was related to an increase in outside services and professional fees, with most of the remainder related to an increase in insurance expenses. Contributing to the increase in outside services of approximately $570,000 and $1.6 million for the three and six months ended June 30, 2005, respectively, over the same period in 2004 were costs associated with Sarbanes-Oxley compliance and the integration of the Primus acquisition.

     For the three months ended June 30, 2005 and 2004, general and administrative expenses as a percentage of total revenues were 13% and 12%, respectively, and for the six months ended June 30, 2005 and 2004, general and administrative expenses as a percentage of total revenues were 13% and 12% respectively. We anticipate that general and administrative expenses will, as a percentage of revenue, be in the 12% to 14% range for 2005.

Restructuring

     During the quarter ended June 30, 2005, we recorded a net restructuring charge of $671,000, primarily due to a $1.8 million charge related to the relocation of our San Francisco office and other facility charges; offset by $1.1 million for adjustments in estimates related to sublease costs included in the 2001, 2002 and 2004 actions. During the quarter ended March 31, 2005, we recorded a net restructuring charge of approximately $204,000 due to adjustments in estimates related to the 2004 restructuring charge for employee severance benefits payable in international geographies. During the years ended 2004, 2003, 2002 and 2001, we recorded net restructuring charges/(benefits) of $3.6 million, $(10.5) million, $19.0 million and $75.6 million, respectively, as a result of the global slowdown in information technology spending. The significant drop in demand in 2001 for technology oriented products, particularly internet related technologies, caused management to significantly scale back our prior growth plans, resulting in a significant reduction in our workforce and consolidation of our facilities in 2001. Throughout 2002, the continued softness of demand for technology products, as well as near term revenue projections, caused us to further evaluate our marketing, sales and service resource capabilities as well as our overall general and administrative cost structure, which resulted in additional restructuring actions being taken in 2002. These actions resulted in a further reduction in headcount and consolidation of additional facilities. In 2003, as we continued to refine our business strategy and to consider future revenue opportunities, we took further restructuring actions to reduce costs, including product development costs, in order to help move us towards profitability. In 2004, our restructuring activities were undertaken to align our headcount more closely to our revenue projections and changing staff requirements as a result of strategic product realignments and our acquisition of Primus and to eliminate facilities that were not needed in order to efficiently run our operations. In April 2005, we relocated our San Francisco office to gain further efficiencies. The charges referred to above primarily pertain to the closure and consolidation of excess facilities, impairment of assets, employee severance benefits, and the settlement of certain contractual obligations. The 2005, 2004 and 2003 charges were recorded in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and Staff Accounting Bulletin (SAB) 100, “Restructuring and Impairment Charges.” The 2002 and 2001 charges were recorded in accordance with Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” SFAS 88 and SAB 100.

2001 Actions

     Actions taken by us in 2001 included the consolidation and closure of excess facilities, a worldwide workforce reduction, the write-off of certain unrealizable assets and settling certain obligations that had no future benefit. In the second quarter of 2001, we recorded a restructuring charge of $44.2 million, and in the fourth quarter of 2001, we recorded a restructuring charge of $31.4 million. In connection with these actions, we also recorded an impairment charge in cost of product licenses for purchased software of $1.4 million. Total restructuring charges for 2001 totaled $75.6 million.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

2005

Accrued

Adjustments

Restructuring

in Estimates

Accrued

Balance as of

Resulting in

Restructuring

December 31, 2004

Reduced Charges

Payments

Balance as of June 30, 2005

Facilities-related costs and impairments		$	6,254			$	(783	)		$	(1,359	)		$	4,112
Employee severance, benefits and related costs			57				—				(57	)			—
Total		$	6,311			$	(783	)		$	(1,416	)		$	4,112

Facilities-Related Costs and Impairments

     During 2001, we recorded facility-related charges of $59.4 million of which $38.1 million was recorded in the second quarter and $21.3 million was recorded in the fourth quarter. The facilities-related charges comprise excess rental space for offices worldwide, net of estimates for vacancy periods and sublease income based on the then-current real estate market data, and related write-offs of abandoned leasehold improvements and fixed assets of $7.7 million and $2.2 million, respectively, which were directly related to excess office facilities. The estimated sublease income was $25.9 million and based on rental rates ranging from $18 to $40 per square foot with estimated vacancy periods prior to the expected sublease income ranging from 10 to 15 months. During the fourth quarter of 2001, we recorded an adjustment to increase the facility-related costs for a change in estimate of the lease obligations for two leases by $9.7 million as a result of a market analysis indicating lower sublease rates and longer vacancy periods due to the continued weakening of the real estate market. The sublease income was adjusted by decreasing anticipated sublease rates from the range of $18 to $40 to the range of $18 to $35 per square foot and extending the initial vacancy periods by approximately 9 months. In addition, we reduced our lease accruals by $8.2 million for a lease settlement in consideration of a buy-out totaling $9.3 million, which is being paid ratably over 4.5 years.

