VIGNETTE CORP, S-1/A, 1999-02-01

VIGNETTE CORP
S-1/A, 1999-02-01
PREPACKAGED SOFTWARE

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<PAGE>

As filed with the Securities and Exchange Commission on February 1, 1999.

Registration No. 333-68345
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VIGNETTE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 7372 74-2769415
(State or Other (Primary Standard (I.R.S.
Jurisdiction of Industrial EmployerIdentification
Incorporation or Classification Code Number)
Organization) Number)
901 South MoPac Expressway
Austin, Texas 78746
(512) 306-4300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
GREGORY A. PETERS
President and
Chief Executive Officer
Vignette Corporation
901 South MoPac Expressway
Austin, Texas 78746
(512) 306-4300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
JAY K. HACHIGIAN ALAN DEAN
BRIAN K. BEARD Davis Polk & Wardwell
ANTHONY M. ALLEN 450 Lexington Avenue
Gunderson Dettmer Stough New York, New York 10017
Villeneuve Franklin & Hachigian, LLP (212) 450-4000
8911 Capital of Texas Highway, Suite
4240
Austin, Texas 78759
(512) 342-2300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE

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<TABLE>
<CAPTION>
Title of Each Class of Amount Proposed Proposed Maximum
Securities to be to be Maximum Offering Aggregate Amount of
Registered Registered Price Per Share Offering Price Registration Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value.................. 4,025,000 $14 $56,350,000 $15,665
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</TABLE>
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(1) $8,340 of such fee has previously been paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)

Issued February 1, 1999

3,500,000 Shares

[LOGO OF VIGNETTE APPEARS HERE]

COMMON STOCK

-----------

Of the 3,500,000 shares of common stock offered hereby, Vignette Corporation
is offering 3,180,000 shares and the selling stockholders are offering
320,000 shares. This is our initial public offering and no public market
currently exists for our shares. We anticipate that the initial
public offering price will be between $12 and $14 per share.

-----------

We have filed an application
for the common stock to
be quoted on the
Nasdaq National Market under
the symbol "VIGN."

-----------

Investing in the common stock involves risks.

See "Risk Factors" beginning on page 4.

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PRICE $ A SHARE

-----------

<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company Stockholders
-------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total........................... $ $ $ $
</TABLE>

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Vignette Corporation has granted the underwriters the right to purchase up to
an additional 525,000 shares to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares to purchasers on , 1999.

-----------

MORGAN STANLEY DEAN WITTER

HAMBRECHT & QUIST

DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated

, 1999
<PAGE>

Vignette: Internet Relationship Management Solutions

It's clear that merely having a Web site on the Internet is not enough to
increase online revenues. Businesses must build relationships that deliver the
right information to the right customers at the right time. In addition, to
increase the return on Internet investments, businesses must create multiple
contact points by providing information on third-party Web sites. The bottom
line is simple: Vignette offers the solutions that build Internet
relationships.

[Graphic of two individuals shaking hands; graphic of a computer with a
banner reading "Everyone Welcome."]

To build an online business, build customer relationships.

To date, most businesses can't get a quality return on their Internet
investment because they aren't building relationships that turn one-time
visitors into long-term customers. To increase returns, companies must manage
content in a way that provides the value and convenience to stimulate buying
and ongoing customer loyalty.

[An arrow from the computer, labeled "One-time visitors become long-term
customers,"' points to another computer with a banner reading "Welcome Jim."
Two individuals stand at the end of a red carpet unrolling from the computer.]

Vignette StoryServer 4. It's time to get personal.

With Vignette StoryServer 4, businesses can manage content in an intelligent
fashion, personalizing the experience for the Web site visitor throughout the
visitor's customer lifecycle. As a result, long-term customer relationships
can be built and the resulting revenues can create opportunities for a
superior return on the company's Internet investment.

[An arrow, labeled "Customers may not come to you, so you need to go to
them," points from the second computer to a graphic of an individual standing
before a large computer with a banner reading, "Welcome Jim" and labeled,
"Company Web Site." Six smaller graphics of an individual standing before a
computer surround the large computer; each of the six is connected to the
large computer by a double-headed arrow. Each small computer has a banner and
a label: "Hi Jim" and "Vendor," "Hey Jim" and "Distributor," "Go Jim!" and
"Online Catalog," "Enter Jim" and "Resellers," "Hello Jim" and "Retailer," and
"Jim!" and "Portal," respectively.]

Vignette Syndication Server. The right information, at the right time, in the
right place.

Once StoryServer 4 is in place building relationships, companies can expand
revenue opportunities by creating additional customer contact points.
Beginning in the first quarter of 1999, companies can use Vignette Syndication
Server to place content on third-party sites allowing them to build a powerful
distribution network that puts their products in direct access to the
customers, wherever they are.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 4
Special Note Regarding Forward-
Looking Statements................. 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
Preemptive Rights................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 29
Management.......................... 46
Certain Transactions................ 55
Principal and Selling Stockholders.. 58
Description of Capital Stock........ 60
Shares Eligible for Future Sale..... 62
Underwriters........................ 64
Legal Matters....................... 66
Experts............................. 66
Additional Information.............. 66
Index to Consolidated Financial
Statements......................... F-1
</TABLE>

Our principal executive offices are located at 901 South MoPac Expressway,
Austin, Texas 78746 and our telephone number is (512) 306-4300. Our World Wide
Web site address is www.vignette.com. The information in the Web site is not
incorporated by reference into this prospectus.

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders are offering to
sell shares of common stock and seeking offers to buy shares of common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of the common stock.

Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

All information in this prospectus relating to the number of shares of our
common stock, options or warrants is based upon information as of December 31,
1998, assuming a 1.96747 to 1 stock split before the offering. For a more
complete discussion regarding our capital stock and other related matters, see
"Capitalization," "Underwriters" and "Management--Employee Benefit Plans."

2
<PAGE>

PROSPECTUS SUMMARY

You should read this summary together with the more detailed information and
our consolidated financial statements and notes appearing elsewhere in this
prospectus.

VIGNETTE

Vignette is a leading provider of Internet Relationship Management software
products and services. Internet Relationship Management software is a new
category of applications that enable mid- to large-sized enterprises to develop
and manage online customer relationships for the purpose of increasing their
Web-based revenues and market share. Our StoryServer 4 application platform
integrates three key capabilities to allow our clients to engage their Web site
visitors with personalized interactions that stimulate buying and strengthen
customer loyalty. Our content management capabilities are designed to increase
the efficiency of team-based Web site production. Our personalization
capabilities adapt the sites' presentation, navigation and content based on
customers' preferences and actions. Our decision support capabilities allow
businesses to analyze customer preferences, examine demographic segmentation
and determine the popularity of individual products and services. Our Vignette
Syndication Server platform, which we announced in October 1998 and expect to
ship in the first quarter of 1999, is designed to enable a business to
distribute its electronic goods and services outside of its own Web site
through a network of reseller, affiliate, and partner Web sites, or its
"Customer Chain." The capabilities of Vignette Syndication Server are designed
to enable our clients to establish these distribution networks on the Internet
to reach more potential customers and increase Web-based revenue opportunities.
We complement our products with a professional services organization that
offers strategic planning, project management and implementation services.

To date, we have licensed the StoryServer software platform to more than 190
clients worldwide in a variety of industries including retail, financial
services, telecommunications, technology and media. Our customers include Bank
One, Charles Schwab and Company, Chicago Tribune, Lands' End, National
Semiconductor, Nokia and Preview Travel. Since shipping our first products in
1997, we have received 13 awards for our industry leadership and product
capabilities including Best Products/Best Private Company from The Red Herring
magazine and the Editor's Choice Award from Seybold Publications.

THE OFFERING

<TABLE>
<C> <S>
Common stock offered............................ 3,500,000 shares, including 320,000 shares
owned by selling stockholders
Common stock to be outstanding after 25,815,169 shares
the offering...................................
Use of proceeds................................. For working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... VIGN
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table presents our summary consolidated balance sheet at
December 31, 1998, which has been adjusted for the conversion of Vignette
preferred stock outstanding as of December 31, 1998 into 16,958,319 shares of
common stock and our sale of 3,180,000 shares of our common stock in this
offering at an assumed public offering price of $13 per share and the
application of the estimated net proceeds. See "Use of Proceeds" and
"Capitalization."

<TABLE>
<CAPTION>
As of December 31, 1998
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Pro Forma
Actual As Adjusted
------------ --------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $ 12,242 $ 49,742
Working capital.................................... 3,757 41,257
Total assets....................................... 22,781 60,281
Long-term debt, less current portion............... 758 758
Redeemable convertible preferred stock............. 36,258 --
Total stockholders' equity (deficit)............... (30,767) 42,991
</TABLE>

3
<PAGE>

RISK FACTORS

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

Risks Related to Our Business

We Expect to Incur Future Losses

We incurred net losses of $3.6 million for the year ended December 31, 1996,
$7.5 million for the year ended December 31, 1997 and $26.2 million for the
year ended December 31, 1998. As of December 31, 1998, we had an accumulated
deficit of $37.3 million. We have not achieved profitability and we expect to
incur net losses for the foreseeable future. To date, we have funded our
operations from the sale of equity securities and have not generated cash from
operations. We expect to continue to incur significant product development,
sales and marketing, and administrative expenses and, as a result, we will
need to generate significant revenues to achieve and maintain profitability.
Although our revenues have grown significantly in recent quarters, we cannot
be certain that we can sustain these growth rates or that we will achieve
sufficient revenues for profitability. If we do achieve profitability, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis in the future. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Our Limited Operating History Makes Financial Forecasting Difficult

Vignette was founded in December 1995 and has a limited operating history.
As a result of our limited operating history, we cannot forecast operating
expenses based on our historical results. Accordingly, we base our expenses in
part on future revenue projections. Most of our expenses are fixed in the
short term and we may not be able to quickly reduce spending if our revenues
are lower than we had projected. Our ability to forecast accurately our
quarterly revenue is limited because our software products have a long sales
cycle that makes it difficult to predict the quarter in which sales will
occur. We would expect our business, operating results and financial condition
to be materially adversely affected if our revenues do not meet our
projections and that net losses in a given quarter would be even greater than
expected.

We Expect Our Quarterly Revenues and Operating Results to Fluctuate

Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

. Demand for our products and services;

. The timing of sales of our products and services;

. The timing of customer orders and product implementations;

. Unexpected delays in introducing new products and services;

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

. Changes in the rapidly evolving market for Internet Relationship
Management solutions;

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

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

. The mix of domestic and international sales; and

. Costs related to possible acquisitions of technology or businesses.

4
<PAGE>

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

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

Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For
instance, quarterly results may fluctuate based on our clients' calendar year
budgeting cycles, slow summer purchasing patterns in Europe and our
compensation policies that tend to compensate sales personnel, typically in
the latter half of the year, for achieving annual quotas.

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

We derive a significant portion of our software license revenues in each
quarter from a small number of relatively large orders. Although we do not
believe that the loss of any particular customer would have an adverse effect
on our business, our operating results could be materially adversely affected
if we were unable to complete one or more substantial license sales in any
future period. For example, in five of the last eight quarters in the period
ended December 31, 1998, we had at least one customer that accounted for at
least 10% of total revenue in such quarter.

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

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

We Need to Expand Our Sales and Distribution Capabilities

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

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

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

5
<PAGE>

We May Be Unable to Adequately Develop Our Professional Services
Organization

We cannot be certain that we can attract or retain a sufficient number of
the highly qualified services personnel that our business needs and we cannot
be certain that our services business will ever achieve profitability. Clients
that license our software typically engage our professional services
organization to assist with support, training, consulting and implementation
of their Web solutions. We believe that growth in our product sales depends on
our ability to provide our clients with these services and to educate third-
party resellers on how to use our products. As a result, we plan to increase
the number of service personnel to meet these needs. New services personnel
will require training and education and take time to reach full productivity.
To meet our needs for services personnel, we may also need to use more costly
third-party consultants to supplement our own professional services
organization. We expect our services revenue to increase in absolute dollars
as we continue to provide consulting and training services that complement our
products and as our installed base of clients grows. To date, our services
costs have been significantly higher than our services revenue, and we expect
that trend to continue for the foreseeable future. We generally bill our
clients for our services on a "time and materials" basis. However, from time
to time we enter into fixed-price contracts for services. On occasion, the
costs of providing the services have exceeded our fees from these contracts
and, from time to time, we may misprice future contracts to our detriment. In
addition, competition for qualified services personnel with the appropriate
Internet specific knowledge is intense. We are in a new market and there is a
limited number of people who have acquired the skills needed to provide the
services that our clients demand.

We Expect Our International Revenue to be Significant Which Subjects Us to
International Business Risks

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

. Expenses associated with customizing products for foreign countries;

. Protectionist laws and business practices that favor local competition;

. Dependence on local vendors;

. Multiple, conflicting and changing governmental laws and regulations;

. Longer sales cycles;

. Difficulties in collecting accounts receivable;

. Foreign currency exchange rate fluctuations; and

. Political and economic instability.

We received 23% of our total revenue in 1998 through licenses and services
sold to clients located outside of the United States. We expect international
revenue to account for a significant percentage of total revenue in the future
and we believe that we must continue to expand our international sales
activities in order to be successful. Our international sales growth will be
limited if we are unable to establish additional foreign operations, expand
international sales channel management and support organizations, hire
additional personnel, customize products for local markets, develop
relationships with international service providers and establish relationships
with additional distributors and third party integrators. In that case, our
business, operating results and financial condition could be materially
adversely affected. Even if we are able to successfully expand international
operations, we cannot be certain that we will be able to maintain or increase
international market demand for our products.

To date, a majority of our international revenues and costs have been
denominated in foreign currencies. We believe that an increasing portion of
our international revenues and costs will be denominated in foreign currencies
in the future. In addition, although we cannot predict the potential
consequences to our business as a result of the adoption of the Euro as a
common currency in Europe, the transition to the Euro presents a number of
risks, including increased competition from European firms as a result of
pricing transparency. To date, we have not engaged in any foreign exchange
hedging transactions and we are therefore subject to foreign currency risk.

6
<PAGE>

We May Be Unable to Properly Manage Growth

We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. In order to manage growth effectively,
we must implement and improve our operational systems, procedures and controls
on a timely basis. If we fail to implement and improve these systems, our
business, operating results and financial condition will be materially
adversely affected. In addition, we moved to new headquarters facilities in
December 1998, which was and will continue to be a disruptive, time consuming
and expensive process.

We May Be Adversely Affected If We Lose Key Personnel

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

We Depend on Our StoryServer Product Line

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

We May Be Unable to Successfully Introduce Vignette Syndication Server

We expect that our future financial performance will depend significantly on
revenue from Vignette Syndication Server and the related tools that we plan to
develop, which is subject to significant risks. We announced Vignette
Syndication Server in October 1998 and we plan to ship Vignette Syndication
Server to clients in the first quarter of 1999. This will be the first version
of a new product designed for a new market opportunity. There are significant
risks inherent in a product introduction such as Vignette Syndication Server.
Market acceptance of Vignette Syndication Server will depend on a market
developing for Internet syndication products and services and the commercial
adoption of standards on which Vignette Syndication Server is based. We cannot
be certain that either will occur. We cannot be certain that Vignette
Syndication Server will meet customer performance needs or expectations when
shipped or that it will be free of significant software defects or bugs. If
Vignette Syndication Server does not meet customer needs or expectations, for
whatever reason, upgrading or enhancing the product could be costly and time
consuming.

We May Not Be Able to Meet the Rapid Changes in Internet Relationship
Management Technology

The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology
enhancements, uncertain product life cycles, changes in client demands and
evolving industry standards. We cannot be certain that we will successfully
develop and market new products, new product enhancements or new products
compliant with present or emerging Internet technology standards. New products
based on new technologies or new industry standards can render existing
products obsolete and unmarketable. To succeed, we will need to enhance our
current products and develop new products on a timely basis to keep pace with
developments related to Internet technology and to satisfy the increasingly
sophisticated requirements of our clients. Internet commerce technology,
particularly Internet Relationship Management

7
<PAGE>

technology, is complex and new products and product enhancements can require
long development and testing periods. Any delays in developing and releasing
enhanced or new products could have a material adverse effect on our business,
operating results and financial condition.

We Face Intense Competition for Internet Relationship Management Software

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

Our principal competitors include: in-house development efforts by potential
clients or partners; other vendors of software that directly address elements
of Internet Relationship Management, such as BroadVision; and developers of
software that address only certain technology components of Internet
Relationship Management (e.g., content management), such as Inso Corporation.

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

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

Sales of Our Products May Be Adversely Affected Due to Privacy Concerns

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

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

We May Be Adversely Impacted by the Year 2000 and Other Information
Technology Issues

8
<PAGE>

may not be able to distinguish whether "00" means 1900 or 2000, which may
result in failures or the creation of erroneous results. We are subject to
potential Year 2000 problems affecting our products, our internal systems and
the systems of our suppliers and customers, any of which could have a material
adverse effect on our business, operating results and financial condition.

We have conducted the first phases of a Year 2000 readiness review for the
current versions of our products. The review includes assessment,
implementation (including remediation, upgrading and replacement of certain
product versions), validation testing, and contingency planning. We continue
to respond to customer questions about prior versions of our products on a
case-by-case basis.

We have largely completed all phases of this plan, except for contingency
planning, for the current versions of our products. As a result, we believe
all current versions of our products are Year 2000 compliant, when configured
and used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used
with or in the host machine or our products are also Year 2000 compliant. We
have not tested our products on all platforms or all versions of operating
systems that we currently support. The initial release of StoryServer 4
required a patch to fix a minor error in a third-party product included in
StoryServer 4. We have provided the patch on our Web site in order to be Year
2000 compliant.

We have tested software obtained from third parties, including licensed
software, shareware, and freeware, that is incorporated into our products, and
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite testing by us and by current and potential clients, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of revenue, diversion of development resources, damage
to our reputation, or increased service and warranty costs, any of which could
materially adversely affect our business, operating results, or financial
condition. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it
is uncertain whether or to what extent we may be affected by it.

Our internal systems include both our information technology, or IT, and
non-IT systems. We have initiated an assessment of our material internal IT
systems, including both our own software products and third-party software and
hardware technology, but we have not initiated an assessment of our non-IT
systems. We expect to complete testing of our IT systems in 1999. To the
extent that we are not able to test the technology provided by third-party
vendors, we are seeking assurances from vendors that their systems are Year
2000 Compliant. We are not currently aware of any material operational issues
or costs associated with preparing our internal IT and non-IT systems for the
Year 2000. However, we may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in our
internal IT and non-IT systems.

We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, or they may
face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected. See
"Risks Related to the Internet Industry--Our Performance Will Depend on the
Growth of the Internet for Commerce."

We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. To date, these costs have
not been material. We will incur additional costs related to the Year 2000
plan for administrative personnel to manage the project, outside contractor
assistance, technical support for our products, product engineering and
customer satisfaction. In addition, we may experience material problems and
costs with Year 2000 compliance that could adversely affect our business,
results of operations, and financial condition.

9
<PAGE>

We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our
critical operations. The cost of developing and implementing such a plan may
itself be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.

We May Be Adversely Impacted by Software Defects

Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects,
including Year 2000 errors. Serious defects or errors could result in lost
revenues or a delay in market acceptance, which would have a material adverse
effect on our business, operating results and financial condition.

We May Incur Material Costs in Connection with Product Liability Claims

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

We Rely on Third Parties For Technology in Our Products

We integrate third-party software as a component of our software. The third-
party software may not continue to be available to us on commercially
reasonable terms. For instance, we license GroupLens Express from Net
Perceptions, Inc. for certain personalization functionality in StoryServer 4.
The agreement expires in October 1999, but it is renewed automatically unless
either party gives 60 days notice prior to the renewal date. If we cannot
maintain licenses to key third-party software, such as GroupLens Express,
shipments of our products could be delayed until equivalent software could be
developed or licensed and integrated into our products, which could materially
adversely affect our business, operating results and financial condition. See
"Business--Proprietary Rights and Licensing."