     The leasehold improvements, which will continue to be in use, related to the facilities we vacated and are subleasing or attempting to sublease, were written down to their estimated fair value of zero because the estimated cash flows to be generated by sublease income at those locations are not and will not be sufficient to recover the carrying value of the assets. Furniture and fixtures were written down to their fair value based on the expected discounted cash flows they will generate over their remaining economic life. Because these assets ceased being used as of the end of the period in which the write-downs were recorded, the fair value of these assets was estimated to be zero. The assets were abandoned and disposed of at the time of the charge.

     During 2002, we recorded an adjustment to increase the facilities-related portion of the 2001 charge by an additional $2.2 million for changes to sublease and vacancy assumptions due to the continued weakening in the real estate market. The sublease income was adjusted by decreasing two anticipated sublease rates from $25 to $18 per square foot and extending the initial vacancy periods by 7 months. In addition, during 2002, we executed sublease agreements for two locations and recorded a reduction to our lease accruals of $853,000 due to favorable sublease terms compared to our original estimates.

     During 2003, we settled future lease obligations for five leases for aggregate payments of $17.1 million, resulting in an aggregate reduction to our lease accruals relating to our 2001 restructuring of $11.5 million, net of sublease and vacancy assumptions. We also recorded an additional charge of $2.8 million for facilities-related costs comprising $2.3 million for updated management assumptions of probable settlement outcomes based on the then-current negotiations and $450,000 for updated sublease assumptions based on current real estate market conditions extending the vacancy period to 33 months from 12 months.

     During 2004, we made adjustments in cost estimates related to space vacated in 2001. These adjustments resulted in an increase to the restructuring charge of $112,000.

     During 2005, we made adjustments to estimates of sublease income related to the 2001 actions, resulting in a credit to the restructuring charge of $783,000. The change in estimate was primarily due to our continued evaluation of the financial condition of our subtenants and their ability to meet their financial obligations to us.

      Employee Severance, Benefits and Related Costs and Exchangeable Shares

     As part of the 2001 restructuring actions, we recorded charges of $7.9 million for employee severance. We terminated the employment of 530 employees, or 46% of our workforce, of which 249 of these employees were from sales and marketing, 117 from services, 101 from general and administrative and 63 from research and development. None of these employees remained employed as of June 30, 2002. In addition, we settled 11,762 exchangeable shares with an employee, who was terminated in connection with the restructuring action, and recorded $1.3 million as a charge to restructuring for this settlement. During 2003, we recorded additional charges of $229,000 for severance related to an employee terminated as part of the 2001 restructuring action.

     During 2004, we reached final settlement with this employee resulting in a reduction to the restructuring charge of $172,000.

      Asset Impairments

     The asset impairment charges included the write-off of approximately $4.0 million of the remaining unamortized goodwill related to the two professional service organizations acquisitions completed in 2000. We had closed these operations and terminated the employees as part of the 2001 restructuring action, and as a result, the unamortized goodwill was impaired and had no future value. In addition, we recorded an impairment charge of approximately $1.4 million in cost of product license revenues related to purchased software, to record the software at its net realizable value of zero due to our abandoning a certain product development strategy. The purchased software had no future use to us.

      Marketing Costs and Legal and Accounting

     We recorded charges of $851,000 to write off certain prepaid costs for future marketing services to their fair value of zero due to changes in our product development strategy. As a result, the prepaid marketing cost had no future utility to the Company. During 2002, we unexpectedly were able to recoup $536,000 and recorded a credit for the amount received. During 2001, we also recorded $405,000 for legal and accounting services incurred in connection with the 2001 restructuring action.

     The 2001 actions were substantially completed by February 28, 2002.

2002 Actions

     Actions taken by us in 2002 included the consolidation and closure of excess facilities, a worldwide workforce reduction and the write-off of certain idle assets. In the fourth quarter of 2002, we recorded a restructuring charge of $18.2 million.

     A summary of the charges and related activity of the restructuring accruals related to the 2002 restructuring actions is as follows (in thousands):

2005

Accrued

Adjustments

Restructuring

in Estimates

Accrued

Balance as of

Resulting in

Restructuring

December 31, 2004

Reduced Charges

Payments

Balance as of June 30, 2005

Facilities-related costs and impairments		$	1,155			$	(36	)		$	(255	)		$	864

      Facilities-Related Costs and Impairments

     During 2002, we recorded facilities-related charges of $14.6 million, which included $12.0 million for operating lease obligations, net of assumptions for vacancy periods and sublease income based on the then-current real estate market data, related to office space that was either idle or vacated during the first quarter of 2003. This action was completed by January 31, 2003. This charge also included write-offs of leasehold improvements and furniture and fixtures associated with these facilities of $948,000 and $507,000, respectively, and computer equipment and software of $1.2 million. The lease charge was for office space we vacated and intend to sublease. The estimated sublease income was $4.8 million and based on rental rates ranging from $23 to $35 per square foot with estimated vacancy periods prior to the expected sublease income ranging from 12 to 21 months.

     As a result of this action and the actions taken in 2001, we wrote off certain computer equipment and software, aggregating $1.2 million, and furniture and fixtures, aggregating $507,000, which were no longer being used due to the reduction in personnel and office locations. These assets were abandoned and written down to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used either as of December 31, 2002 or in the first quarter of 2003 and were disposed of in the quarter ended March 31, 2003. In addition, we wrote off leasehold improvements, which will continue to be in use, related to the facilities it is attempting to sublease to their fair value of zero because the estimated cash flows to be generated by sublease income at those locations will not be sufficient to recover the carrying value of the assets.

     During 2003, we recorded an adjustment of $1.9 million primarily to increase our lease obligation accrual at two locations because of changes in the assumptions of the vacancy period and sublease income. The sublease income was adjusted by decreasing anticipated sublease rates from $23 to $18 per square foot for one facility and from $35 to $30 per square foot at the other location. We also extended the initial vacancy periods from 12 to 21 months to 24 to 42 months. These changes resulted in an estimated reduction of sublease income of $1.8 million. In addition, principally due to a favorable lease settlement relating to our 2002 restructuring activities, we reduced our lease obligations by $7.2 million. The settlement resulted in terminating a future lease obligation for an aggregate payment of $3.3 million, which was paid in January 2004. As a result of this transaction, we recorded prepaid rent of $2.2 million increasing the accrual adjustments in 2003 to $4.1 million.

     During 2004, we recorded an adjustment to our estimates related to the 2002 actions, resulting in a credit to the restructuring charge of $242,000.

     We executed a sub-lease agreement during the three months ended June 30, 2005. As a result, we recorded an adjustment to our estimates of sub-lease costs related to the 2002 actions, resulting in a credit to the restructuring charge of $36,000.

      Employee Severance, Benefits and Related Costs

     As part of the 2002 restructuring action, we recorded a charge of $3.6 million for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 125 employees, or 23% of our workforce. Of the 125 employees, 53 of the employees were from sales and marketing, 45 from services, 19 from general and administrative and 8 from research and development. We accrued employee benefits pursuant to ongoing benefits plans and statutory minimum requirements in foreign locations. We began the termination process on January 6, 2003 and all employees had been terminated by June 30, 2003. During the second quarter of 2003, we recorded an adjustment to increase the severance accrual by $327,000 based on final severance settlements with certain employees at our foreign locations. During the fourth quarter of 2003, we reduced certain severance accruals by $86,000, primarily at our foreign locations due to amounts being settled at less than the amount recorded as a result of foreign currency exchange movements.

2003 Actions

     As a result of several reorganization decisions, we undertook plans to restructure operations in the second and third quarters of 2003. Actions taken by us included the closure of excess facilities, a worldwide workforce reduction and the write-off of certain idle assets.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						2005
		Accrued				Adjustments								Accrued
		Restructuring				in Estimates								Restructuring
		Balance as of				Resulting in								Balance as of
		December 31, 2004				Reduced Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	1,373			$	(24	)		$	(249	)		$	1,100

Second Quarter 2003 Actions

     During the quarter ended June 30, 2003, we recorded a restructuring charge of $2.0 million. We also recorded an impairment charge in cost of product licenses of $169,000 related to certain purchased software.