Our Success Depends on Our Ability to Protect Our Proprietary Technology

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

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

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

. Redesign those products or services that incorporate such technology.

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

10
<PAGE>

Our Existing Stockholders Will Exercise Significant Control Over Vignette

On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 48.8% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. See "Principal and Selling Stockholders."

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

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

. Authorizing the issuance of "blank check" preferred stock;

. Providing for a classified board of directors with staggered, three-year
terms;

. Prohibiting cumulative voting in the election of directors;

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

. Limiting the persons who may call special meetings of stockholders;

. Prohibiting stockholder action by written consent; and

. Establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.

Certain provisions of Delaware law and our stock incentive plans may also
discourage, delay or prevent someone from acquiring or merging with us. See
"Management--Employee Benefit Plans" and "Description of Capital Stock--Anti-
takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law."

Changes in Accounting Standards Could Adversely Affect Our Financial Results

The American Institute of Certified Public Accountants issued Statement of
Position 97-2, Software Revenue Recognition, in October 1997 and amended it by
Statement of Position 98-4. We adopted these statements effective January 1,
1998. In December 1998, the AICPA issued SOP 98-9 which further amended SOP
97-2 and 98-4. We believe our current revenue recognition policies and
practices are materially consistent with these statements. However, full
implementation guidelines for this standard have not yet been issued. Once
available, our current revenue accounting practices may need to change and
such changes could materially adversely affect our future revenue and
earnings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Risks Related to the Internet Industry

Our Performance Will Depend on the Growth of the Internet for Commerce

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

11
<PAGE>

Our Performance Will Depend on the New Market for Internet Relationship
Management Software

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

Our Business May Be Threatened By Increasing Government Regulation of the
Internet

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

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

Risks Related to the Securities Markets

Our Stock Price May Be Volatile

Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after the offering. We negotiated and determined the initial public offering
price with the representatives of the underwriters based on several factors.
This price may vary from the market price of the common stock after the
offering. The market price of the common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:

. Variations in quarterly operating results;

. Changes in financial estimates by securities analysts;

. Changes in market valuations of Internet software companies;

. Announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;

. Loss of a major client or failure to complete significant license
transactions;

12
<PAGE>

. Additions or departures of key personnel;

. Sales of common stock in the future; and

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

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

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could have a material adverse
effect on our business, operating results and financial condition.

We May Be Unable to Meet Our Future Capital Requirements

We expect the net proceeds from this offering, cash on hand, cash
equivalents and commercial credit facilities to meet our working capital and
capital expenditure needs for at least the next 12 months. After that time, we
may need to raise additional funds and we cannot be certain that we would be
able to obtain additional financing on favorable terms, if at all. Further, if
we issue equity securities, stockholders may experience additional dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of common stock. If we cannot raise funds, if
needed, on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a material adverse
effect on our business, operating results and financial condition. See "Use of
Proceeds," "Dilution" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

Substantial Sales of Our Common Stock Could Adversely Affect Our Stock Price

Sales of a substantial number of shares of common stock after the offering
could adversely affect the market price of the common stock by potentially
introducing a large number of sellers of our common stock into a market in
which the common stock price is already volatile, thus driving the common
stock price down. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities. On
completion of this offering, we will have 25,815,169 shares of common stock
outstanding or 26,340,169 shares if the underwriter's over-allotment option is
exercised in full and 5,420,577 shares subject to currently exercisable
options. Except for the 242,367 shares that may be purchased by existing
stockholders under certain preemptive rights, which will be subject to a 180-
day lockup agreement, the 3,500,000 shares sold in this offering, or 4,025,000
shares if the underwriter's over-allotment option is exercised in full, will
be freely tradable without restriction or further registration under the
Federal securities laws unless purchased by "affiliates" of Vignette as that
term is defined in Rule 144. The remaining 22,315,169 shares of common stock
outstanding on completion of the offering will be "restricted securities" as
that term is defined in Rule 144.

Our directors, executive officers, and certain other stockholders, including
the stockholders purchasing shares in this offering through the exercise of
their preemptive rights have executed lock-up agreements that limit their
ability to sell common stock. These stockholders have agreed not to sell or
otherwise dispose of any shares of common stock for a period of at least 180
days after the date of this prospectus without the prior written approval of
Morgan Stanley & Co. Incorporated. When the lock-up agreements expire, these
shares and the shares underlying the options will become eligible for sale, in
some cases only pursuant to the volume, manner of sale and notice requirements
of Rule 144. See "Management--Employee Benefit Plans" and "Shares Eligible for
Future Sale."

Investors Will Experience Immediate Dilution

The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately
after the offering. Accordingly, if you purchase common stock in the

13
<PAGE>

offering, you will incur immediate dilution of approximately $11.33 in the
book value per share of the common stock from the price you pay for the common
stock. This calculation assumes that you purchased the common stock for $13.00
per share.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute forward-
looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.

This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.

14
<PAGE>

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 3,180,000 shares of
common stock we are offering will be approximately $37.5 million at an assumed
initial public offering price of $13.00 share and after deducting estimated
offering expenses of $950,000 and underwriting discounts and commissions
payable by Vignette. If the underwriters' over-allotment option is exercised
in full, we estimate that such net proceeds will be approximately $43.8
million. We will not receive any of the proceeds from the sale of shares of
common stock by the selling stockholders. The primary purposes of this
offering are to obtain additional working capital, create a public market for
our common stock, facilitate our future access to public capital markets and
provide liquidity to existing stockholders.

We intend to use the proceeds we receive from the offering for working
capital and general corporate purposes. Although we may use a portion of the
net proceeds to acquire technology or businesses that are complementary to our
business, there are no current plans in this regard. Pending such uses, we
plan to invest the net proceeds in short-term, interest-bearing, investment
grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the
foreseeable future. Our lines of credit currently prohibit the payment of
dividends.

PREEMPTIVE RIGHTS

Certain holders of our Series F and Series H preferred stock have a
preemptive right to purchase shares of common stock sold in this offering, at
the initial public offering price. This right to purchase shares is limited to
10% of the offering amount in the case of the Series F holders and an
additional 2.5% of the offering amount in the case of the Series H holders. As
of the date of this prospectus, such stockholders with preemptive rights have
the right to purchase approximately 242,367 of the shares to be issued in this
offering. The number of shares that may be purchased under these rights,
however, may be limited at the discretion of the underwriters. Shares
purchased by these stockholders under their preemptive rights will reduce the
number of shares available to new investors in this offering.

15
<PAGE>

CAPITALIZATION

Unless otherwise specifically stated, the information in this prospectus has
been adjusted to reflect a 1.96747 to 1 stock split and the conversion of all
outstanding shares of preferred stock into common stock on the completion of
the offering, but does not take into account the possible issuance of
additional shares of common stock to the underwriters pursuant to their right
to purchase additional shares to cover overallotments.

The following table sets forth our capitalization as of December 31, 1998.
The pro forma information reflects the filing of an amendment to our amended
and restated certificate of incorporation to provide for authorized capital
stock of 80,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock and the conversion of all shares of preferred
stock outstanding as of December 31, 1998 into 16,958,319 shares of common
stock on completion of this offering. The pro forma as adjusted information
reflects the sale of the shares of common stock offered hereby (assuming an
initial public offering price of $13.00 per share) and the application of the
net proceeds we receive from this offering. The outstanding share information
excludes 5,420,577 shares of common stock issuable on exercise of outstanding
options as of December 31, 1998 with a weighted average exercise price of
$3.09 per share, 14,756 shares of common stock issuable upon exercise of an
outstanding warrant at an exercise price of $.51 per share, 90,358 shares of
common stock issuable upon exercise of warrants at an exercise price of $8.30
per share and 658,107 shares of common stock reserved for issuance under our
stock plans as of December 31, 1998. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and the Notes
thereto. See "Use of Proceeds" and "Management--Employee Benefit Plans."

<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------
Pro
Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Long-term debt, less current portion......... $ 758 $ 758 $ 758
Redeemable convertible preferred stock, $0.01
par value, 12,916,404 shares authorized,
12,784,565 issued and outstanding, actual;
no shares authorized, issued and
outstanding, pro forma and pro forma as
adjusted.................................... 36,258 -- --
Warrant to purchase redeemable convertible
preferred stock............................. 169 169 169
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par
value, 4,438,655 shares authorized,
4,173,754 issued and outstanding, actual;
no shares authorized, issued and
outstanding, pro forma and pro forma as
adjusted................................... 42 -- --
Preferred stock, $0.01 par value, no shares
authorized, issued or outstanding, actual;
10,000,000 shares authorized pro forma and
pro forma as adjusted, no shares issued or
outstanding, pro forma and pro forma as
adjusted................................... -- -- --
Common stock, $0.01 par value, 33,446,991
shares authorized, 5,676,850 shares issued
and outstanding (net of 169,498 treasury
shares), actual; 80,000,000 shares
authorized, 22,635,169 shares issued and
outstanding, pro forma; 80,000,000 shares
authorized, 25,815,169 issued and
outstanding, pro forma as adjusted......... 57 226 258
Additional paid-in capital.................. 12,810 48,941 86,409
Notes receivable for purchase of common
stock...................................... (172) (172) (172)
Deferred stock compensation................. (6,196) (6,196) (6,196)
Accumulated other comprehensive loss........ (11) (11) (11)
Accumulated deficit......................... (37,297) (37,297) (37,297)
-------- -------- -------
Total stockholders' equity (deficit)......... (30,767) 5,491 42,991
-------- -------- -------
Total capitalization......................... $ 6,418 $ 6,418 43,918
======== ======== =======
</TABLE>

16
<PAGE>

DILUTION

The pro forma net tangible book value of our common stock as of December 31,
1998, giving effect to the conversion of all shares of preferred stock
outstanding as of December 31, 1998 into common stock on the closing of this
offering, was $5,491,000, or approximately $.24 per share. "Pro forma net
tangible book value" per share represents the amount of our total tangible
assets less total liabilities, divided by 22,635,169 shares of common stock
outstanding after giving effect to the conversion of the preferred stock
outstanding as of December 31, 1998 into common stock. After giving effect to
the issuance and sale of 3,180,000 shares of common stock offered by Vignette
at an assumed initial public offering price of $13.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by Vignette, the pro forma net tangible book value
of Vignette as of December 31, 1998 would have been $42,991,000, or $1.67 per
share. This represents an immediate increase in pro forma net tangible book
value of $1.43 per share to existing stockholders and an immediate dilution in
net tangible book value of $11.33 per share to new investors. The following
table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share as of December 31,
1998........................................................... $ .24
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 1.43
-----
Pro forma net tangible book value per share after offering........ 1.67
------
Dilution per share to new investors............................... $11.33
======
</TABLE>

The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of preferred stock into common stock on
the closing of this offering, as of December 31, 1998, the difference between
the number of shares of common stock purchased from Vignette, the total
consideration paid to Vignette and the average price paid by existing
stockholders and by new investors, at an assumed initial public offering price
of $13.00 per share, before deduction of estimated discounts and commissions
and estimated offering expenses payable by Vignette:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 22,635,169 88% $40,759,000 50% $ 1.80
New investors.............. 3,180,000 12 41,340,000 50 13.00
---------- ----- ----------- -----
Total.................... 25,815,169 100.0% $82,099,000 100.0%
========== ===== =========== =====
</TABLE>

Sales by the selling stockholders in this offering will reduce the number of
shares held by existing stockholders to 22,315,169, or 86% of the total number
of shares of common stock outstanding after this offering, or 85% assuming the
underwriters' over-allotment option is exercised in full, and will increase
the number of shares held by new investors to 3,500,000 shares, or 14% of the
total number of shares of common stock outstanding after this offering, or
4,025,000 or 15% assuming the underwriters' over-allotment option is exercised
in full. See "Principal and Selling Stockholders."

As of December 31, 1998, there were approximately 5,420,577 shares subject
to outstanding options at a weighted exercise price of approximately $3.09 per
share; 14,756 shares of common stock issuable on exercise of an outstanding
warrant at an exercise price of $.51 per share; and 90,358 shares of common
stock issuable on exercise of warrants at an exercise price of $8.30 per
share; and 658,107 shares were reserved for issuance under our stock plans as
of December 31, 1998. To the extent outstanding options and warrants are
exercised, there will be further dilution to new investors. See "Management--
Employee Benefit Plans."

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
------------ ------------ -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenue:
Product license.................... $ -- $ 1,943 $ 8,584
Services........................... -- 1,081 7,621
------------ ------------ -------------
Total revenue....................... -- 3,024 16,205
Cost of revenue:
Product license.................... -- 37 964
Services........................... -- 1,438 9,340
------------ ------------ -------------
Total cost of revenue............... -- 1,475 10,304
------------ ------------ -------------
Gross profit........................ -- 1,549 5,901
Operating expenses:
Research and development........... 892 2,895 6,962
Sales and marketing................ 428 4,964 15,880
General and administrative......... 503 1,333 4,864
Write-off of acquired in-process
research and development.......... 1,865 -- 2,089
Amortization of deferred stock
compensation...................... -- -- 2,475
------------ ------------ -------------
Total operating expenses............ 3,688 9,192 32,270
------------ ------------ -------------
Loss from operations................ (3,688) (7,643) (26,369)
Other income, net................... 62 169 172
------------ ------------ -------------
Net loss............................ $ (3,626) $ (7,474) $ (26,197)
============ ============ =============
Basic net loss per share............ $ (5.76) $ (4.18) $ (9.20)
============ ============ =============
Shares used in computing basic net
loss per share..................... 630 1,788 2,849
Pro forma basic net loss per share.. $ (1.46)
=============
Shares used in computing pro forma
basic net loss per share........... 17,904
</TABLE>

<TABLE>
<CAPTION>
As of December 31,
--------------------------
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $ 1,863 $ 6,865 $ 12,242
Working capital.................................... 1,583 4,255 3,757
Total assets....................................... 2,229 8,499 22,781
Long-term debt and capital lease obligations, less
current portion................................... 198 833 758
Redeemable convertible preferred stock............. 3,458 13,458 36,258
Total stockholders' equity (deficit)............... (1,770) (9,248) (30,767)
</TABLE>

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements."

Overview

Vignette is a leading global provider of Internet Relationship Management
software products and services, a new category of enterprise solutions
designed to enable businesses to build sustainable online customer
relationships, increase the returns on their Internet-related investments and
capitalize on Internet business opportunities. We were founded in December
1995. From December 1995 through December 1996, we devoted our efforts
principally to raising capital, research and development activities, and
establishing markets for our products. As a result, we were considered a
"development stage enterprise" during this period. Beginning in January 1997,
we actively began selling our products. To date, we have developed and
released several versions of our StoryServer product and have sold our
products and services to over 190 clients. We market and sell our products
worldwide primarily through our direct sales force. Our principal office is in
Austin, Texas, and we also have offices in Alexandria, Virginia; Atlanta,
Georgia; Boston, Massachusetts; Chicago, Illinois; Dallas, Texas; Newport
Beach, California; New York, New York; San Mateo, California; Valencia,
California; Hamburg, Germany; London, England; and Sydney, Australia.

We derive our revenue from the sale of software product licenses and from
professional consulting, maintenance and support services. Product license
revenue is recognized when persuasive evidence of an agreement exists, the
product has been delivered, we have no remaining significant obligations with
regard to implementation, the license fee is fixed or determinable and
collection of the fee is probable. Services revenue consists of fees from
professional services and from maintenance and telephone support. Professional
services include integration of software, application development, training
and software installation. We bill professional services fees either on a time
and materials basis or on a fixed-price schedule. We recognize professional
services fees billed on a time and materials basis as the services are
performed. We recognize professional services fees on fixed-price service
arrangements on the completion of specific contractual milestone events, or
based on an estimated percentage of completion as work progresses. Our clients
typically purchase maintenance agreements annually, and we price maintenance
agreements based on a percentage of the product license fee. We price
telephone support based on differing levels of support. Clients purchasing
maintenance agreements receive unspecified product upgrades and electronic,
Web-based technical support, while purchasers of support contracts receive
additional telephone support. We recognize revenue from maintenance and
support agreements ratably over the term of the agreement, typically one year.
We record cash receipts from clients and billed amounts due from clients in
excess of revenue recognized as deferred revenue. The timing and amount of
cash receipts from clients can vary significantly depending on specific
contract terms and can therefore have a significant impact on the amount of
deferred revenue in any given period.

Cost of revenue consists of costs to manufacture, package and distribute our
products and related documentation, as well as personnel and other expenses
related to providing professional services. Since our inception, we have
incurred substantial costs to develop our technology and products, to recruit
and train personnel for our engineering, sales and marketing and professional
services departments, and to establish an administrative organization. As a
result, we have incurred net losses in each fiscal quarter since inception
and, as of December 31, 1998, had an accumulated deficit of $37.3 million. We
anticipate that our operating expenses will increase substantially in future
quarters as we increase sales and marketing operations, develop new
distribution channels, fund greater levels of research and development,
broaden professional services and support, and improve operational and
financial systems. Accordingly, we expect to incur additional losses for the
foreseeable future. In addition, our limited operating history makes it
difficult for us to predict future operating results and, accordingly, there
can be no assurance that we will achieve or sustain revenue growth or
profitability.

19
<PAGE>

We had 310 full-time employees at December 31, 1998, up from 79 and 26 at
December 31, 1997 and 1996, respectively. This rapid growth places a
significant demand on our management and operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect
that future expansion will continue to challenge our ability to hire, train,
motivate, and manage our employees. Competition is intense for highly
qualified technical, sales and marketing and management personnel. If our
total revenue does not increase relative to our operating expenses, our
management systems do not expand to meet increasing demands, we fail to
attract, assimilate and retain qualified personnel, or our management
otherwise fails to manage our expansion effectively, there would be a material
adverse effect on our business, financial condition and operating results.

Results of Operations

Revenue

Total revenue increased from $3.0 million in 1997 to $16.2 million in 1998.
This increase was attributable to an increase in our client base resulting in
substantial growth in product license and services revenue. No one client
accounted for greater than 10% of total revenue during 1998. Two clients
accounted for 24% of total revenue in 1997. We did not have any revenue in
1996, as we were in the development stage.

Product License. Product license revenue increased from $1.9 million in 1997
to $8.6 million in 1998, representing 64% and 53% of total revenue,
respectively. The increase in product license revenue in absolute dollars was
due primarily to an increase in the number of clients resulting from growing
market acceptance of our StoryServer product after the release of StoryServer
3 in September 1997. Product license revenue decreased as a percentage of
total revenue due to the increase in services revenue during the same period.
We first began shipping our products in January 1997.

Services. Services revenue increased from $1.1 million in 1997 to $7.6
million in 1998, representing 36% and 47% of total revenue, respectively.
Services revenue from professional services fees increased from $941,000 in
1997 to $6.2 million in 1998. Services revenue from maintenance and support
agreements increased from $140,000 in 1997 to $1.4 million in 1998. The
increase in all types of services revenue was due primarily to an increase in
the number of clients and sale of product licenses, which generally include or
lead to contracts to perform professional services and purchases of software
maintenance and technical support service agreements.

Services revenue increased as a percentage of total revenue in 1998 due to
the expansion of our services capabilities by hiring additional services
personnel. We believe that growth in our product license sales depends on our
ability to provide our clients with support, training, consulting and
implementation services and educating third-party resellers on how to use our
products. As a result, we invested to expand our professional services
organization in 1998. We do not believe that services revenue will continue to
increase as a percentage of total revenue. We expect that professional
services-related revenue will increase in absolute dollars in the future to
the extent that additional clients license our products and as we expand both
our capacity for the delivery of professional services as well as the scope of
our professional services offerings. We expect that services revenue from
maintenance and support agreements will increase in absolute dollars in the
future due to the maintenance components of new and existing license
agreements.

Cost of Revenue

Product License. Product license costs consist of expenses we incurred to
manufacture, package and distribute our products and related documentation and
costs of licensing third-party software incorporated into our products.
Product license costs increased from $37,000 in 1997 to $964,000 in 1998,
representing 2% and 11% of product license revenue, respectively. The increase
in absolute dollars and as a percentage of product license revenue in 1998 was
primarily attributable to the fact that we entered into an OEM license with
Net Perceptions for its GroupLens Express software that allows us to embed
certain personalization functionality into StoryServer. We expect product
license costs to increase in the future in absolute dollar terms due to
additional clients licensing our products and the acquisition of OEM licenses
to third party technology that we may choose to embed in our product
offerings.

20
<PAGE>

Services. Services costs include salary expense and other related costs for
our professional service, maintenance and telephone support staffs, as well as
third-party contractor expenses. Services costs increased from $1.4 million in
1997 to $9.3 million in 1998, representing 133% and 123% of services revenue,
respectively. The increase in dollar amount was primarily due to startup costs
incurred in connection with beginning and expanding our professional services
organization, and to a lesser extent, the increase in the number of product
license clients, which generally require our professional services. To date,
our services costs have been significantly higher than our services revenue,
and we expect that trend to continue for the foreseeable future as we continue
to expand our professional services organization. Services costs related to
professional services increased from $1.4 million in 1997 to $8.8 million in
1998, representing 144% and 143% of professional services-related revenue.
Services costs related to maintenance and support agreements increased from
$84,000 in 1997 to $510,000 in 1998, representing 60% and 35% of maintenance
and support-related revenue, respectively.

We expect services costs to increase in the future in absolute dollars to
the extent that we continue to generate new clients and associated product
license and services revenue. Services costs as a percentage of services
revenue can be expected to vary significantly from period to period depending
on the mix of services we provide, whether such services are provided by us or
third-party contractors, and overall utilization rates.

Operating Expenses

Research and Development. Research and development expenses consist
primarily of personnel costs to support product development. Research and
development expenses increased from $2.9 million in 1997 to $7.0 million in
1998, representing 96% and 43% of total revenue, respectively. Research and
development expenses increased from $892,000 in 1996 to $2.9 million in 1997.
The increase in absolute dollars in these periods was due to increases in
internal engineering personnel.

We believe that continued investment in research and development is critical
to attaining our strategic objectives, and, as a result, we expect research
and development expenses to increase significantly in absolute dollars in
future periods. To date, all software development costs have been expensed in
the period incurred.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other related costs for sales and marketing personnel, sales
commissions, travel, public relations and marketing materials and tradeshows.
Sales and marketing expenses increased from $5.0 million in 1997 to $15.9
million in 1998, representing 164% and 98% of total revenue, respectively. The
increase in absolute dollars was due to a significant increase in sales and
marketing personnel and our increased marketing program expenditures.

Sales and marketing expenses increased from $428,000 in 1996 to $5.0 million
in 1997. The increase was due to a substantial increase in sales and marketing
personnel and the commencement of the sales and marketing of our products in
January 1997.

We believe these expenses will continue to increase in future periods as we
expect to continue to expand our sales and marketing efforts. We also
anticipate that sales and marketing expenses may fluctuate as a percentage of
total revenue from period to period as new sales personnel are hired and begin
to achieve productivity.

General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and certain facilities-related
expenses. General and administrative expenses increased from $1.3 million in
1997 to $4.9 million in 1998, representing 44% and 30% of total revenue,
respectively. General and administrative expenses increased from $503,000 in
1996 to $1.3 million in 1997. The increase in absolute dollars for these
periods was due to increased personnel and facility expenses necessary to
support our expanding operations and, to a lesser extent, costs related to the
establishment of European operations in November 1997.

21
<PAGE>

We believe general and administrative expenses will increase in absolute
dollars as we expect to add personnel to support our expanding operations,
incur additional costs related to the growth of our business, and assume the
responsibilities of a public company.

Write-off of Acquired In-Process Research and Development. During May 1998,
we acquired from RandomNoise, Inc. certain in-process research and development
effort, a developed product and an insignificant amount of equipment in
exchange for $2.1 million, consisting of $100,000 in cash and 375,830 shares
of our Series G Preferred Stock valued at $2.0 million. The in-process
research and development effort related to the development of a visual
development tool using graphical user interface, or GUI, technology that was
not present in the developed product and not possessed by us. The results of
the in-process research and development effort at the time of purchase had not
progressed to a stage where they met technological feasibility as they lacked
many key elements including: the ability to integrate with database-oriented
dynamic publishing systems; database interfacing capabilities; enhanced and
consistent application performance; memory requirements consistent with those
of our other products; multiple Internet browser recognition capabilities;
standardized documentation; and automated testing capabilities. There existed
a significant amount of uncertainty surrounding the successful development and
completion of the research and development acquired. This was our first
attempt to develop GUI-based technology. We were uncertain of our ability to
complete the development of a new product within a timeframe acceptable to the
market and ahead of competitors. Additionally, the amount of development
required to enable the acquired in-process research and development to be
compatible with StoryServer was significant, which increased the uncertainty
surrounding its successful development. At the time of the transaction, we
estimated that an additional 90 person months or $900,000 would be required to
complete the new GUI-based technology tool, including the key elements
described above. As of December 31, 1998, we had actually incurred 92 person
months or $920,000 and estimated that an additional 13 person months would be
required to meet a targeted release in the first quarter of 1999. If we are
not successful in completing the development within the contemplated
timeframe, we believe that the introduction of the new visual development tool
will be delayed and sales of StoryServer to less sophisticated customers may
be delayed. If a delay occurs, we do not believe it will have a significant
adverse effect on our results of operations.

Substantially all of the $2.1 million purchase price was allocated to the
acquired in-process research and development effort based upon the following:
we assigned no value to the developed product as we do not intend to sell,
support or enhance such product and we believe it has no alternative future
use; the $2.0 million value ascribed to the 375,830 shares of our Series G
Preferred Stock was based on the value per share received from the issuance of
Series F Preferred Stock, which occurred in April 1998; and further, the
allocation of substantially all of the $2.1 million purchase price was
determined to be reasonable based on our estimate of costs we would incur if
we had performed this effort internally. We determined that the value of the
consideration given and the estimate of costs we would incur if we had
performed this effort internally represented the most appropriate bases for
determining the value of the acquired in-process research and development,
because we are developing the new GUI-based technology tool to complement the
current product portfolio and help facilitate sales of other products to
customers with less sophisticated information technology departments. We do
not believe that the incremental impact on future revenues or profit margins
from the sale of the new GUI-based technology tool is an appropriate measure
for the value of the acquired in-process research and development as the
amount of revenues and profit margins from sales of the new GUI-based
technology tool was not the sole determining factor for management's decision
to invest in the acquired in-process research and development. Management
believed that the impact that the new GUI-based technology tool would have on
sales of our other products should also be considered. Management believes
that such impact is most appropriately measured by the value of the
consideration given and the estimated replacement cost.

During July 1996, we acquired from CNET certain software and related
intellectual property rights for 3,669,315 shares of our Series C Preferred
Stock valued at approximately $1.9 million. CNET was using the software
technology for internal Website production purposes and not selling or
marketing the technology. This software technology provided us with the basis
for development of our initial product, StoryServer. At the time of
acquisition, the software technology lacked many key elements essential to the
ultimate product that we would

22
<PAGE>

market and sell, such as an enhanced user interface, expansion to additional
database platforms, an automated install feature, and automated testing
capabilities. A significant amount of uncertainty surrounded the successful
development of StoryServer. At the time the software technology was acquired,
we were still in the formation stage and, we were unproven in our ability to
successfully develop and market any software product. Also, a significant
amount of technical risk existed, as the viability of the intended StoryServer
product would be jeopardized if we were not successful in programming a user
interface, programming an installation and configuration capability, porting
the software to operate on more recent versions or additional platforms such
as the Netscape browser, Sybase, Oracle and Informix database software, and
adding quality assurance test suites. In addition, there was additional risk
associated with the Internet marketplace, since it was still in its infancy as
far as being a viable commercial medium. We incurred approximately an
additional 45 person months or $500,000 to complete the key elements and the
development of the product, which was completed in December 1996. Due to the
level of uncertainty surrounding the successful development of the acquired
in-process research and development at the time of acquisition and the
inability to accurately forecast a revenue stream and profit margin from
expected sales of the intended StoryServer product, we believed that the most
appropriate determination of the value of the acquired in-process research and
development was the amount of consideration given. Accordingly, all of the
approximately $1.9 million purchase price was allocated to acquired in-process
research and development efforts.

Amortization of Deferred Stock Compensation. In 1998, we recorded total
deferred stock compensation of $8.7 million in connection with stock options
granted during 1998. We are amortizing this amount over the vesting periods of
the applicable options, resulting in amortization expense of $2.5 million in
1998. These amounts represent the difference between the exercise price of
certain stock option grants and the deemed fair value of our common stock at
the time of such grants.

Other Income, Net

Other income, net consists of interest income and expense and gain or loss
on disposals of equipment. Other income, net increased from $169,000 in 1997
to $172,000 in 1998. The slight increase was due to a $272,000 increase in
interest income earned from cash balances on hand in 1998 over 1997, partially
offset by a $63,000 increase in loss on disposals of equipment and a $206,000
increase in interest expense in 1998 over 1997. Proceeds from the private sale
of equity securities in 1997 and 1998 caused cash and short-term investment
balances in 1997 and 1998 to be higher than the comparable prior periods.
Other income net increased from $62,000 in 1996 to $169,000 in 1997. The
increase was due to increased interest income earned from cash balances on
hand, partially offset by loss on disposals of equipment and increased
interest expense in 1997 compared to 1996.

23
<PAGE>

Quarterly Results

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

<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Product license........ $ 249 $ 402 $ 528 $ 764 $ 1,293 $ 1,629 $ 2,230 $ 3,432
Services............... 7 75 455 544 958 1,293 2,108 3,262
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 256 477 983 1,308 2,251 2,922 4,338 6,694
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Product license........ 3 8 13 13 25 219 266 454
Services............... 111 174 389 764 850 1,867 2,862 3,761
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 114 182 402 777 875 2,086 3,128 4,215
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 142 295 581 531 1,376 836 1,210 2,479
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 539 630 737 989 1,112 1,867 1,861 2,122
Sales and marketing.... 516 919 1,435 2,094 1,677 3,324 4,397 6,482
General and
administrative........ 157 202 359 615 698 1,134 1,619 1,413
Write-off of acquired
in-process research
and development....... -- -- -- -- -- 2,089 -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- 16 499 352 1,608
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,212 1,751 2,531 3,698 3,503 8,913 8,229 11,625
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,070) (1,456) (1,950) (3,167) (2,127) (8,077) (7,019) (9,146)
Other income, net....... 8 6 74 81 38 25 141 (32)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,062) $(1,450) $(1,876) $(3,086) $(2,089) $(8,052) $(6,878) $(9,178)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenue:
Revenue:
Product license........ 97% 84% 54% 59% 58% 56% 51% 51%
Services............... 3 16 46 41 42 44 49 49
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Product license........ 1 2 1 1 1 7 6 7
Services............... 44 36 40 58 38 64 66 56
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 45 38 41 59 39 71 72 63
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 55 62 59 41 61 29 28 37
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 210 132 75 76 49 64 43 31
Sales and marketing.... 202 193 146 160 75 114 102 97
General and
administrative........ 61 42 37 47 31 39 37 21
Write-off of acquired
in-process research
and development....... -- -- -- -- -- 71 -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- 1 17 8 24
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 473 367 258 283 156 305 190 173
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (418) (305) (199) (242) (95) (276) (162) (136)
Other income, net....... 3 1 8 6 2 1 3 (1)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ (415)% (304)% (191)% (236)% (93)% (275)% (159)% (137)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

Our total revenue has increased in each quarter following commercial release
of our StoryServer software in January 1997. The increase in each quarter is
due to the increase in the number of customers resulting from increased market
awareness and acceptance of our software, expansion of our sales organization,
including the

24
<PAGE>

establishment of European sales operations in November 1997, and increased
maintenance and support and service revenues reflecting the growth in the
installed base of product licenses.

Cost of revenue has increased each quarter in conjunction with our increases
in total revenue. Product license costs were higher in the quarters ended June
30, 1998 through December 31, 1998 primarily due to the fact that we entered
into an OEM license with Net Perceptions in the quarter ended June 30, 1998.
Services costs increased during the quarter ended December 31, 1997 due to
increased services performed by our staff and increased usage of third-party
consultants. Services costs increased during the quarters ended June 30, 1998
through December 31, 1998 due to increased usage of third-party consultants
and salaries and related costs for increased professional service personnel in
each period.

Operating expenses have generally increased in absolute dollars each quarter
as we have increased staffing in sales and marketing, product development and
general and administrative functions. During the quarter ended June 30, 1998,
we purchased in-process research and development from RandomNoise for $2.1
million, which was immediately expensed to acquired in-process research and
development. Sales and marketing expenses increased in the quarters ended
December 31, 1997 and 1998 primarily due to the sales staff achieving sales
quotas for the years ended 1997 and 1998, which resulted in sales commissions
and incentives being paid in the fourth quarter. Sales and marketing expenses
increased during the quarter ended June 30, 1998 due to increased travel and
presales costs in conjunction with increased client sales efforts in the
period, costs incurred for the recruitment of additional sales and marketing
staff and increases in sales and marketing personnel. Sales and marketing
expenses increased during the quarter ended September 30, 1998 and December
31, 1998 due to increases in sales and marketing personnel and our increased
marketing program expenditures. In 1998, we recorded total deferred stock
compensation of $8.7 million in connection with stock options granted during
1998. We amortized this amount over the vesting periods of the applicable
options, resulting in amortization expense of $16,000, $499,000, $352,000 and
$1.6 million in the quarters ended March 31, June 30, September 30 and
December 31, 1998, respectively.

As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in
part on future revenue projections. Most of these expenses are fixed in the
short term, and we may not be able to quickly reduce spending if revenues are
lower than we have projected. Our ability to forecast accurately our quarterly
revenue is limited due to the long sales cycle of our software products, which
makes it difficult to predict the quarter in which license sales will occur,
and the variability of client demand for professional services. We would
expect our business, operating results and financial condition to be
materially adversely affected if revenues do not meet projections and that net
losses in a given quarter would be even greater than expected.

We expect our revenues and operating results may vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:

. Demand for our products and services;

. The timing of sales of our products and services;

. Unexpected delays in introducing new products and services;

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

. Changes in the rapidly evolving market for Internet Relationship
Management solutions;

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

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

. The mix of domestic and international sales; and

. Costs related to possible acquisitions of technology or businesses.

We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our

25
<PAGE>

business, operating results or financial condition could be materially
adversely affected and net losses in a given quarter would be even greater
than expected.

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

Net Operating Losses and Tax Credit Carryforwards

As of December 31, 1998, we had net operating loss and research and
development carryforwards of approximately $27.0 million and $560,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates, beginning 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses
and tax credits in the event of an "ownership change" of a corporation. Our
ability to utilize net operating loss carryforwards on an annual basis will be
limited as a result of a prior "ownership change" in connection with private
sales of equity securities. We have provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its realization. Our
accounting for deferred taxes under Statement of Financial Accounting
Standards No. 109 involves the evaluation of a number of factors concerning
the realizability of our deferred tax assets. In concluding that a full
valuation allowance was required, management primarily considered such factors
as our history of operating losses and expected future losses and the nature
of our deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.

Liquidity and Capital Resources

Since our inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities,
resulting in net proceeds of $36.1 million through December 31, 1998. Cash
used in operating activities was $1.5 million, $4.9 million, and $17.2 million
in 1996, 1997 and 1998, respectively. The $17.2 million of cash used in
operating activities for the year ended December 31, 1998 includes an increase
in client accounts receivables of approximately $6.8 million from December 31,
1997. This increase is directly attributable to increased client contracts
signed at the close of the quarter ended December 31, 1998 containing
immediate invoicing terms.

To date, our investing activities have consisted primarily of capital
expenditures totaling $318,000, $694,000 and $2.2 million in 1996, 1997, and
1998, respectively, to acquire property and equipment, mainly computer
hardware and software, for our growing employee base. We expect that our
capital expenditures will increase as our employee base grows. At December 31,
1998, we did not have any material commitments for capital expenditures.

At December 31, 1998, we had $12.2 million in cash and cash equivalents and
$3.8 million in working capital. Net cash provided by financing activities in
1996, 1997 and 1998 were $3.7 million, $10.6 million and $24.8 million,
respectively. We have a $8.0 million revolving line of credit and a $2.0
million equipment line of credit with Imperial Bank that each bear interest at
the bank's prime rate plus 0.75%. At December 31, 1998, $1.5 million and $1.2
million are outstanding under the revolving and equipment lines of credit,
respectively. These lines of credit are secured by all of our tangible and
intangible personal property. We are currently in compliance with all related
financial covenants and restrictions.

In addition, at December 31, 1998, we have agreements with Comdisco, Inc.
providing for available credit of up to $5.0 million over a period of 36
months at an interest rate of 12% per year, an equipment lease line of $1.25
million over a period of 36 months at an interest rate of 7.5% per year and
the issuance to Comdisco, Inc. of warrants to purchase 90,358 shares of Series
H Preferred Stock at an exercise price of $8.30 per share. The line of credit
with Comdisco, Inc. is secured by our receivables, equipment, fixtures,
inventory and all other tangible property and is subordinated to our
indebtedness to Imperial Bank. The warrants will expire three years

26
<PAGE>

from the date of this offering. In addition, Comdisco, Inc. has the right to
purchase additional warrants in the event we increase our equipment lease line
or fail to repay our credit line by the maturity date.

We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents, short-term investments and commercial credit
facilities will be sufficient to meet our working capital requirements for at
least the next 12 months. Thereafter, we may require additional funds to
support our working capital requirements or for other purposes and may seek to
raise such additional funds through public or private equity financings or
from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing will be obtainable
on terms favorable to us or that any additional financing will not be
dilutive.

Recent Accounting Pronouncements

SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supercede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on our financial results. However, full
implementation guidelines for this standard have not yet been issued. Once
available, our current revenue accounting practices may need to change and
such changes could affect our future revenue and earnings. SOP 98-9, which was
issued in December 1998, amends SOP 97-2 and SOP 98-4. We are required to
adopt SOP 98-9 in the year ended December 31, 2000. We do not expect such
adoption will have a significant effect on our results of operations.
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income, or FAS 130. FAS 130 requires
disclosures of total non-stockholder changes in equity in interim periods and
additional disclosures of components of non-stockholder changes in equity on
an annual basis. In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, or FAS 131. The Company
adopted FAS 131 for the year ended December 31, 1998. The adoption of this
standard did not have a material effect on our financial disclosures.

Year 2000 Compliance

The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example,
software with date-sensitive functions that is not Year 2000 compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results.

We have conducted the first phases of a Year 2000 readiness review for the
current versions of our products. The review includes assessment and
implementation, which includes remediation, upgrading and replacement of
certain product versions, as well as validation testing, and contingency
planning. We continue to respond to customer questions about prior versions of
our products on a case-by-case basis.

We have largely completed all phases of our plan, except for contingency
planning, with respect to the current versions of all of our products. As a
result, the current versions of each of our products are "Year 2000
Compliant," as defined below, when configured and used in accordance with the
related documentation, and provided that the underlying operating system of
the host machine and any other software used with or in the host machine or
our products are also Year 2000 Compliant. The initial release of StoryServer
4 required a patch to fix a minor error in a third-party product included in
StoryServer 4. We have provided the patch on our Web site in order to be Year
2000 Compliant.