Facilities-Related Costs and Impairments

     During the second quarter of 2003, we recorded facilities-related charges of $1.1 million comprising $866,000 for an operating lease related to idle office space, $144,000 of leasehold improvements and fixed assets written down to their fair value, and $61,000 for various office equipment leases. The lease charge was for office space we vacated and intended to sublease. The amount of the operating lease charge was based on assumptions from current real estate market data for sublease income rates and vacancy rates at the location. The estimated sublease income was $500,000 based on a rental rate of $35 per square foot with an estimated vacancy period prior to the expected sublease income of 24 months. In the fourth quarter of 2003, as result of updated market conditions, the estimated sublet rental rate was lowered from $35 per square foot to $30 per square foot and the vacancy period was extended to 36 months from 24 months resulting in an additional charge of $227,000. In accordance with SFAS 146, we have recorded the present value of the net lease obligation.

     As a result of a reduction of employees and closure of an office location, we wrote off computer and office equipment to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used by June 30, 2003 and were disposed of by September 30, 2003. In addition, we wrote off leasehold improvements, which continue to be in use, related to the facility it is attempting to sublease to their fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

      Employee Severance, Benefits and Related Costs

     As part of the second quarter 2003 restructuring action, we recorded a charge of $927,000 for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 32 employees, or 7.4% of our workforce, consisting of 11 employees from sales and marketing, 3 from services, 3 from general and administrative and 15 from research and development. We accrued employee benefits pursuant to our ongoing benefit plans for domestic locations and under statutory minimum requirements in foreign locations. All employees were notified of their termination as of June 30, 2003. The termination process was completed during the fourth quarter of 2003. During the third quarter of 2003, we accrued an additional $69,000 for employees at our foreign locations based on management’s best estimate of the final payments for severance. During the fourth quarter of 2003, we reduced certain severance accruals by $84,000 at our international locations as a result of final settlements.

      Asset Impairments

     We recorded a charge in cost of product license revenues of $169,000 to reduce the carrying value of third-party software embedded into one of our products, which was a minor component of our suite of products, to its net realizable value of $210,000 based on management’s best estimate of future net cash flows to be generated from the sale of the software to customers. We discontinued marketing of this software and have ceased future development work specifically related to this third-party software. However, we have not changed our overall product strategy for the purpose for which the software was acquired.

Third Quarter 2003 Action

     During the third quarter of 2003, we recorded a restructuring charge of approximately $771,000.

      Facilities -Related Costs and Impairments

     We recorded facilities-related charges of $393,000 comprising $227,000 for an operating lease related to idle office space and $166,000 of leasehold improvements and fixed assets written down to their fair value. The lease charge was for office space we vacated and intended to sublease. The amount of the operating lease charge was based on assumptions from current real estate market data for sublease income rates and vacancy rates at the location. The estimated sublease income was $216,000 based on a rental rate of $19 per square foot with an estimated vacancy period prior to the expected sublease income of 12 months. During the fourth quarter, as a result of updated market conditions, we determined that it is unlikely we will sublet this space before our lease expires resulting in an additional charge of $198,000. In accordance with SFAS 146, we have recorded the present value of the net lease obligation.

     As a result of a reduction of employees and the closure of one office location, we wrote off computer and office equipment to their fair value based on the expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero. These assets ceased being used prior to September 30, 2003 and were disposed of by December 31, 2003. In addition, we wrote down leasehold improvements to their fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

      Employee Severance, Benefits and Related Costs

     We recorded a charge of $309,000 for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 16 employees, or 4.3% of our workforce, consisting of 7 employees from sales and marketing, 4 from services and 5 from research and development. We accrued employee benefits pursuant to our ongoing benefit plans. All employees were notified of their termination as of September 30, 2003. The termination process was completed during the fourth quarter of 2003.

     During 2004, we made adjustments in cost estimates related to space vacated in 2003 and employee severance estimates related to 2003 actions. These adjustments resulted in a net reduction to the restructuring charge of $77,000.

     During 2005, we recorded an adjustment to our cost estimates related to the 2003 actions, resulting in a credit to the restructuring charge of $24,000.

2004 Actions

     During 2004, we recorded a restructuring charge of $3.6 million, comprised of new actions of $3.9 million and net credits resulting from changes in estimates related to prior actions of $379,000.