We have defined "Year 2000 Compliant" as the ability to:

(a) correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;

(b) function according to the product documentation provided for this
date change, without changes in operation resulting from the advent of a
new century, assuming correct configuration;

27
<PAGE>

(c) where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner;

(d) if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways that are
unambiguous as to century; and

(e) recognize year 2000 as a leap year. We have not tested our products
on all platforms or all versions of operating systems that we currently
support.

We have tested software obtained from third parties (licensed software,
shareware, and freeware) that is incorporated into our products, and are
seeking assurances from our vendors that licensed software is Year 2000
Compliant. Despite testing by us and by current and potential clients, and
assurances from developers of products incorporated into our products, our
products may contain undetected errors or defects associated with Year 2000
date functions. Known or unknown errors or defects in our products could
result in delay or loss of revenue, diversion of development resources, damage
to our reputation, or increased service and warranty costs, any of which could
materially adversely affect our business, operating results, or financial
condition. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it
is uncertain whether or to what extent we may be affected by it.

Vignette's internal systems include both our information technology, or IT,
and non-IT systems. We have initiated an assessment of our material internal
IT systems, including both our own software products and third-party software
and hardware technology, but we have not initiated an assessment of our non-IT
systems. We expect to complete testing of our IT systems in 1999. To the
extent that we are not able to test the technology provided by third-party
vendors, we are seeking assurances from such vendors that their systems are
Year 2000 Compliant. Although we are not currently aware of any material
operational issues or costs associated with preparing our internal IT and non-
IT systems for the Year 2000, we may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology
used in our internal IT and non-IT systems.

We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current and potential clients may incur
significant expenses to achieve Year 2000 compliance. If our clients are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate budgets that current or potential customers could have for
purchases of our products and services. As a result, our business, results of
operations or financial condition could be materially adversely affected.

We have funded our Year 2000 plan from available cash and have not
separately accounted for these costs in the past. To date, these costs have
not been material. We will incur additional costs related to the Year 2000
plan for administrative personnel to manage the project, outside contractor
assistance, technical support for our products, product engineering and
customer satisfaction. We may experience material problems and costs with Year
2000 compliance that could adversely affect our business, results of
operations and financial condition.

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<PAGE>

BUSINESS

Overview

We are a leading global provider of Internet Relationship Management
software products and services, a new category of enterprise solutions
designed to enable businesses to build sustainable online customer
relationships, increase the returns on their Internet-related investments and
capitalize on Internet business opportunities. Our Internet Relationship
Management solutions allow businesses to create and manage Internet business
channels that are designed to attract, engage and retain online customers. By
using Vignette's solutions, our clients can build Internet Relationship
Management applications that are intended to convert more Web site visitors
into long-term customers and generate opportunities for increased Web-based
revenue and market share. Since shipping our first products in 1997, we have
received 13 awards for our industry leadership and product capabilities
including Best Products/Best Private Company from The Red Herring magazine and
the Editor's Choice Award from Seybold Publications.

Our StoryServer 4 application platform incorporates an enterprise-class
architecture and leading-edge Internet technology that enables companies to
develop, deploy and manage advanced online businesses that increase Internet-
based revenue opportunities and permit superior relationship management on the
Web. Through the integration of advanced content management, lifecycle
personalization and decision support tools, StoryServer 4 allows our clients
to engage their Web site visitors with personalized interactions that provide
value and convenience to stimulate buying and ongoing customer loyalty. We
also provide a set of tools built for the StoryServer 4 platform that enables
both business and technical managers to interact with customers through the
Web site and efficiently control the operation of the site. We will further
enhance our solution set with Vignette Syndication Server, a new software
platform formally announced in October 1998 and expected to be shipped in the
first quarter of 1999. We designed Vignette Syndication Server to enable
businesses to build and manage value-added distribution networks whereby a
company can distribute its electronic goods and services outside of its own
Web site through a network of reseller, affiliate, and partner Web sites, or
its "Customer Chain." These super-distribution capabilities will enable our
clients to extend their online reach and increase Web-based revenue
opportunities. We complement our products with a professional services
organization that offers a range of services including strategic planning,
project management and implementation. We designed these services to improve
our clients' competitive position, shorten time-to-market and reduce project
implementation risk. Our ability to successfully deliver an integrated
solution to our clients provides us with a significant competitive advantage
in the market for Internet Relationship Management products and services.

We market our products and services globally through our direct sales force,
resellers and systems integrators to businesses seeking to enhance the value
of their Web-based relationships, maximize the return on their Internet-
related investments and capitalize on the substantial growth of the Internet
as a new marketing and distribution channel. We also leverage strategic
alliances with a number of technology and Internet organizations to increase
the penetration and market acceptance of our Internet Relationship Management
platform, development tools and professional services. To date, we have
licensed the StoryServer software platform to more than 190 clients worldwide
in a variety of industries including retail, financial services,
telecommunications, technology and media. Our clients include Bank One,
Charles Schwab and Company, Chicago Tribune, Lands' End, National
Semiconductor, Nokia and Preview Travel.

Industry Background

The emergence and acceptance of the Internet and the World Wide Web has
fundamentally changed the way that consumers and businesses communicate,
obtain information, purchase goods and transact business. International Data
Corporation, or IDC, estimates that the number of Internet users worldwide
will grow from

29
<PAGE>

approximately 69 million in 1997 to 320 million in 2002. IDC also estimates
that revenue generated from Internet commerce will exceed $400 billion by
2002. As the Internet has become more accessible, functional and widely used,
it has emerged as a primary business channel alongside the telephone, paper-
based communication and face-to-face interaction. For instance, businesses are
increasingly using the Web as both a marketing tool and distribution channel
to communicate and conduct business with partners, customers and employees.

Origins of Online Business

The growth in the number of Internet users, as well as the open nature of
the Internet, has led many businesses to seek new ways to take advantage of
this global platform. The earliest business use of the Internet was the
creation of informational Web sites, which typically involved merely
reformatting existing marketing materials to create an online brochure. This
simple use of the Internet to present static information was quickly
supplanted by the first generation of electronic commerce businesses. The
introduction of new technology enabled businesses to create Web sites for
online publishing, which were financed by advertising, and electronic catalog
businesses where hard goods such as books or computers could be sold. These
Internet businesses focused on developing a basic advertising and transaction
infrastructure rather than capitalizing on the unique aspects of Internet
commerce. In addition, these first generation online businesses were based on
traditional, physical world business models and were differentiated only by
wider selection and lower prices. Success for these businesses was measured by
the total amount of Web site traffic.

Advertising- and transaction-based Internet business models have been
successful in generating online transactions. However, as the number of
companies attempting to conduct business online has increased, the Web has
become a highly competitive business environment in which customers have a
large number of easily accessible choices, eroding customer loyalty. As a
result, it is becoming increasingly difficult for businesses on the Internet
to reach their target audiences, build customer loyalty and differentiate
themselves from their competitors using business strategies taken from the
physical world. Consequently, online businesses are finding it increasingly
expensive to locate and attract the right types of Web site visitors and
increasingly difficult to convert these visitors into profitable and long-term
customers.

Evolution of Online Business

As the next generation of online business models evolve, companies are
changing the ways they measure their success online. Both advertising- and
commerce-based businesses have begun to use the percentage of Web site
visitors that actually transact business, or the conversion rate, as the key
gauge of their effectiveness in attracting and retaining loyal customers out
of their total Web site visitor population. According to Forrester Research,
the current average conversion rate for first-time visitors to an electronic
commerce Web site is 2.7%, a rate similar to unsolicited direct mailings. To
address this problem, businesses are beginning to focus their strategies on
increasing online conversion rates by more effectively engaging a new type of
"connected customer." Connected customers are individuals who place more value
on information convenience, online advisory services and improved access to
products and services, than on price and physical geographic location.

To capture the connected customer, businesses must focus on developing and
executing a new set of online strategies to build long-term customer
relationships and strengthen customer loyalty. To attract connected customers,
businesses must provide users with more relevant and targeted experiences each
time they interact with the company online. To achieve this objective,
businesses must provide potential customers with greater information
convenience, online advisory services and improved access to products and
services.

For the connected customer, information convenience means having all of the
data necessary to make a decision at one Web site. As a result, businesses are
finding it necessary to broaden their Web offerings beyond their own products
and services. Many online businesses are acquiring rich, third-party content
and product lines that allow them to deliver highly interactive, topical
portals that provide the convenience of one-stop shopping. For example, an
online stock brokerage firm might license daily industry news, company
analyses, and financial planning articles to provide their customers with a
complete set of financial management information on a single Web site.

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Increasingly, businesses must also offer online advisory services to provide
the expertise the customer needs to make an informed purchasing decision. For
example, an online travel agency might add advisory services that help
vacation travelers perform extensive pre-purchase research on their favorite
destinations. Through highly personalized services based on the collection and
analysis of customer profiles, businesses can enhance the lifetime value of
each customer, increase customer switching costs and create strong competitive
barriers.

Businesses also are extending their online reach to engage potential
customers in more online locations than just their own Web sites. To increase
Web-based revenues, businesses need to maximize not only the number of
visitors and customers coming to their own Web sites, but also their total
online reach across their entire Customer Chain. For example, a business that
sells books online needs to reach not only the buyers that come to its own Web
site, but also visitors to other book-related sites, such as locations
dedicated to authors, book reviews and literature. In effect, it is as
necessary for businesses to create broad distribution and reseller
relationships online as it is in the physical world in order to have as many
points of contact with the customer as possible. The creation of such a super-
distribution model forms an instantaneous, worldwide distribution system. The
Internet has made it possible for all companies to have a worldwide online
distribution system, a system that was previously available only to large
companies that could afford to build out such a network in the physical world.

Need for Comprehensive Internet Relationship Management Solutions

As online business models evolve and the amount of business transacted on
the Web increases, enterprises are seeking new Internet solutions that will
enable them to develop, maintain and leverage relationships with customers and
affiliates. Much as companies adopted Enterprise Resource Planning software in
the late-1980s to manage back-office operations and Sales Force Automation
software in the mid-1990s to manage front-office operations, many businesses
are now searching for Internet Relationship Management software solutions to
help them manage their online customer relationships. Businesses realize that
Internet Relationship Management solutions, like other enterprise solutions,
are mission-critical and pose significant technological challenges that
require large resource commitments. For example, early adopters of Internet
Relationship Management strategies, such as Amazon.com, built in-house
solutions that required significant custom development, evaluation,
implementation and integration of disparate technologies and platforms.
Companies building these solutions internally face long development cycles,
high ongoing maintenance costs, and limited functionality and scalability.

Accelerated adoption of the Internet as a business channel is driving
businesses to seek enterprise software providers that have the expertise to
deliver solutions that minimize their time to market and maximize the value of
their Internet investment. To date, software providers have focused on
developing applications that managed discrete portions of Internet
Relationship Management, such as transaction management, catalog tools,
collaborative filtering/personalization, authoring, site management and
application development. Today, however, businesses are increasingly demanding
an integrated package of platforms, tools and applications that address all
aspects of Internet Relationship Management, rather than point products and
toolkits. A fully integrated Internet Relationship Management solution must
include the ability to attract, engage and retain customers and understand
their needs and preferences via a direct relationship through a company's Web
site. This solution also must enable companies to create and manage Customer
Chains, value-added distribution networks whereby a company can distribute its
electronic goods and services outside of its own Web site through a network of
reseller, affiliate and partner Web sites. These requirements demand an
Internet Relationship Management solution that supports advanced content
management and syndication, personalization and decision support capabilities.

The Vignette Solution

We are a leading global provider of Internet Relationship Management
software products and services specifically designed to enable businesses to
enhance the value of their Web-based relationships, maximize the return on
their Internet-related investments and capitalize on the substantial growth of
the Internet as a new business channel. Our Internet Relationship Management
solutions enable businesses to create and manage Internet business channels
that are designed to attract, engage and retain online customers. We believe
our

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<PAGE>

solutions allow our clients to increase their online effectiveness and improve
customer conversion rates, resulting in opportunities for greater Web-based
revenues and market share. Our integrated solution set includes an enterprise-
class Internet application platform, as well as a set of tools for business
and technical managers to interact with customers through the Web site and
control its operation. Vignette Syndication Server, formally announced in
October 1998, will extend our application platform to enable our clients to
create and manage Customer Chains. We are focused on continuing to develop and
extend our product and service offerings to provide our clients with a
comprehensive means for building, managing and delivering sophisticated
Internet Relationship Management solutions, thereby increasing our clients'
return on their Internet investments.

We believe our comprehensive, integrated Internet Relationship Management
solutions represent a fundamentally new approach to doing business on the
Internet and provide our clients with the following benefits:

Higher Customer Conversion and Retention Rates. Our products and services
enable our clients to use the Internet as a channel to build profitable, long-
term customer relationships and to use those relationships to create new
marketing opportunities to drive revenue growth. Businesses that use our
solutions can develop Internet applications that interact, as opposed to
solely transact, with Web visitors. For instance, our Internet Relationship
Management platform incorporates unique lifecycle personalization technology
that allows our clients to create personalized Web experiences that engage
visitors and encourage return visits through tailored, customized
interactions. We believe that these personalized experiences enhance customer
loyalty, satisfaction and retention, resulting in higher conversion rates. By
creating Internet applications that are designed to appeal to new customers
and promote long-term, online customer relationships, businesses are better
positioned to capture increased online revenues.

Increased Revenue Opportunities through More Flexible Business Model. Our
solutions are designed to enable our clients to pursue a broad range of
business opportunities that enhance Web-based revenues, such as co-branding,
multiple Web site production and super-distribution. Our clients have obtained
partner license fees in return for co-branding their Web sites with partner
logos, content and navigation. For example, a major portal provider has co-
branded its destination with over 100 Internet Service Providers, or ISPs,
with each version of the Web site targeted specifically for that ISP's
customer base. In return, this portal receives significant royalty payments
from each ISP with very little actual cost to produce the branded Web site.
Our multiple Web site production capabilities have enabled a major online news
provider to use a small team to create over 200 online community Web sites
that are specific to urban areas in and around their local community. Each
community has its own Web site that contains local advertising and content.
The news provider was able to generate increased advertising revenue from
these localized Web sites.

Rapid Time To Market. Businesses using our solutions can develop Internet
Relationship Management applications more rapidly than most other third-party
or in-house alternatives. As a result, our solutions permit businesses to
expand their existing online business and enter into new online markets on an
accelerated time frame. Clients benefit from our component-based application
architecture that maximizes content and application reusability and Web site
performance. Many of our clients take an integrated approach to the
construction and delivery of their relationship management applications. Our
professional services organization provides these clients with business
strategy consulting, project management and application development
implementation. Our integrated approach to delivering our products and
services permits our clients to deploy Internet Relationship Management
solutions quickly and cost-effectively, thereby increasing online revenues and
market share.

Increased Operational Control of Internet Applications at a Lower Effective
Cost. Our Internet Relationship Management solutions permit clients to manage
their Internet business channels more efficiently and with greater control
than most in-house or other third-party alternatives. Our product features
also dramatically reduce the amount of labor and capital expenditure required
to operate and maintain sites on the Internet. Our solutions incorporate: (a)
content management capabilities designed to increase the efficiency of team-
based Web site production, enhance application developer productivity and
reduce maintenance costs;

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<PAGE>

(b) decision support capabilities that allow businesses to analyze customer
preferences, examine demographic segmentation and determine the popularity of
individual products and services; and (c) a scalable application server
platform which is capable of handling a very large number of Web site visitors
with optimized performance while substantially curtailing Web server hardware
expenditures. Our products and services provide clients with greater
operational control and compelling cost advantages in operating and
maintaining their Web sites, as well as in the cost of customer acquisition
and retention.

Strategy

Our objective is to enhance our position as a leading global provider of
Internet Relationship Management solutions. To achieve this objective, we have
adopted the following strategies:

Maintain Leadership in Internet Relationship Management Solutions
Market. Our industry-leading Internet Relationship Management solutions enable
enterprises to build and deploy effective online businesses. Our StoryServer 4
application platform allows businesses to maximize their online potential by
offering relevant products and services to the appropriate customer audience,
thereby increasing customer conversion rates and strengthening customer
loyalty. With our recently announced Vignette Syndication Server, we will
offer a platform for creating a new category of easily-deployed, enterprise
applications that will enable businesses of any size to achieve instantaneous,
online distribution of their products and services across an extensive network
of reseller, affiliate and partner Web sites. In the future, we intend to
maintain our leadership position by developing new Internet Relationship
Management products and services to help businesses generate new online
revenue opportunities.

Expand Sales Channels to Drive Market Penetration. We are working to
increase customer adoption of our solutions by expanding our direct sales
operations and our indirect sales channels through additional relationships
and strategic alliances with key systems integrators, value-added resellers,
or VARs, and original equipment manufacturers, or OEMs. We believe that a
multi-channel sales effort will broaden customer awareness of our products and
will allow us to effectively target a wide variety of industries that would
benefit from our solutions.

Expand International Presence. We believe that there will be significant
international opportunities for our products and services and continue to
expand our global marketing and distribution efforts to address the range of
markets and applications for our Internet Relationship Management solutions.
We plan to continue aggressive expansion of our international presence by
adding direct sales personnel and increasing our indirect sales channels to
fully capitalize on international market opportunities. We have opened sales
offices in Hamburg, Germany, London, England and Sydney, Australia and intend
to continue our expansion throughout Europe, Asia and those regions where
businesses and other institutional clients are using distributed networks and
the Internet to create sales opportunities.

Leverage Professional Services Capabilities. We have established successful
relationships with our clients by serving as an advisor in developing and
deploying Internet Relationship Management solutions. We are extending our
direct professional services capabilities to provide an expanded set of
services to address such areas as online business strategy, project management
and application development. In addition, we intend to offer similar high-
quality professional services capabilities through third-party alliances and
are currently focused on the development of relationships with VARs and
systems integrators. By offering our clients a full range of professional
services on a global basis, we believe we can broaden market awareness about
the advantages of our Internet Relationship Management solutions and create
opportunities to sell new or enhanced products to clients.

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<PAGE>

Products

Our integrated solution set includes an enterprise-class Internet
application platform, tools for both business and technical managers to
interact with customers through the Web site and our recently announced
Vignette Syndication Server that is designed to enable businesses to create
and manage Customer Chains. The following table summarizes our current and
future products:

<TABLE>
<CAPTION>
Category Features Shipment Dates
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Platforms
. StoryServer 4 Designed to develop and manage Internet Available July 1998.
Relationship Management applications. Runs First version of
on Sun Solaris or Windows NT servers and StoryServer shipped in
supports Oracle, Sybase, Informix and January 1997.
Microsoft SQL databases.
. Vignette Syndication Designed to enable businesses to create and Anticipated first quarter
Server manage Customer Chains - the distribution 1999.
and resale of online products and services
through reseller, affiliate and partner Web
sites.
Tools
. Production Center Designed for team-based project and content Shipped with StoryServer
management. Allows authors, editors, 4 in July 1998. First
designers, developers and business managers version shipped in
to work collaboratively in the production September 1997.
of the Internet Relationship Management
application and Web site.
. Business Center Enables business managers to analyze and
report on Web site visitor demographics and Shipped with StoryServer
behavior data. 4 in July 1998.
. Development Center A visual development tool designed to Anticipated first half of
reduce the time to deploy critical Web 1999.
business applications by simplifying
programming and permitting a wider range of
users to develop Internet Relationship
Management applications.
. Distribution Center Enables a business manager to create online Anticipated first quarter
build-to-order products for affiliates and 1999.
manage the distribution of those products
across affiliated Web sites.
</TABLE>

Platforms

StoryServer 4. StoryServer 4 is an Internet Relationship Management
application platform that enables our clients to create and manage customer
relationships online. StoryServer 4 incorporates three key capabilities:
advanced content management, lifecycle personalization and decision support.
StoryServer 4 enables businesses to create and manage mission critical
Internet applications that attract, engage and retain online customers. We
believe that StoryServer 4 increases Web site visitor conversion rates and
strengthens customer loyalty, resulting in higher Web-based revenues for our
clients.

Vignette Syndication Server. In October 1998, we formally announced Vignette
Syndication Server and plans to ship the product in early 1999. Vignette
Syndication Server is designed to enable businesses to create and manage
integrated Customer Chains. The Vignette Syndication Server operates on the
same platforms as StoryServer 4 and requires StoryServer 4 to syndicate
content but not to receive content. There can be no assurance that we will be
successful in developing and marketing Vignette Syndication Server or our
related tools on a timely basis or that Vignette Syndication Server will
achieve commercial acceptance.

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<PAGE>

Tools

Production Center. Production Center provides an environment for team-based
project and content management by centralizing the elements of content
application development and deployment. This tool allows authors, editors,
designers, developers and business managers to work collaboratively. With
Production Center, each type of user involved in content development and
deployment is dedicated a different area of the desktop application.

Business Center. Business Center enables business managers to analyze and
report on visitor demographic and behavior data collected by StoryServer 4.
This tool allows business managers to gain an in-depth understanding of the
needs and preferences of their Web site visitors and customers. With this
knowledge, managers can improve the design of and visitor interaction with the
Web site, thereby increasing conversion rates and revenues.

Development Center. In the first half of 1999, we plan to introduce and ship
Development Center, a visual environment for building Internet applications.
Development Center is being designed to reduce the time to deploy Internet
Relationship Management solutions by simplifying programming and permitting a
wider range of users to develop Internet Relationship Management applications.

Distribution Center. Distribution Center, expected to be shipped in the
first quarter of 1999 as part of Vignette Syndication Server, is being
designed to enable business managers to develop online products and content
for distribution to resellers, affiliates and partners in their Customer
Chains. Distribution Center is also being designed to allow these managers to
create and manage the business rules and relationships associated with each of
the resellers, affiliates and partners in their Customer Chains.

Vignette Professional Services

The Vignette Professional Services, or VPS, organization is integral to our
ability to provide our clients with an innovative and comprehensive Internet
Relationship Management solution. VPS has over 100 staff years of combined
software project management experience. VPS helps clients define, design and
rapidly implement successful Internet businesses with innovative Internet
Relationship Management applications. VPS focuses its consulting services on
influencing the client's ability to understand and build online relationships
with their customers. The goals of the VPS organization are to mitigate
initial implementation risks, improve the time to market and integrity of the
solution and provide competitive advantages to and share best practices with
client project teams. We charge for our services on either a time and
materials basis or on a fixed fee basis, and provide our services through our
VPS practices in San Francisco, California; Austin, Texas; Boston,
Massachusetts; New York, New York; London, England; and Sydney, Australia.

We currently offer our customers a broad spectrum of services across the
design, implementation and ongoing support stages of an Internet Relationship
Management system deployment including the following:

. strategic business consultation;

. needs analysis;

. architectural analysis and performance planning;

. Internet Relationship Management project management;

. technical site design;

. development and deployment;

. software integration; and

. client education and training.

In the design stage, VPS provides a variety of services that help ensure
that the client and VPS understand the client's business objectives and
determine the technical requirements of the Internet Relationship

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<PAGE>

Management application implementation. In the implementation stage, we utilize
our Site Development Methodology to ensure that the project is well managed. At
this stage, VPS's extensive experience with Web site design reduces technical
project risk and ensures proper integration of any third-party software.
Finally, VPS offers comprehensive education and training to enable a client's
internal team to seamlessly assume control over ongoing support of the Web
site.

The following graphic depicts the services that we provide across the three
stages of an Internet Relationship Management system deployment:

[GRAPHIC APPEARS HERE]

Vignette has established complementary relationships with several service
partners including Pencom, WebWorks, Perficient, Octane, North American Media
Engines, as well as a number of leading graphic design firms and business
integrators. These partners provide VPS with a substantial network of
expertise, as well as the ability to lead large and complex projects and
deliver a complete solution.

Clients

To date, Vignette had licensed versions of its products to over 190 clients.
Chicago Tribune and Preview Travel accounted for approximately 13% and 11%,
respectively, of our total revenue for 1997. No one client accounted for more
than 10% of the total revenue in 1998. Vignette's clients represent a broad
spectrum of enterprises within diverse sectors, including financial services,
health, education and government, media, retail, services, technology and
telecommunications.

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The following is a partial list of our clients that have purchased licenses
and/or services from us and that we believe are representative of our overall
client base.

Financial Services Time Inc. New Media
Bank One Tribune Media Services
Ceridian The Trip.Com
World Media Online
Charles Schwab and Company
Citicorp Ziff Davis Publishing

First Chicago Retail
Bookcraft
First Union National
Interactive Investor International Lands' End
Massachusetts Mutual Life Insurance Wherehouse Entertainment
Company Whole Foods

The Mutual Life Insurance Company of Services
New York American Business Information
New York Life Insurance Company Atevo
PaineWebber Browning-Ferris Services
RBC Dominion (Royal Bank of Canada)

DHL Worldwide Express
Health, Education, and Government EDS
American Medical Association Forrester Research
City of San Carlos Hoover's
Columbia University Intelliquest
The Family Education Co. Lufthansa Executive Network
Kaplan Education Centers PECO Energy
National Cancer Institute Preview Travel
United Healthcare Services
Shell

USDA Graduate School

Technology
Media Advanced Micro Devices
Bertelsmann Bay Networks
Cendant Software Online Services
CBS Broadcasting
CBS Sportsline Emprise Corporation
Chicago Tribune Excite
City Online BV
CNET Hewlett-Packard
I3S
Deseret News Publishing National Semiconductor
Direct Medical Knowledge Seagate Technology
Electronic Newsstand Siemens Business Communication
Systems
The Guardian
Hollywood Online Sun Microsystems
The Houston Chronicle Sybase

IDG Corporation Telecommunications
iVillage Ameritech
Lycos AT&T
Mecklermedia Corporation British Telecom
On Health Networks Nokia
Orlando Sentinel Sonera
Playboy Enterprises Sprint
Road Runner Group
The Seattle Times US West
Simon & Schuster
Spiegel Online

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<PAGE>

Case Studies

The following case studies illustrate the issues faced by three
representative clients in deploying Internet applications, and the benefits
derived from developing and deploying these applications using StoryServer.

Online Travel Services Company

A highly successful online travel services company selling an increasingly
commoditized product faced intense competition from two large online
competitors. The firm elected to focus its business on vacation travelers who
make highly considered purchases and need value-added travel planning
assistance before making purchasing decisions. To increase its revenue targets
and customer conversion rates, the firm needed an Internet Relationship
Management system that delivered interactive travel planning assistance to
facilitate vacation purchases through its Web site. Such a system would have
to handle a multi-million member customer base and support tens of thousands
of personalized visitor sessions each day. In addition, to meet the firm's
application goals, the system also would have to automatically integrate a
series of travel-related resources licensed and syndicated from other Web
sites, and integrate this content within the firm's travel planning
application. An internally-built system would have been too expensive, and
most packaged solutions did not provide an application architecture that would
accommodate the necessary content flexibility or deliver adequate system
performance.

The travel services firm deployed StoryServer and worked with VPS to launch
a major new version of their Web site in less than six months. The firm was
first to market with a Web-based vacation travel planning service that
integrated syndicated travel guide content and delivered it as an integral
part of their Internet Relationship Management application. The firm was
immediately able to process significantly more visitor sessions because Web
server utilization dropped from 90% to 10%. By reducing Web server
utilization, the firm was able to delay significant planned hardware
expenditures. StoryServer also enabled the firm to reduce its time to
deployment for new versions of the travel planning application, creating
significant advantages over its online competitors. The firm's marketing staff
is now considering additional syndication arrangements to further increase the
customer value of the travel planning application. StoryServer provided the
company with an Internet Relationship Management solution that significantly
increased its customer conversion rates.

Financial Services Company

A major retail banking company planned an extensive Internet banking
initiative in which the Internet would become a primary business channel for
its retail customers. The bank's existing Web site was a simple system that
allowed customers to check account balances and read information about its
banking products. The bank needed to position the new version of its Web site
as a daily financial gateway that would assist customers with loan selection,
college planning, house purchases and managing personal stock portfolios. The
problem was that the bank's existing Web systems were designed as either a
means of delivering simple brochure content, or as Web-enabled front ends on
top of its proprietary transaction systems. Neither of these systems by
themselves could create an integrated advisory experience that would
reasonably engage clients on a daily basis and allow the bank to better retain
customers. The bank's new Web-based business required an Internet application
platform that could deliver a set of highly interactive, content-rich
applications to a large, diverse population of customers, and be managed on a
real-time basis by the bank's marketing managers. The bank knew that its
competitors were working on a similar project, and that time to market was
critical in order to increase market share and establish itself as an Internet
banking leader.

The bank selected Vignette's StoryServer product as the strategic technology
platform for the future of its relationship-based banking business on the Web.
By engaging VPS, the bank was able to meet its application functional
requirements and launch dates, going online within months of its investment in
the Vignette solution. The bank's new Web site delivers a broad personal
banking experience, offering planning tools for products and services ranging
from money management to auto loans to insurance, as well as an individual
investor portfolio management system. In addition, the Web site delivers a
news and research section that syndicates daily investor information from the
Dow Jones news service. The success of this venture recently resulted in the
bank's new parent deciding to invest in another deployment of StoryServer for
its next generation retail banking Web site due to be launched early next
year.

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Worldwide Provider of News and Information

A major news and information publishing company planned on entering the
online regional communities business to compete with CitySearch and
Microsoft's Sidewalk. The company's business plan called for a major regional
Web site accompanied by up to 250 local community Web sites targeted to reach
the local online communities. Existing technologies made delivering multiple
online communities cost-prohibitive because the cost of producing and managing
each new Web site outweighed the revenue potential. The company needed a
platform that would enable it to rapidly and cost-effectively deliver new
online services across dozens of regional Web sites, target local businesses
as advertisers and let local community leaders as well as staff editors
produce editorial content while controlling the overall production of each
property at a central location. Likewise, the development team needed a highly
scalable application architecture that would allow new online properties to be
designed and deployed using reusable applications and content yet allow each
online community Web site to uniquely interact with its visitors on topics of
local interest.

The client chose Vignette because StoryServer offered a complete end-to-end
solution for hosting multiple Web sites from a single platform and content
base, and automating content management so that the control over the
production of each property was centralized. Using StoryServer, the company
was able to build a broad base of advertising slots and maximize the revenue
potential of each Web site without the expense of running each property
individually. The production team now produces enhanced application
functionality from a central location for the various Web sites. At the same
time, community leaders retain control over their own presentation, navigation
and content. As a result, the company has been able to increase its market
share position for interactive community Web sites in its region. It has
rapidly deployed dozens of local properties, and established a fixed cost
business model that limits the growth in developer, producer and editor
headcount required to support the opportunity.

Technology

We believe our advanced technology enables our clients, partners and
consultants to build, deliver and manage enterprise-class Internet
Relationship Management systems in less time, at lower cost and with better
business results than existing alternatives.

Product Architecture

We believe that we have developed a unique architecture for meeting the
technical demands of applications designed for Internet Relationship
Management. By emphasizing an application architecture based on content
management, a lifecycle personalization model that effectively accommodates
both Web customer acquisition and retention, and a patented design for
extremely scalable and high-performance Web page delivery, the Vignette
solution provides an efficient architecture for clients to build and deploy
highly scalable Internet Relationship Management applications quickly and
cost-effectively. We believe that this architecture also provides a strong
foundation on which we can develop future products.

Content Management. We have developed proprietary content management
technology designed to manage the high volume of dynamic interactions that
occur between many concurrent Web site visitors and the relationship
management application. The content management system provides three key
functions:

. Content Abstraction Services. Allow application developers to build and
deploy applications that can access and manage any type of content, such
as relational data, flat files, or XML (Extensible Markup Language) data
through a single Application Programming Interface, or API, model. This
simplifies application development and significantly reduces time-to-
deployment by uncoupling decisions about storage repositories and data
formats from application logic and protects existing database repository
investments. We plan to further enhance the system's rapid application
development capabilities in early 1999 with our Development Center tool,
a visual data modeling and drag-and-drop application builder tool that
will take further advantage of these content abstraction services.

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<PAGE>

. Automated Asset Management. Provides a broad set of functionality for
managing and automating most tasks associated with managing content
assets, including production team access control, asset-specific
workflow, version control, launch and expiration scheduling, and visual
project management.

. Content Components. Greatly enhance the template-based approach to
Internet application development. Components allow Internet applications
to be built and operated in an object-oriented fashion, with components
serving as the building blocks for dynamic assembly and adaptive
navigation. Unlike other products that require complex programming to
support interactivity, StoryServer 4 provides native support for
interactive content components. This approach eliminates the problem of
inflexible application structures associated with existing template-based
dynamic architectures.

Lifecycle Personalization. Our lifecycle personalization services are
designed to help clients substantially increase their conversion rates and
increase the lifetime value of the typical online customer by managing
relationships through their complete lifecycle. These services, which are
described below, enable clients to personalize Web experiences by adapting the
site's presentation, navigation and content based on implicitly observed
behavior and explicitly stated preferences as the relationship evolves over a
number of interactions from anonymous visitor to well-known customer. We
believe that our approach requires less time and effort to deploy and
maintain, and requires substantially less investment in Web server hardware
than competing alternatives.

Our lifecycle personalization tools consist of five primary components,
which when utilized in combination with content management functions, enable
clients and partners to develop applications that are effective for both
online customer acquisition and customer retention.

. Presentation Agent for System Targeting. Automatically adapts the
application's presentation to accommodate a new, anonymous visitor's
environment to present content that is suited to the visitor's browser
capabilities, operating system, and local language.

. Matching Agent for Behavior Targeting. As a new visitor becomes familiar
with the site, the Matching Agent uses observations about a visitor's
behavior on the Web site to infer the visitor's interest and to adapt
navigation and content to observed affinities. With the Matching Agent,
businesses can implement merchandising over the Web without requiring
visitors to explicitly divulge information about themselves.

. Recommendation Agent for Needs Targeting. The Recommendation Agent is
utilized when visitors become sufficiently familiar with the site to
facilitate targeted suggestions. The Recommendation Agent recommends
content to a visitor that others with similar tastes found interesting.

. Personal Pages for Customization. Useful at the well-known stage, the
site can offer the capability for visitors to define personal pages that
are explicitly tailored to their needs each time they return to the site.

. Open Profiling Services. Open Profiling Services manage and populate a
centralized repository of visitor profile and content information. This
feature provides a visitor registry for storing visitor information, a
content catalog for creating taxonomy of content on the Web site for use
in personalization, and an Observation Manager that observes, tracks and
records visitor behavior and preferences without impacting site
performance.

Syndication Services. The forthcoming Vignette Syndication Server will
utilize a proprietary set of technologies that allows customers to build
online reseller channels through affiliate Web sites. Vignette Syndication
Server allows the creation of these channels by using a logical set of
content, or packages, business rules for governing affiliate relationships, or
subscriptions, and automated remote management services for managing its
content within its affiliate Web sites. These proprietary services have been
based on the emerging Information and Content Exchange, or ICE, specification
standard for content syndication, which is an XML-based specification being
jointly developed by Vignette and over seventy other companies including
Microsoft, Sun Microsystems and Adobe. None of the companies involved in the
development of the ICE specification have any proprietary rights with respect
to the technology. Although there is no obligation on the part of Vignette,
the

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<PAGE>

initial member of the authoring group, to continue developing ICE for the
World Wide Web Consortium, or W3C, it is Vignette's intention to continue to
assist in the development and use of the ICE protocol. We believe that by
fostering the creation and adoption of an open standard for content
syndication, and being the first company to provide proprietary value-added
services in the delivery of a product that embodies these concepts, we will be
able to quickly establish technology leadership in this arena.

Scalability and Performance

We believe that one of our key technological strengths is StoryServer 4's
ability to deliver industry-leading Web page delivery performance and
scalability while running on low cost Web server hardware. Internet
applications that are built with competing products that dynamically generate
Web pages can be significantly slower (depending on the server configuration)
than first generation static Web sites. This degrades the overall Web site
experience for the site visitor, lowers the visitor's interest in returning to
the Web site, reduces the client's ability to handle large visitor traffic
volumes, and creates a requirement for the client to significantly increase
Web server capital equipment expenditures.

StoryServer 4's ability to deliver unique performance characteristics is
achieved using three techniques:

. A patented caching mechanism is integrated with the product's content
component architecture and allows applications to deliver dynamically
generated and personalized Web pages at speeds nearly equivalent to the
performance of static Web page delivery.

. Integration of this patented caching mechanism with our personalization
technologies, so highly personalized Web pages can be delivered without
the cost and real-time delay of significant transactional computation
required by other solutions attempting to offer personalization
capabilities.

. The ability to distribute application server components of the platform
product across multiple physical Web servers allows high-end sites to
scale up performance and gain increased system availability as a result.

Adherence to Industry Standards

We have invested significant resources in developing our architecture to
comply with widely accepted commercial software industry standards for
building large scale Internet applications. Our products use SQL (Structured
Query Language) for accessing RDBMSs (Relational Database Management Systems),
HTTP (Hypertext Transfer Protocol) for Internet access, NSAPI (Netscape
Application Programming Interface) for access to Netscape's Internet servers,
ISAPI (Information Server Application Programming Interface) for access to
Microsoft's Internet servers, and XML for representing and processing content.
Adherence to these industry standards provides compatibility with existing
applications, enables ease of modification and reduces the need for software
to be rewritten, thus protecting the client's investment. Furthermore, our
products can be operated in conjunction with RDBMSs provided by Oracle,
Microsoft, Informix or Sybase, utilizing their native, high-performance
interfaces.

We have focused our investments in particular on developing our architecture
to comply with XML, a recently approved standard for data representation being
adopted by the industry. Software systems that are XML-compliant provide
customers with the ability to reduce application development time, easily
integrate with legacy enterprise systems, and build applications that span the
business processes of the company, its suppliers, distributors and customers.
We believe that our rapid adoption of XML and our leadership position in
building applications based on XML will allow us to further our technology
leadership as this standard becomes the de facto data representation model for
enterprise applications delivery. Specifically, we first introduced XML
services in the 3.2 release of StoryServer and are building our forthcoming
Vignette Syndication Server on top of an XML-based protocol known as ICE. We
continue to invest in XML technologies and participate as a member of the W3C
standards committee, with representation on the W3C Advisory Committee.

We develop most of our software in Java or C++, two widely accepted standard
programming languages for developing object-oriented applications. We choose
whichever language is best suited to the requirements of

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a particular component. We generally use Java to develop client programs,
where we can benefit from the rapid development capabilities and heterogeneous
platform support capabilities of Java. We actively support our Java products
on Sun Solaris, Windows 95, Windows NT, and Macintosh platforms, and
continuously evaluate new platforms as justified by the business. We generally
use C++ for server programs, because of our high scalability and performance
requirements.

Research and Development

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

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

Our research and development expenditures, including the write-off of
acquired in-process research and development, for fiscal 1996, 1997 and 1998
were approximately $2.8 million, $2.9 million and $9.1 million, respectively.
We expect that we will continue to commit significant resources to research
and development in the future. All research and development expenses have been
expensed as incurred. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing customer requirements. The
introduction of products incorporating new technologies and the emergence of
new industry standards could render existing products obsolete and
unmarketable. Our future success will depend in part on our ability to
anticipate changes, enhance our current products, develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of our customers. See "Risk Factors--Risks
Related to Our Business--We May Not Be Able to Meet the Rapid Changes in
Internet Relationship Management Technology."