      Facilities-Related Costs and Impairments

     During the fourth quarter of 2004, we recorded facilities-related charges of $1.5 million primarily comprised of $800,000 for an operating lease related to idle office space net of assumptions for vacancy period and sublease income based on the then current real estate market data, $200,000 of leasehold improvements written down to their fair value and $500,000 of prepaid rent related to the abandoned space, which was recorded as part of prior lease settlements. The lease charge was for office space we vacated before December 31, 2004 and intended to sublease. The estimated sublease income was $350,000 based on a rental rate of $13 per square foot with an estimated vacancy period prior to the expected sublease income of 6 months. In accordance with SFAS 146, we have recorded the present value of the net lease obligation.

     As a result of a reduction of employees and the closure of office space, we wrote off $200,000 of leasehold improvements related to the vacated space to their estimated fair value of zero because the estimated cash flows to be generated from that location will not be sufficient to recover the carrying value of the assets.

      Employee Severance, Benefits and Related Costs

     As part of the fourth quarter 2004 restructuring action, we recorded a charge of $2.5 million for severance and benefit costs related to cost reduction actions taken across the worldwide employee base. The severance and benefit costs were for 56 employees, or 14% of our workforce, consisting of 27 employees from sales and marketing, 8 from services, 6 from general and administrative and 15 from research and development. We accrued employee benefits pursuant to our ongoing benefit plans for domestic locations and under statutory minimum requirements in foreign locations. All employees were notified of their termination as of December 31, 2004. As of December 31, 2004, 13 employees had been terminated. As of June 30, 2005 the termination process was completed.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						2005
		Accrued				Adjustments								Accrued
		Restructuring				in Estimates								Restructuring
		Balance as of				Resulting in								Balance as of
		December 31, 2004				Additional Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	750			$	(267	)		$	(239	)		$	244
Employee severance, benefits and related costs			1,569				168				(1,457	)			280
Total		$	2,319			$	(99	)		$	(1,696	)		$	524

     During the first quarter of 2005, we recorded a restructuring charge of $200,000, resulting from adjustments to estimates made in 2004 for employee severance benefits payable in international geographies, and a $4,000 charge to facilities related cost due to adjusting our estimates.

     During the second quarter of 2005, we recorded a credit of $32,000 to the employee severance costs, and a credit of $271,000 to the facilities related cost charge, due to adjusting our estimates of net sublease obligations as a result of executing a sub lease agreement for which the term began in the second quarter of 2005.

2005 Actions

     During 2005, the Company recorded net restructuring charges of $875,000, comprised of new actions of $1.8 million and net credits resulting from changes in estimates related to prior actions of $942,000.

Facilities-Related Costs and Impairments

     During the second quarter of 2005, we relocated our San Francisco office and reduced the amount of space we occupy in San Francisco. As a result of this action and the cessation of the use of this facility and other minor facilities charges, we recorded facilities-related charges of $1.8 million primarily comprised of $1.0 million of deferred rent related to the abandoned space, $118,000 of lease hold improvements written down to their fair value, and $557,000 for an operating lease related to idle office space vacated during the second quarter of 2005 net of assumptions for sublease income based on an executed sublease agreement. In accordance with SFAS 146, we recorded the present value of the net lease obligation.

     A summary of the charges and related activity of the restructuring accruals is as follows (in thousands):

						Write-Offs
		2005				And				Balance as of
		Charges				Payments				June 30, 2005
Facilities-related costs and impairments		$	1,817			$	(1,350	)		$	467

Abandoned Facilities Obligations

     At June 30, 2005, we had lease arrangements related to seven abandoned facilities. The lease arrangements with respect to six of these facilities are ongoing, and one is the subject of a lease settlement arrangement under which we are obligated to make payments through 2006. All locations for which we have recorded restructuring charges have been exited, and thus management’s plans with respect to these leases have been completed. A summary of the remaining facility locations and the timing of the remaining cash payments are as follows (in thousands):

Lease Locations		2005				2006				2007				2008				2009				Total
Cambridge, MA*		$	1035			$	1,035															$	2,070
Cambridge, MA			69				91																160
Cambridge, MA			200				400																600
Waltham, MA			696				1,452			$	1,452			$	1,452			$	363				5,415
Chicago, IL			319				427																746
San Francisco, CA			256				513				512												1,281
Reading, UK			235				570				570				570				142				2,137
Facility obligations, gross			2,860				4,488				2,534				2,022				505				12,409
Contracted and assumed sub-lease income			(1,026	)			(1,718	)			(1,467	)			(1,215	)			(304	)			(5,730	)
Net cash obligations		$	1,834			$	2,770			$	1,067			$	807			$	201			$	6,679
Assumed sub-lease income		$	—			$	135			$	270			$	270			$	67			$	742