Sales and Marketing

We market our products primarily through our direct sales force and also
intend to expand our indirect sales through additional relationships with
systems integrators, VARs and OEMs. We generate leads from a variety of
sources, including businesses seeking partners to develop interactive
marketing and selling applications. Initial sales activities typically include
a demonstration of our product capabilities followed by one or more detailed
technical reviews. As of December 31, 1998, the direct sales force consisted
of 57 sales executives and support personnel.

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

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

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Strategic Alliances

A critical element of our sales strategy is to establish strategic alliances
to assist us in marketing, selling and developing customer applications, as
well as to increase product interoperability within the industry. This
approach is intended to increase the number of personnel available to perform
application design and development services for our customers and provide
additional marketing expertise and technical expertise in certain vertical
industry segments. These alliances fall into four categories: (a) the
Information & Content Exchange alliance, (b) platform alliances, (c)
technology alliances and (d) design alliances.

Information and Content Exchange Alliance. To facilitate the adoption of
Web-based content syndication technologies in the marketplace, we co-founded
the ICE working group to create an industry-standard protocol for enabling
cross-Website syndication capabilities. In January 1998, we formed the ICE
Authoring Group comprising 12 additional companies: Adobe, CNET, Firefly,
Hollinger International, Microsoft, National Semiconductor, Net Perceptions,
News Internet Services, Preview Travel, Sun Microsystems (JavaSoft), Tribune
Media Services and Ziff Davis. In support of this protocol creation, we have
also co-founded the ICE Advisory Council comprising over 70 companies that
provide input and feedback to the Authoring Group during the creation of the
protocol.

Platform Alliances. To ensure that our products are based on industry
standards and take advantage of current and emerging technologies, we
emphasize strategic platform alliances. The benefits of this approach include
enabling us to focus on our core competencies, reducing time to market and
simplifying the task of designing and developing applications by both Vignette
and our customers. Key strategic platform alliances to date have included
strategic relationships with Sun Microsystems, developer of the Java language;
Oracle and Sybase, providers of industry-standard relational databases; and
Hewlett-Packard, a leading Internet server hardware manufacturer.

Technology Alliances. To assure that our products are compatible with the
latest technology, we have formed technology alliances with many of the
leading technology companies serving the Web. Vignette and its partners
exchange marketing and sales information, sales leads, and technology
integration practices. Our technology alliance categories include: e-commerce
transactions; ad management; site traffic and management; multi-lingual site
support and translations; personalization; operations management; security;
information architecture and navigation; high value content loading and
maintenance and building online communities.

Design Alliances. Our prospective customers often retain the services of Web
design firms. These companies' primary business is to provide design services
rather than software resale. However, many are regarded as thought leaders in
the field and have influence over technology choices for the customer. We have
established relationships with 36 of these design firms.

Our strategy is to establish additional design alliances as new technologies
and standards emerge, although no assurance can be given that we will be
successful in establishing such alliances.

Competition

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

Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and
thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have wider

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<PAGE>

name recognition and more extensive customer bases that could be leveraged,
thereby gaining market share to our detriment. Such competitors may be able to
undertake more extensive promotional activities, adopt more aggressive pricing
policies, and offer more attractive terms to purchasers than we can. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their products. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.

Such competition could materially and adversely affect our ability to obtain
revenues from license fees from new or existing customers and professional
service fee revenues from existing customers on terms favorable to us.
Further, competitive pressures may require us to reduce the price of our
software. In either case, our business, operating results and financial
condition would be materially and adversely affected. There can be no
assurance that we will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on our
business, financial condition and operating results. See "Risk Factors--Risks
Related to Our Business--We Face Intense Competition for Internet Relationship
Management Software."

Proprietary Rights and Licensing

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

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

To date, we have not been notified that our products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement with respect to our current or future
products. We expect that developers of Web-based commerce software products
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and as the functionality of
products in different segments of the software industry increasingly overlaps.
Any such claims, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources,
cause product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all. A successful claim of product
infringement against us and our failure or inability to license the infringed
technology

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<PAGE>

or develop or license technology with comparable functionality could have a
material adverse effect on our business, financial condition and operating
results. See "Risk Factors--Risks Related to Our Business--Our Success Depends
on Our Ability to Protect Our Proprietary Technology."

We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. We
license GroupLens Express from Net Perceptions for certain personalization
functionality in StoryServer. The agreement expires in October 1999, but it is
renewed automatically unless either party gives 60 days notice prior to the
renewal date. In addition, we license RogueWave Software to provide embedded
low-level C++ utility functions in its software under a perpetual license
agreement accompanied by annual maintenance renewals. If we cannot maintain
licenses to this third-party software, shipments of our products could be
delayed until equivalent software could be developed or licensed and
integrated into our products, which could materially adversely affect our
business, operating results and financial condition.

Employees

As of December 31, 1998, we had a total of 310 employees. Of the total
employees, 87 were in engineering, 95 in sales and marketing, 93 in
professional services and 35 in finance and administration. Our future success
will depend in part on our ability to attract, retain and motivate highly
qualified technical and management personnel, for whom competition is intense.
From time to time we also employ independent contractors to support our
professional services, product development, sales, marketing and business
development organizations. Our employees are not represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our employees are good.

Properties

Our headquarters are currently located in a leased facility in Austin,
Texas, consisting of approximately 79,000 square feet under a five-year lease
with expansion options. We have also leased offices for sales and support
personnel in Alexandria, Virginia; Atlanta, Georgia; Boston, Massachusetts;
Chicago, Illinois; Dallas, Texas; Newport Beach, California; New York, New
York; San Mateo, California; Valencia, California; and Sydney, Australia.

Legal Proceedings

We are not a party to any material legal proceedings.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information regarding the executive
officers and directors of Vignette as of December 31, 1998.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gregory A. Peters....... 38 Chief Executive Officer, President, and Director
Ross B. Garber.......... 32 Co-founder, Chairman of the Board and Director
Neil Webber............. 36 Co-founder, Chief Technology Officer and Director
Sherry A. Atherton...... 39 Vice President, Engineering and Customer Support
Pany Christoforou....... 41 Vice President, Europe
William R. Daniel....... 42 Vice President, Business Development
Bradley V. Husick....... 34 Vice President, Global Network Development
Peter T. Klante......... 36 Vice President, Marketing
Jack F. Lynch........... 37 Vice President, Finance and Operations and Secretary
Philip C. Powers........ 39 Vice President, Professional Services
Michael J. Vollman...... 41 Vice President, North American Sales and Professional Services
Robert E. Davoli(2)..... 50 Director
Steven G.
Papermaster(1)......... 40 Director
John D. Thornton(1)(2).. 33 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee

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

Ross B. Garber co-founded Vignette in December 1995 and has served as a
director since that time. From December 1995 to June 1998, he served as our
Chief Executive Officer and President. Since June 1998, Mr. Garber has served
as Chairman of the Board. From July 1994 to December 1995, Mr. Garber served
as Director of Worldwide Channel Sales with DAZEL Corporation, a client/server
software company. From 1990 to July 1994, he served as Director of Business
Development with Epoch Systems, a client/server software company. He received
a Bachelor of Arts degree in Finance from the University of Massachusetts,
Amherst.

Neil Webber co-founded Vignette in December 1995 and has served as a
director since that time. He has served as our Chief Technology Officer since
February 1997, served as our Vice President, Development from December 1995 to
February 1997 and served as our Secretary from December 1995 to September
1998. Previously, Mr. Webber served as Chief Architect at DAZEL Corporation, a
client/server software company, from January 1995 to October 1995. From
November 1993 to January 1995, he served as a System Architect at IBM. Prior
to that, Mr. Webber held various positions at Epoch Systems, a client/server
software company, from March 1987 to November 1993. Mr. Webber received a
Bachelor of Science degree in Computer Science and Engineering from
Massachusetts Institute of Technology.

46
<PAGE>

Sherry A. Atherton has served as our Vice President, Engineering and
Customer Support since February 1997. From June 1995 to February 1997, Ms.
Atherton managed the enterprise engineering, program management, and technical
publications groups at Documentum, Inc., a document management company. From
May 1992 to June 1995, she held several management positions in engineering at
Sybase, Inc., a database company. Ms. Atherton received a Honours Bachelor of
Mathematics degree from the University of Waterloo.

Pany Christoforou is an employee of Protege Software Limited ("Protege"), a
U.K. based company in the business of assisting U.S. companies establish their
European operations and, pursuant to our agreement with Protege, has served as
our Vice President, Europe since January 1998 when we opened our European
operation. From September 1997 to December 1997, he served as European General
manager for Webline Communications Corp., a developer of solutions for
customer interaction organizations. From December 1992 to August 1997, he
served as U.K. General Manager for Neuron Data, a supplier of business rules
automation software. Prior to that time, Mr. Christoforou spent four years as
salesman and divisional manager at Ingres, a database company. He received a
Bachelor of Science degree in Mathematics from Hatfield Polytechnic.

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

Bradley V. Husick has served as our Vice President, Global Network
Development since November 1998 and served as our Vice President, Business
Development from June 1997 to November 1998. Mr. Husick worked as a self-
employed consultant from November 1996 to June 1997. From September 1995 to
November 1996, he served as Vice President of Marketing and Business
Development for NetGravity, Inc., an Internet ad management software provider
that he co-founded. From April 1993 to August 1995, Mr. Husick served as Vice
President of Marketing for Clement Mok Designs, an interactive design firm,
where he also served as Director of Marketing for CMCD, Inc., a CD-ROM
publishing company affiliated with Clement Mok Designs. From May 1991 to March
1993, Mr. Husick served as Group Product Manager for Macromedia, a multimedia
software company. Mr. Husick received a Bachelor of Science in Astrophysics
with honors from Rice University and a Master of Business Administration with
honors from Columbia University.

Peter T. Klante has served as our Vice President, Marketing since May 1998.
From May 1996 to April 1998, Mr. Klante served as Vice President of Worldwide
Marketing for Fulcrum Technologies, a provider of knowledge management and
information retrieval solutions. From March 1994 to April 1996, he was at
Lotus Development where he served as the senior director of the Notes Product
Group and prior to that as the Marketing Director for the Notes Companion
Products. From January 1993 to February 1994, Mr. Klante served as Vice
President of the Client/Server Business Unit for Cognos, Inc., an application
development and business intelligence software company. Mr. Klante received a
Bachelor of Mathematics degree from the University of Waterloo.

Jack F. Lynch has served as our Vice President, Operations since July 1997
and as our Vice President, Finance and Operations and Secretary since
September 1998. From March 1993 to July 1997, Mr. Lynch served as Controller
of Trilogy Software, Inc., a sales force automation software company. In
addition, Mr. Lynch previously served in various financial capacities with
Legent Corporation (formerly Goal Systems, Inc.), a systems software company,
Litel Telecommunications and Andersen Consulting, and is a veteran of the
United States Marine Corps. He received a Bachelor in Science in Accounting
and Business Administration from the University of Kansas and a Masters of
Business Administration from Ohio State University.

47
<PAGE>

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

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

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

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

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

Board of Directors

We currently have authorized seven directors. Upon the completion of the
offering, the terms of the office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
the stockholders to be held in 2000; Class II, whose term will expire at the
annual meeting of stockholders to be held in 2001; and Class III, whose term
will expire at the annual meeting of the stockholders to be held in 2002. The
Class I directors are Ross B. Garber and Steven G. Papermaster, the Class II
directors are Neil Webber and Robert E. Davoli, and the Class III directors
are Gregory A. Peters and John D. Thornton. At each annual meeting of
stockholders after the initial classification, the successors to directors
whose term will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of Vignette. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among any of our directors or officers.

48
<PAGE>

Board Committees. The Audit Committee consists of Mr. Thornton and Mr.
Papermaster. The Audit Committee makes recommendations to the Board of
Directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates our audit and control functions. The
Compensation Committee consists of Mr. Davoli and Mr. Thornton. The
Compensation Committee makes recommendations regarding our stock plans and
makes decisions concerning salaries and incentive compensation for our
employees.

Director Compensation. Directors currently do not receive any cash
compensation from Vignette for their services as members of the Board of
Directors, although members are reimbursed for actual and reasonable out of
pocket expenses in connection with attendance at Board of Directors and
Committee meetings. Directors are eligible to participate in our stock plans,
and beginning in 1998, employee directors will also be able to participate in
our 1999 Equity Incentive Plan and non-employee directors will receive
periodic option grants under our 1999 Non-Employee Director Stock Option Plan.
In August 1998, Mr. Papermaster was granted an option to purchase 49,186
shares of our common stock at an exercise price of $4.83 per share subject to
a four year vesting schedule in connection with his appointment to the Board.
See "--Employee Benefit Plans."

Compensation Committee Interlocks and Insider Participation

None of the members of the Compensation Committee is currently or has been,
at any time since the formation of Vignette, an officer or employee of
Vignette. No member of the Compensation Committee serves as a member of the
Board of Directors or compensation committee of any entity that has one or
more executive officers serving as a member of our Board or Compensation
Committee.

Executive Compensation

The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1998 paid by us for services by our Chief
Executive Officer and our five other highest-paid executive officers whose
total salary and bonus for such fiscal year exceeded $100,000, collectively
referred to below as the Named Executive Officers:

<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- --------------------
Number of Securities Other
Salary Bonus Underlying Options Compensation(2)
---------- --------- -------------------- ---------------
<S> <C> <C> <C> <C>
Gregory A. Peters....... $ 93,558 $ 18,750 1,168,371 $22,298
President and Chief Ex-
ecutive Officer(1)
Ross B. Garber.......... 130,000 38,844 203,829 227
Chairman of the
Board(1)
Neil Webber............. 120,000 23,094 49,186 251
Chief Technology Offi-
cer
Sherry A. Atherton...... 124,062 20,000 67,248 263
Vice President,
Engineering
Michael J. Vollman...... 117,404 86,250 384,719 61,304
Vice President, North
American Operations
Peter T. Klante......... 81,731 17,500 206,790 44,249
Vice President, Market-
ing
</TABLE>
- --------
(1) Mr. Garber served as Chief Executive Officer of Vignette until June 1998.
Mr. Peters became President and Chief Executive Officer effective June
1998 at an annual salary of $175,000.

(2) Includes cost of term life insurance and relocation expenses. The amount
for Mr. Peters includes $22,067 in relocation expenses. The amount for
Mr. Vollman includes $60,893 in relocation expenses. The amount for Mr.
Klante includes $44,073 in relocation expenses.

49
<PAGE>

Option Grants in Last Fiscal Year

The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1998 to each of the Named Executive Officers. No stock
appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Exercise Option Term (4)
Options to Employees in Price (3) Expiration ---------------------
Granted (1) Fiscal 1998 (2) ($/share) Date 5% 10%
----------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Peters....... 470,677 8.27% $1.07 5/31/06 $ 238,723 $ 571,784
697,694 12.26 1.07 5/31/06 353,864 847,566
Ross B. Garber.......... 203,829 3.58 0.22 3/31/06 20,775 49,760
Neil Webber............. 49,186 0.86 0.22 3/31/06 5,013 12,008
Sherry A. Atherton...... 67,248 1.18 0.22 4/20/06 6,854 16,417
Michael J. Vollman...... 206,791 3.63 0.22 2/11/06 21,077 50,483
68,930 1.21 0.22 4/20/06 7,026 16,828
59,813 1.05 3.56 8/2/06 101,606 243,364
49,186 0.86 6.36 12/20/06 149,205 357,372
Peter T. Klante......... 206,790 3.63 0.22 4/20/06 21,077 50,483
</TABLE>
- --------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by Vignette at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and
the optionee vests as to 25% of the option shares upon completion of one
year of service from the date of grant and the balance in a series of
equal quarterly installments over the next three years of service
thereafter. The option shares will vest upon an acquisition of Vignette by
merger or asset sale, unless our repurchase right with respect to the
unvested option shares is transferred to the acquiring entity. The option
shares will also vest should the optionee's employment or service be
involuntarily terminated within 18 months following an acquisition of
Vignette by merger or asset sale. Each of the options has an eight year
term, subject to earlier termination in the event of the optionee's
cessation of service with Vignette.

(2) Based on an aggregate of 5,853,234 options granted to our employees under
the 1995 Stock Option/Stock Issuance Plan during the 12 months ended
December 31, 1998.

(3) The exercise price was equal to the fair market value of our common stock
as valued by the Board of Directors on the date of grant. The exercise
price may be paid in cash, in shares of our common stock valued at fair
market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by lending the optionee sufficient funds to pay the
exercise price for the purchased shares, together with any federal and
state income tax liability incurred by the optionee in connection with
such exercise.

(4) The potential realizable value is calculated based on the term of the
option at the time of grant (eight years). Stock price appreciation of 5%
and 10% is assumed pursuant to rules promulgated by the Securities and
Exchange Commission and does not represent our prediction of our stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the
date of grant appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.

50
<PAGE>

Option Values

The following table sets forth for each of the Named Executive Officers
options exercised and the number and value of securities underlying
unexercised options that are held by the Named Executive Officers as of
December 31, 1998.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-
Number of Unexercised Options at Money Options at
Shares December 31, 1998(2) December 31, 1998(3)
Acquired Value ------------------------- -----------------------
Name on Exercise Realized (1) Vested Unvested Vested Unvested
- ---- ----------- ------------ ------ -------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Peters....... 0 -- 0 1,168,371 $ 0 $ 13,947,687
Ross B. Garber.......... 203,829 $70,448 0 0 0 0
Neil Webber............. 0 -- 0 49,186 0 628,918
Sherry A. Atherton...... 67,248 23,242 0 0 0 0
Michael J. Vollman...... 275,721 95,295 0 108,999 0 891,680
Peter T. Klante......... 206,790 71,471 0 0 0 0
</TABLE>
- --------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all the option shares, but any
shares purchased under those options will be subject to repurchase by
Vignette, at the original exercise price paid per share, upon the
optionee's cessation of service with Vignette, prior to the vesting in
such shares. The heading "Vested" refers to shares no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase
as of December 31, 1998.

(3) Based on an assumed initial public offering price of $13 per share less
the exercise price payable for such shares.

Change of Control Arrangements

The compensation committee of the Board of Directors, as the administrator
of the 1999 Equity Incentive Plan, can provide for accelerated vesting of the
shares of common stock subject to outstanding options held by any executive
officer or director of Vignette in connection with certain changes in control
of Vignette. The accelerated vesting may be conditioned on the termination of
the individual's employment following the change in control event. Except for
Gregory A. Peters, none of our executive officers have employment agreements
with us, and their employment may be terminated at any time. We entered into
an agreement with Mr. Peters, our President and Chief Executive Officer, as of
April 30, 1998, which provides that Mr. Peters will be paid a salary of
$175,000 and will be eligible for a bonus of $75,000. We agreed to pay Mr.
Peters' relocation expenses up to $75,000 plus the taxes that would be due.
The agreement also provides that Mr. Peters will receive a severance payment
in the amount of six months of base salary if Mr. Peters' employment is
involuntarily terminated without cause and one year of base salary plus target
bonus if Mr. Peters' employment is involuntarily terminated without cause
following certain changes in control of Vignette. If Mr. Peters' employment is
involuntarily terminated following certain changes in control of Vignette, the
letter agreement provides that his option share vesting will accelerate as if
he had remained employed for two additional years. However, if a change in
control occurs after the offering at a price per share higher than the price
for the offering, then Mr. Peters will fully vest in his option shares.

Executive Bonus Plan

We have adopted a bonus program pursuant to which selected officers and
other full-time employees are eligible for annual cash bonuses based upon
Vignette achieving specified objectives. For 1999, an officer's target bonus
will be awarded based upon Vignette achieving revenue targets. For Mr. Peters,
the 1999 bonus will be awarded based on Vignette meeting customer bookings
targets and other objectives to be determined by the compensation committee of
the Board of Directors. For sales employees, bonuses are based on customer
bookings and operating margin objectives.

51
<PAGE>

Employee Benefit Plans

1999 Equity Incentive Plan

Our 1999 Equity Incentive Plan was adopted by the Board of Directors on
September 9, 1998 and our stockholders will also be asked to approve the
adoption of the plan. We have reserved 1,000,000 shares of common stock for
issuance under the 1999 Equity Incentive Plan. Any shares not yet issued under
our 1995 Stock Option/Stock Issuance Plan as of the date of this offering will
also be available for grant under the 1999 Equity Incentive Plan. As of
January 1 of each year, commencing with the year 2000, the number of shares
reserved for issuance under the 1999 Equity Incentive Plan will be increased
automatically by 5% of the total number of shares of common stock then
outstanding or, if less, by 1,000,000 shares. As of January 1, 1999, no
options had been granted under the 1999 Equity Incentive Plan. Under the 1999
Equity Incentive Plan, the eligible individuals are: employees, non-employee
members of the Board of Directors and consultants. The types of awards that
may be made under the 1999 Equity Incentive Plan are options to purchase
shares of common stock, stock appreciation rights, restricted shares and stock
units. Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for such favorable
tax treatment. With limited restrictions, if shares awarded under the 1999
Equity Incentive Plan or the 1995 Stock Option/Stock Issuance Plan are
forfeited, then those shares will again become available for new awards under
the 1999 Equity Incentive Plan.

The compensation committee of our Board of Directors administers the 1999
Equity Incentive Plan. The committee has the complete discretion to make all
decisions relating to the interpretation and operation of the 1999 Equity
Incentive Plan, including the discretion to determine which eligible
individuals are to receive any award, determine the type, number, vesting
requirements and other features and conditions of each award.

The exercise price for incentive stock options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of the
common stock on the option grant date. The exercise price for non-qualified
options granted under the 1999 Equity Incentive Plan may not be less than 85%
of the fair market value of the common stock on the option grant date. The
exercise price may be paid in cash or in outstanding shares of common stock.
The exercise price may also be paid by using a cashless exercise method, a
pledge of shares to a broker or promissory note. The purchase price for newly
issued restricted shares awarded under the 1999 Equity Incentive Plan may be
paid in cash, by promissory note or the rendering of past or future services.

The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept
the cancellation of outstanding options or stock appreciation rights in return
for the grant of new options or stock appreciation rights. The new option or
right may have the same or a different number of shares and the same or a
different exercise price.

Upon certain defined events causing a change in control of Vignette, an
option or other award under the 1999 Equity Incentive Plan will become fully
exercisable or fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. An
option or award will become fully exercisable or fully vested if the holder's
employment or service is involuntarily terminated within 18 months following
the change in control. Change in control includes:

. a merger or consolidation of Vignette after which Vignette's then
current stockholders own less than 50% of the surviving corporation,

. sale of all or substantially all of the assets of Vignette,

. a proxy contest that results in replacement of more than one-third of
the Board of Directors over a 24-month period or

. an acquisition of 50% or more of Vignette's outstanding stock by a
person other than by a person related to Vignette, such as a corporation
owned by the stockholders of Vignette.

52
<PAGE>

In the event of a merger or other reorganization, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or
its parent, shall be continued by us if we are a surviving corporation, shall
have accelerated vesting and then expire early, or shall be cancelled for a
cash payment.

The Board may amend or terminate the 1999 Equity Incentive Plan at any time.
If the Board amends the plan, stockholder approval of the amendment will be
sought only if required by an applicable law. The 1999 Equity Incentive Plan
will continue in effect indefinitely unless the Board decides to terminate the
plan earlier.

Employee Stock Purchase Plan

The Board of Directors adopted our Employee Stock Purchase Plan on September
9, 1998, and our stockholders will also be asked to approve the adoption of
the plan. We have reserved 750,000 shares of common stock for issuance under
the Employee Stock Purchase Plan. As of January 1 each year, the number of
shares reserved for issuance under the Employee Stock Purchase Plan will be
increased automatically by 2% of the total number of shares of common stock
outstanding or, if less, 750,000 shares. The Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code. Two
overlapping offering periods each with a duration of 24 months will commence
on February 15 and August 15 each calendar year. However, the first offering
period will commence on the effective date of the offering and end on August
15, 2001. Purchases of common stock will occur on February 14 and August 14
each calendar year during an offering period. The Employee Stock Purchase Plan
will be administered by the compensation committee of the Board of Directors.
Each of our employees is eligible to participate if he or she is employed by
us for at least 20 hours per week and for more than five months per year.

The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions
may not exceed 15% of the employee's cash compensation. The initial period
during which payroll deductions will be accumulated will begin on the
effective date of this offering and end on August 14, 1999. No more than 2,000
shares may be purchased on any purchase date. The price of each share of
common stock purchased under the Employee Stock Purchase Plan will be 85% of
the lower of (A) the fair market value per share of common stock on the date
immediately before the first date of the applicable offering period or (B) the
fair market value per share of common stock on the purchase date. In the case
of the first offering period, the price per share under the plan will be 85%
of the price offered to the public in the offering. Employees may end their
participation in the Employee Stock Purchase Plan at any time. Participation
ends automatically upon termination of employment with Vignette.

In the event of a change in control of Vignette, the Employee Stock Purchase
Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees. The Board of Directors may
amend or terminate the Employee Stock Purchase Plan at any time. If the Board
increases the number of shares of common stock reserved for issuance under the
Employee Stock Purchase Plan, it must seek the approval of our stockholders.

1999 Non-Employee Directors Option Plan

Our 1999 Non-Employee Director Option Plan was adopted by the Board of
Directors on September 9, 1998, and our stockholders will also be asked to
approve the adoption of the plan. Under the 1999 Non-Employee Director Option
Plan, non-employee members of the Board of Directors will be eligible for
automatic option grants.

A maximum of 250,000 shares of common stock has been authorized for issuance
under the 1999 Non-Employee Director Option Plan. No shares have been issued
yet under the 1999 Non-Employee Director Option Plan.

The compensation committee of the Board of Directors will make any
administrative determinations under the 1999 Non-Employee Director Option
Plan.

53
<PAGE>

The exercise price for options granted under the 1999 Non-Employee Director
Option Plan may be paid in cash or in outstanding shares of common stock.
Options may also be exercised on a cashless basis through the same-day sale of
the purchased shares.

Each individual who first joins the Board of Directors as a non-employee
director on or after the effective date of this offering will receive at that
time an option grant for 25,000 shares of common stock. In addition, at each
annual stockholders meeting, beginning in 2000, each non-employee director
will automatically be granted at that meeting, whether or not he or she is
standing for re-election at that particular meeting, a stock option to
purchase 2,500 shares of common stock. Each option will become exercisable for
25% of the shares after one year of Board service and in a series of equal
quarterly installments over the next three years of service thereafter. Each
option will have an exercise price equal to the fair market value of the
common stock on the automatic grant date. Each option will have a maximum term
of ten years, but will terminate earlier if the optionee ceases to be a member
of the Board of Directors. Each option will fully vest automatically upon a
change in control.

The Board of Directors may amend or modify the 1999 Non-Employee Director
Option Plan at any time. The 1999 Non-Employee Director Option Plan will
terminate on September 8, 2008, unless the Board of Directors decides to
terminate the plan sooner.

54
<PAGE>

CERTAIN TRANSACTIONS

Transactions with Directors and Officers

In February 1996, we raised additional capital to finance our operations
through the sale of 786,985 shares of Series A Preferred Stock to the
following stockholders for approximately $.51 per share:

<TABLE>
<CAPTION>
Shares of
Series A Aggregate
Preferred Stock Consideration
--------------- -------------
<S> <C> <C>
Austin Ventures IV-A, L.P. ....................... 158,769 $ 80,697
Austin Ventures IV-B, L.P. ....................... 333,097 169,303
Sigma Partners III, L.P. ......................... 246,425 125,250
Sigma Associates III, L.P. ....................... 44,858 22,800
Sigma Investors III, L.P. ........................ 3,836 1,950
------- ---------
Total........................................... 786,985 $ 400,000
======= =========
</TABLE>

In February, June and July 1996, we raised additional capital to finance our
operations through the sale of an aggregate of 3,646,077 shares of Series B
Preferred Stock to the following stockholders for approximately $.84 per
share:

<TABLE>
<CAPTION>
Shares of
Series B Aggregate
Preferred Stock Consideration
--------------- -------------
<S> <C> <C>
Austin Ventures IV-A, L.P. ....................... 594,665 $ 498,711
Austin Ventures IV-B, L.P. ....................... 1,247,602 1,046,290
Sigma Partners III, L.P. ......................... 991,292 831,337
Sigma Associates III, L.P. ....................... 181,113 151,889
Sigma Investors III, L.P. ........................ 21,490 18,023
CNET, Inc. ....................................... 609,915 511,500
--------- ----------
Total........................................... 3,646,077 $3,057,750
========= ==========
</TABLE>

In July 1996, we sold 3,669,315 shares of Series C Preferred Stock, to CNET,
Inc. in exchange for certain intellectual property rights as set forth in the
Stock Purchase Agreement dated July 19, 1996. In connection with the sale we
entered into the Prism Development and Marketing Agreement, or the Prism
Agreement, with CNET dated July 19, 1996 whereby CNET licensed certain
intellectual property rights surrounding its "Prism" technology. Pursuant to
the Prism Agreement, we agreed to license certain of our products royalty free
on a limited number of CNET Web sites and both parties agreed to share in
product enhancements. Pursuant to the Amended and Restated Stockholders'
Agreement, dated as of July 19, 1996, Halsey M. Minor became one of our
directors. Mr. Minor resigned from our Board of Directors in September 1998.
Mr. Minor currently serves as Chairman and Chief Executive Officer of CNET,
Inc.

In June and July 1997, we raised additional capital to finance our
operations through the sale of 1,647,290 shares and 79,672 shares,
respectively, of Series E Preferred Stock, to the following stockholders for
approximately $2.16 per share:

<TABLE>
<CAPTION>
Shares of
Series E Aggregate
Preferred Stock Consideration
--------------- -------------
<S> <C> <C>
Austin Ventures IV-A, L.P. ....................... 282,469 $ 608,737
Austin Ventures IV-B, L.P. ....................... 592,614 1,277,118
Sigma Partners III, L.P. ......................... 668,132 1,439,862
Sigma Associates III, L.P. ....................... 165,349 356,338
Sigma Investors III, L.P. ........................ 18,398 39,652
--------- ----------
Total........................................... 1,726,962 $3,721,707
========= ==========
</TABLE>

55
<PAGE>

On April 21, 1998, we loaned $58,858.80 to Michael J. Vollman, Vice
President, North American Operations in connection with Mr. Vollman's exercise
of an option to purchase 275,721 shares of common stock. Mr. Vollman issued a
promissory note to us bearing interest at the rate of 5.70% per annum, which
note is secured by a pledge of the shares acquired and is payable in full by
April 21, 1999. On April 24, 1998, we loaned Mr. Vollman $60,000 for the
purchase of Mr. Vollman's residence in the Austin area. Mr. Vollman issued a
promissory note to Vignette bearing interest at the rate of 5.70% per annum,
which note has been paid in full.

In April 1998, we raised additional capital to finance our operations
through the sale of 328,848 shares of Series F Preferred Stock to the
following stockholders for approximately $5.33 per share:

<TABLE>
<CAPTION>
Shares of
Series F Aggregate
Preferred Stock Consideration
--------------- -------------
<S> <C> <C>
Austin Ventures IV-A, L.P. ....................... 60,657 $ 322,790
Austin Ventures IV-B, L.P. ....................... 127,257 677,210
Sigma Partners III, L.P. ......................... 110,536 588,226
Sigma Associates III, L.P. ....................... 27,355 145,575
Sigma Investors III, L.P. ........................ 3,043 16,197
------- ----------
Total........................................... 328,848 $1,749,998
======= ==========
</TABLE>

Pursuant to the Stockholders' Agreement, dated as of February 5, 1996, John
D. Thornton and Robert E. Davoli joined our Board of Directors. Mr. Thornton
is a General Partner of AV Partners IV, L.P., which is the General Partner of
Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. Mr. Davoli is a
General Partner of Sigma Management III, L.P., which is the General Partner of
Sigma Partners III, L.P., Sigma Associates III, L.P. and Sigma Investors III,
L.P. In addition, pursuant to the Stockholder's Agreement dated April 22,
1998, the holders of Series F Preferred Stock and certain holders of Series E
Preferred Stock have a right to purchase up to 10% of the shares of common
stock in this offering subject to certain limitations. On September 25, 1998
Messrs. Thornton and Davoli each were granted an option to purchase 49,186
shares of our common stock at an exercise price of $6.36 per share subject to
a four year vesting schedule in connection with their service as members of
the Board. See "Principal and Selling Stockholders" for more information
regarding securities held by these purchasers.

In August 1998, CNET and Vignette amended the Prism Agreement to provide
that CNET's and NBC Multimedia's jointly owned subsidiary, Snap! LLC, may use
an undefined number of copies of StoryServer for (a) Snap!'s Internet sites
accessible through www.snap.com and (b) for certain Snap! LLC co-branded
sites. Such amendment also provides that if CNET no longer holds a 50% or more
ownership interest in Snap! LLC, any subsequent copies installed and used
after that time must be purchased from us. In consideration, CNET assigned to
Vignette all rights and title to and interest in U.S. Patent No. 5,740,430,
issued on April 14, 1998, "Method and apparatus for server-independent caching
of dynamically-generated customized pages," and provided $100,000 of
advertising on CNET's Web site for our use.

In August 1998, Mr. Papermaster, one of our directors, was granted an option
to purchase 49,186 shares of our common stock at an exercise price of $4.83
per share subject to a four year vesting schedule in connection with his
appointment to the Board. See "Management--Employee Benefit Plans."

Indemnification

Our Certificate of Incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Delaware General Corporation
Law. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.

56
<PAGE>

Our Bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, including any circumstances in which
indemnification is otherwise discretionary under Delaware law. We have also
entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify
such officers and directors against certain liabilities that may arise by
reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.

Protege Software Professional Services Agreement

In November 1997, we and Protege Software (Holdings) Limited, or Protege,
entered into a professional services agreement under which Protege agreed to
perform certain professional services for our European subsidiary, Vignette
Europe Ltd. Protege provides Vignette Europe with its back-office and
administrative functions such as payroll, invoicing and accounting. In
addition, Protege provides general consulting services to Vignette Europe.
These services include assisting Vignette Europe with the development of its
business plans, implementation of its marketing strategy, localization of its
products and organization of training courses and seminars regarding our
products. The professional services agreement between us and Protege expires
on June 30, 1999. It may be terminated by either party, without cause, on
three months' written notice. Protege is in the business of providing similar
services to technology companies seeking to establish European operations.

Under the terms of the professional services agreement between us and
Protege, we agreed to pay Protege, in addition to its costs of providing the
services, management fees for the operations of Vignette Europe. Protege is
entitled, at its option, to convert up to 55% of a portion of the management
fees earned prior to December 31, 1998 into our fully paid voting stock at a
price of $5.21 per share.

Pany Christouforou, an employee of Protege, has served as our Vice
President, Europe pursuant to the professional services agreement between us
and Protege since January 1998.

57
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to us regarding
beneficial ownership of our common stock as of December 31, 1998, and as
adjusted to reflect the sale of shares offered hereby and the conversion of
all outstanding shares of preferred stock into shares of common stock held by
all current executive officers and directors individually and as a group. In
accordance with the rules of the Securities and Exchange Commission,
beneficial ownership includes voting or investment power with respect to
securities and includes the shares issuable pursuant to stock options that are
exercisable within 60 days of December 31, 1998. Shares issuable pursuant to
stock options are deemed outstanding for computing the percentage of the
person holding such options but are not outstanding for computing the
percentage of any other person. The number of shares of common stock
outstanding after this offering includes 3,180,000 shares of common stock
being offered for sale by Vignette in this offering. The percentage of
beneficial ownership for the following table is based on 22,635,169 shares of
common stock outstanding as of December 31, 1998 assuming conversion of all
outstanding shares of preferred stock into common stock, and 25,815,169 shares
of common stock outstanding after the completion of this offering assuming no
exercise of the underwriters' over-allotment option. Unless otherwise
indicated, the address for each listed stockholder is: c/o Vignette
Corporation, 901 South MoPac Expressway, Austin, Texas 78746. To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.

<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Before Number of Owned After
the Offering Shares the Offering (1)
Name and Address of ------------------- Being -------------------
Beneficial Owner Number Percent Offered Number Percent
------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Funds affiliated with Austin
Ventures(2) ................ 4,195,768 18.54% -- 4,195,768 16.23%
114 West Seventh Street
1300 Norwood Tower
Austin, TX 78701
Sigma Entities(3) ........... 2,481,827 10.96 -- 2,481,827 9.60
2884 Sand Hill Road, Suite
121
Menlo Park, CA 94025
CNET, Inc. .................. 2,315,467 10.23 -- 2,315,467 8.96
150 Chestnut Street
San Francisco, CA 94111
Adobe Ventures II, L.P. ..... 1,115,965 4.93 -- 1,115,965 4.32
One Bush Street
San Francisco, CA 94104
Charles River Entities(4).... 1,767,905 7.81 -- 1,767,905 6.84
1000 Winter Street, Suite
3300
Waltham, MA 02154
Gregory A. Peters(5)......... 1,187,162 4.99 -- 1,187,162 4.39
Ross B. Garber(6)............ 1,606,431 7.10 160,000 1,446,431 5.59
Neil Webber(7)............... 1,623,160 7.16 160,000 1,463,160 5.65
Sherry A. Atherton........... 210,528 * -- 210,528 *
Pany Christoforou(8)......... 177,071 * -- 177,071 *
William R. Daniel(9)......... 177,071 * -- 177,071 *
Bradley V. Husick............ 234,494 1.04 -- 234,494 *
Peter T. Klante.............. 206,790 * -- 206,790 *
Jack F. Lynch................ 189,321 * -- 189,321 *
Philip C. Powers(10)......... 177,071 * -- 177,071 *
Michael J. Vollman(11)....... 384,720 1.69 -- 384,720 1.48
Robert E. Davoli(3).......... 2,531,021 11.16 -- 2,531,021 9.77
Steven G. Papermaster(12).... 49,186 * -- 49,186 *
John D. Thornton(2).......... 4,244,954 18.71 -- 4,244,954 16.39
All directors and executive
officers as a group
(13 persons)(13)............ 12,998,980 57.06% 320,000 12,678,980 48.76%
</TABLE>
- --------

* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.

58
<PAGE>

(1) Assumes no exercise of the underwriters' over-allotment option and that
certain existing stockholders' preemptive rights are not exercised. See
"Underwriters."

(2) Includes 1,135,986 shares held by Austin Ventures IV-A, L.P. and
2,383,288 shares held by Austin Ventures IV-B, L.P. Also includes 644,279
shares held by Austin Ventures V, L.P. and 32,215 shares held by Austin
Ventures V Affiliates Fund, L.P. Mr. Thornton, a director of Vignette, is
a General Partner of AV Partners IV, L.P., which is the general partner
of Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P., and is a
General Partner of AV Partners V, L.P., which is the general partner of
Austin Ventures V, L.P. and Austin Ventures V Affiliates Fund, L.P. Mr.
Thornton disclaims beneficial ownership of the shares held by Austin
Ventures IV-A, L.P., Austin Ventures IV-B, L.P., Austin Ventures V, L.P.
and Austin Ventures V Affiliates Fund, L.P. except to the extent of his
pecuniary interest therein arising from his partnership interest in AV
Partners IV, L.P. or AV Partners V, L.P., as the case may be. Amount
shown for Mr. Thornton includes options immediately exercisable for
49,186 shares.

(3) Includes 2,016,385 shares held by Sigma Partners III, L.P., 418,675
shares held by Sigma Associates III, L.P. and 46,767 shares held by Sigma
Investors III, L.P. Mr. Davoli, one of our directors, is a General
Partner of Sigma Management III, L.P., which is the general partner of
Sigma Partners III, L.P., Sigma Associates III, L.P. and Sigma Investors
III, L.P. Mr. Davoli disclaims beneficial ownership of the shares held by
Sigma Partners III, L.P., Sigma Associates III, L.P. and Sigma Investors
III, L.P. except to the extent of his pecuniary interest therein arising
from his general partnership interest in Sigma Partners. Amount shown for
Mr. Davoli includes options immediately exercisable for 49,186 shares.

(4) Includes 1,761,103 shares held by Charles River Partnership VIII, a
limited partnership and 6,802 shares held by Charles River VIII-A LLC.

(5) Includes options immediately exercisable for 1,168,371 shares.

(6) Includes 46,845 shares owned by Ross Garber, Custodian for Hailey Garber
under T.U.T.M.A., 46,845 shares owned by Ross Garber, custodian for
Harrison Garber under T.U.T.M.A. and 89,744 shares owned by the Garber
Trust of 1998.

(7) Includes 31,479 shares owned by NW/NSA Trust, Neil Webber, Trustee and
options immediately exercisable for 49,186 shares.

(8) Includes options immediately exercisable for 177,071 shares.

(9) Includes options immediately exercisable for 177,071 shares.

(10) Includes options immediately exercisable for 177,071 shares.

(11) Includes options immediately exercisable for 108,999 shares.

(12) Includes options immediately exercisable for 49,186 shares.

(13) Includes options immediately exercisable for 1,828,257 shares.

59
<PAGE>

DESCRIPTION OF CAPITAL STOCK

On the closing of this offering, our authorized capital stock will consist
of 80,000,000 shares of common stock, $0.01 par value, and 10,000,000 shares
of preferred stock, $0.01 par value.

Common Stock

As of December 31, 1998, there were 5,676,850 shares of common stock
outstanding that were held of record by approximately 150 stockholders. As of
December 31, 1998, there are 5,420,577 shares of common stock subject to
outstanding options, all of which are currently exercisable. There will be
25,815,169 shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and assuming no exercise after December
31, 1998 of outstanding options) after giving effect to the sale of the shares
of common stock to the public offered hereby and the conversion of our
preferred stock into common stock. The holders of common stock are entitled to
one vote per share on all matters to be voted on by the stockholders. Subject
to preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. In the event of the liquidation,
dissolution, or winding up of Vignette, the holders of common stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued on
completion of this offering will be fully paid and nonassessable. See
"Dividend Policy."

Preferred Stock

On the closing of this offering, 10,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The Board of Directors has
the authority to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change in control
of Vignette without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of the
preferred stock.

Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law

Certificate of Incorporation and Bylaws. Our Amended and Restated
Certificate of Incorporation to be effective on the closing of this offering
provides that the Board of Directors will be divided into three classes of
directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
Vignette and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors. The Amended and Restated Certificate of
Incorporation also provides that, effective on the closing of this offering,
all stockholder actions must be effected at a duly called meeting and not by a
consent in writing. Further, provisions of the Bylaws and the Amended and
Restated Certificate of Incorporation provide that the stockholders may amend
the Bylaws or certain provisions of the Amended and Restated Certificate of
Incorporation only with the affirmative vote of 75% of our capital stock.
These provisions of the Amended and Restated Certificate of Incorporation and
Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of Vignette. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors
and to discourage certain types of transactions that may involve an actual or
threatened change of control of Vignette. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal. The
provisions also are intended to

60
<PAGE>

discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual
or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management. See "Risk Factors--Risks Related to Our
Business--Anti-Takeover Provisions in Our Charter Documents and Delaware Law
Could Prevent or Delay a Change in Control of Our Company."

Delaware Takeover Statute. We are subject to Section 203 of the Delaware
General Corporation Law, or DGCL Section 203, which regulates corporate
acquisitions. DGCL Section 203 prevents certain Delaware corporations,
including those whose securities are listed for trading on the Nasdaq National
Market, from engaging, under certain circumstances in a "business combination"
with any "interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of DGCL
Section 203, a "business combination" includes, among other things, a merger
or consolidation involving Vignette and the interested stockholder and the
sale of more than ten percent (10%) of Vignette's assets. In general, DGCL
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more the outstanding voting stock of Vignette and
any entity or person affiliated with or controlling or controlled by such
entity or person. A Delaware corporation may "opt out" of DGCL Section 203
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of DGCL
Section 203.

Registration Rights

After this offering, the holders of approximately 21,202,000 shares of
common stock and rights to acquire common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Under the terms of the agreement between us and the holders of such
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock therein. Additionally, such holders are also entitled to certain demand
registration rights pursuant to which they may require us on up to four
occasions to file a registration statement under the Securities Act at our
expense with respect to our shares of common stock, and we are required to use
our best efforts to effect such registration. Further, holders may require us
to file an unlimited number of additional registration statements on Form S-3
at our expense. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and our
right not to effect a requested registration within six months following an
offering of our securities, including the offering made hereby. In addition,
the holders of registration rights have agreed not to exercise such rights for
at least 180 days after the offering without the prior written consent of
Morgan Stanley & Co. Incorporated.

Transfer Agent and Registrar

The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C., and its telephone number is (214) 965-2235.

61
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

On completion of this offering, we will have 25,815,169 shares of common
stock outstanding. Of this amount, 3,500,000 shares, which are offered hereby,
will be available for immediate sale in the public market as of the date of
this prospectus, or 3,257,633 shares if certain existing stockholders'
preemptive rights are exercised in full. Approximately 385,411 additional
shares will be available for sale in the public market 90 days after the
offering, subject to compliance with the volume and other limitations of Rule
144. Approximately 21,138,645 additional shares will be available for sale in
the public market following the expiration of 180-day lockup agreements with
representatives of the underwriters, subject in some cases to compliance with
the volume and other limitations of Rule 144.

<TABLE>
<CAPTION>
Days after Date of Approximate Shares
this Prospectus Eligible for Future Sale Comment
------------------ ------------------------ -------
<S> <C> <C>
On Effectiveness........ 3,500,000 Freely tradable shares sold in offering
90 days................. 385,411 Shares salable under Rule 144
21,138,645 Lockup released; shares salable under Rule 144,
180 days................ 144(k) or 701
Thereafter.............. 1,033,480 Restricted securities held for one year or less
</TABLE>

In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least
one year is entitled to sell within any three-month period commencing 90 days
after the date of this prospectus a number of shares that does not exceed the
greater of (a) 1% of the then outstanding shares of common stock which will be
approximately 258,150 shares immediately after the offering, or (b) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to manner of sale requirements, and depending on the amount
sold, the filing of a Form 144 with respect to such sale. A person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of
Vignette at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Persons deemed to be affiliates must always sell pursuant to
Rule 144, even after the applicable holding periods have been satisfied.

We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this
offering, there has been no public market for the common stock, and there can
be no assurance that a significant public market for the common stock will
develop or be sustained after the offering. Any future sale of substantial
amounts of the common stock in the open market may adversely affect the market
price of the common stock offered hereby.

We, our directors, executive officers, and certain other stockholders,
including the stockholders purchasing shares in this offering through the
exercise of their preemptive rights, have agreed pursuant to the Underwriting
Agreement and other agreements that we will not sell any common stock without
the prior consent of Morgan Stanley & Co. Incorporated for a period of 180
days from the date of this prospectus, except that we may, without such
consent, grant options and sell shares pursuant to our stock plans.

Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of the date of this prospectus, the holders of options
exercisable into approximately 5,420,577 shares of common stock will be
eligible to sell their shares on the expiration of the 180-day lockup period,
or subject in certain cases to vesting of such options.

We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock issued or reserved for issuance under
our stock plans within 180 days after the date of this prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act. We intend to register these
shares on Form S-8, along with options that have not been issued under our
stock plans as of the date of this prospectus.

62
<PAGE>

In addition, after this offering, the holders of approximately 21,202,000
shares of common stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares, except for shares
purchased by affiliates of Vignette, becoming freely tradable without
restriction under the Securities Act immediately on the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."

63
<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Hambrecht & Quist LLC and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated are acting as representatives, have
severally agreed to purchase, and we and the selling stockholders have agreed
to sell to them an aggregate of 3,500,000 shares of common stock. The number
of shares of common stock that each underwriter has agreed to purchase is set
forth opposite its name below:

<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Hambrecht & Quist LLC..............................................
Dain Rauscher Wessels..............................................
---------
Total............................................................ 3,500,000
=========
</TABLE>

The underwriters are offering the shares subject to their acceptance of the
shares from us and the selling stockholders and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to
take and pay for all of the shares of common stock offered hereby, other than
those covered by the over-allotment option described below, if any such shares
are taken.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives
of the underwriters.

Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 525,000 additional shares of common stock at
the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $ , the total underwriters'
discounts and commissions would be $ , and the total proceeds to us would be
$ .

At our request, the underwriters have reserved up to 245,000 shares of
common stock to be sold in the offering and offered hereby for sale, at the
public offering price, to our directors, officers, employees, business

64
<PAGE>

associates and related persons. The number of shares of common stock available
for sale to the general public will be reduced to the extent such individuals
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.

We, the directors, officers and certain other of our stockholders have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, we will not, directly or indirectly:

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
(whether such shares or any such securities are then owned by such
person or are thereafter acquired directly from us); or

. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock,

whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

. the sale to the underwriters of the shares of common stock under the
underwriting agreement;

. the issuance by Vignette of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus which is described in the prospectus;

. transactions by any person other than Vignette relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock; or

. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "VIGN."

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.

We, the selling stockholders and the underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.

In April 1998, we sold shares of our Series F Preferred Stock in a private
placement. In this private placement, Hambrecht & Quist California purchased
84,561 shares of Series F Preferred Stock, which are convertible into 84,561
shares of common stock, for approximately $450,000, or approximately $5.33 per
share,

65
<PAGE>

and H&Q Vignette Investors L.P. purchased 197,311 shares of Series F Preferred
Stock, which are convertible into 197,311 shares of common stock, for
approximately $1.1 million, or approximately $5.33 per share. Hambrecht &
Quist California and H&Q Vignette Investors, L.P. purchased these shares on
the same terms as the other investors in the private placement. Hambrecht &
Quist LLC, one of the underwriters in this offering, is wholly owned by
Hambrecht & Quist California. H&Q Vignette Investors, L.P. is a California
limited partnership with two general partners. One of the general partners is
a wholly owned subsidiary of Hambrecht & Quist California and the other is a
limited liability company of which two of the three members are employees of
Hambrecht & Quist LLC. In addition, approximately half of the limited partners
of H&Q Vignette Investors, L.P. are employees of Hambrecht & Quist LLC or
directors of Hambrecht & Quist Group, the parent corporation of Hambrecht &
Quist California.

In November 1998, we sold shares of our Series H Preferred Stock in a
private placement. In this private placement, Morgan Stanley Dean Witter
Equity Funding, Inc., or MSDW Equity Funding, purchased 180,723 shares of
Series H Preferred Stock, which are convertible into 180,723 shares of common
stock (subject to adjustment), for approximately $1,500,000, or approximately
$8.30 per share. MSDW Equity Funding purchased these shares on the same terms
as the other investors in the private placement. Morgan Stanley & Co.
Incorporated, one of the underwriters in this offering, and MSDW Equity
Funding are both wholly owned subsidiaries of Morgan Stanley Dean Witter & Co.

Pricing of the Offering

Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between Vignette, the selling
stockholders and the representatives of the underwriters. Among the factors to
be considered in determining the public offering price will be our record of
operations, our current financial position and future prospects, the
experience of our management, sales, earnings and certain of our other
financial and operating information in recent periods, the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to ours.
The estimated public offering price range set forth on the cover page of this
prospectus is subject to change as a result of market conditions and other
factors.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed on for us by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Austin, Texas.
Certain legal matters in connection with the offering will be passed on for
the underwriters by Davis Polk & Wardwell, New York, New York.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements for each of the three years in the period ended December
31, 1998, as set forth in their report, which is included in this prospectus.
Our consolidated financial statements are included in this prospectus in
reliance on their report, given on their authority as experts in accounting
and auditing.

ADDITIONAL INFORMATION

We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the common stock. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to Vignette and the common stock, we refer you to the
registration statement and the exhibits and schedules filed as a part of the

66
<PAGE>

registration statement. Statements contained in this prospectus concerning the
contents of any contract or any other document are not necessarily complete.
If a contract or document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document that has been
filed. Each statement in this prospectus relating to a contract or document
filed as an exhibit is qualified in all respects by the filed exhibit. The
registration statement, including exhibits and schedules thereto, may be
inspected without charge at the SEC's principal office in Washington, D.C.,
and copies of all or any part thereof may be obtained from such office after
payment of fees prescribed by the SEC. The SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov.

We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited consolidated financial data
for the first three quarters of each year.

Our logo and certain titles and logos of our products mentioned in this
prospectus are either (1) our trademarks or (2) trademarks that have been
licensed to us. Each trademark, trade name or service mark of any other
company appearing in this prospectus belongs to its holder.

67
<PAGE>

VIGNETTE CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)................................. F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Vignette Corporation

We have audited the accompanying consolidated balance sheets of Vignette
Corporation and Subsidiaries as of December 31, 1998 and 1997, the related
consolidated statements of operations, changes in redeemable convertible
preferred stock and stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vignette
Corporation and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP

Austin, Texas

January 14, 1999

F-2
<PAGE>

VIGNETTE CORPORATION

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

<TABLE>
<CAPTION>
Pro Forma Redeemable
Convertible Preferred
December 31, Stock and
------------------ Stockholders' Equity at
1997 1998 December 31, 1998
-------- -------- -----------------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 6,865 $ 12,242
Accounts receivable, net of
allowance of $37 in 1997 and
$297 in 1998................ 650 7,488
Note receivable from
employee.................... -- 110
Prepaid expenses and other... 196 280
-------- --------
Total current assets....... 7,711 20,120
Property and equipment:
Equipment.................... 71 111
Computers and purchased
software.................... 834 2,704
Furniture and fixtures....... 16 63
Leasehold improvements....... 50 159
-------- --------
971 3,037
Accumulated depreciation..... (227) (1,283)
-------- --------
744 1,754
Other assets................... 44 907
-------- --------
Total assets............... $ 8,499 $ 22,781
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............. $ 433 $ 589
Accrued expenses............. 1,785 7,501
Deferred revenue............. 1,163 6,092
Current portion of capital
lease obligation............ 23 7
Current portion of long-term
debt........................ 24 1,895
Other current liabilities.... 28 279
-------- --------
Total current liabilities.. 3,456 16,363
Capital lease obligation, less
current portion............... 7 --
Long-term debt, less current
portion....................... 826 758
-------- --------
Total liabilities.......... 4,289 17,121
Redeemable convertible pre-
ferred stock.................. 13,458 36,258 $ --
Warrant to purchase redeemable
convertible preferred stock... -- 169 169
Stockholders' equity (deficit):
Convertible preferred stock.. 38 42 --
Common stock--$.01 par value;
33,446,991 shares
authorized; 3,492,093 shares
in 1997, 5,676,850 shares in
1998; 22,635,169 shares on a
pro forma basis (net of
treasury shares of 141,382
in 1997 and 169,498 in 1998
and on a pro forma basis)
issued and outstanding...... 35 57 226
Additional paid-in capital... 1,782 12,810 48,941
Notes receivable for purchase
of common stock............. -- (172) (172)
Deferred stock compensation.. -- (6,196) (6,196)
Accumulated other
comprehensive loss.......... (3) (11) (11)
Accumulated deficit.......... (11,100) (37,297) (37,297)
-------- -------- --------
Total stockholders' equity
(deficit)................. (9,248) (30,767) $ 5,491
-------- -------- ========
Total liabilities and
stockholders'
equity (deficit).......... $ 8,499 $ 22,781
======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

VIGNETTE CORPORATION

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

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue:
Product license.................................. $ -- $ 1,943 $ 8,584
Services......................................... -- 1,081 7,621
------- ------- --------
Total revenue...................................... -- 3,024 16,205
Cost of revenue:
Product license.................................. -- 37 964
Services......................................... -- 1,438 9,340
------- ------- --------
Total cost of revenue.............................. -- 1,475 10,304
------- ------- --------
Gross profit....................................... -- 1,549 5,901
Operating expenses:
Research and development......................... 892 2,895 6,962
Sales and marketing.............................. 428 4,964 15,880
General and administrative....................... 503 1,333 4,864
Write-off of acquired in-process research and
development..................................... 1,865 -- 2,089
Amortization of deferred stock compensation...... -- -- 2,475
------- ------- --------
Total operating expenses........................... 3,688 9,192 32,270
------- ------- --------
Loss from operations............................... (3,688) (7,643) (26,369)
Other income (expenses):
Interest income.................................. 71 245 517
Interest expense................................. (9) (47) (253)
Other............................................ -- (29) (92)
------- ------- --------
62 169 172
------- ------- --------
Net loss........................................... $(3,626) $(7,474) $(26,197)
======= ======= ========
Basic net loss per share........................... $ (5.76) $ (4.18) $ (9.20)
======= ======= ========
Shares used in computing basic net loss per share.. 630 1,788 2,849
Pro forma basic net loss per share................. $ (1.46)
========
Shares used in computing pro forma basic net loss
per share......................................... 17,904
</TABLE>

See accompanying notes.

F-4
<PAGE>

VIGNETTE CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stockholders' Equity (Deficit)
-------------------------------------------------------------------------------
<CAPTION>
Redeemable Conver- Convertible Notes
tible Preferred Stock Preferred Stock Common Stock Receivable
-------------------------- --------------- ----------------- Additional for Purchase Deferred
Number of Number of Number of Paid- of Common Stock
Shares Value Warrant Shares Value Shares Value in Capital Stock Compensation
---------- ------- ------- --------- ----- ---------- ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options
exercised...... -- $ -- $ -- -- $ -- 3,374,442 $ 34 $ 2 $ -- $ --
Issuance of
Series A stock. 786,985 400 -- -- -- -- -- -- -- --
Series A
issuance costs. -- -- -- -- -- -- -- (18) -- --
Issuance of
Series B stock. 3,646,077 3,058 -- -- -- -- -- -- -- --
Series B
issuance costs. -- -- -- -- -- -- -- (2) -- --
Issuance of
Series C stock. -- -- -- 3,669,315 37 -- -- 1,828 -- --
Series C
issuance costs. -- -- -- -- -- -- -- (25) -- --
Stock grants.... -- -- -- -- -- 196 -- -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- -- --
Total
comprehensive
loss........... -- -- -- -- --
---------- ------- ----- --------- ----- ---------- ---- ------- ----- -------
Balance at
December 31,
1996........... 4,433,062 3,458 -- 3,669,315 37 3,374,638 34 1,785 -- --
Exercise of
Series D
warrant........ -- -- -- 128,609 1 -- -- 106 -- --
Issuance of
Series E stock. 4,640,247 10,000 -- -- -- -- -- -- -- --
Series E
issuance costs. -- -- -- -- -- -- -- (126) -- --
Stock options
exercised...... -- -- -- -- -- 258,837 3 21 -- --
Repurchase of
unvested stock. -- -- -- -- -- (141,382) (2) (9) -- --
Compensation
expense from
stock options
granted........ -- -- -- -- -- -- -- 5 -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- -- --
Foreign
currency
translation
adjustment..... -- -- -- -- -- -- -- -- -- --
Total
comprehensive
loss........... -- -- -- -- -- -- -- -- -- --
---------- ------- ----- --------- ----- ---------- ---- ------- ----- -------
Balance at
December 31,
1997........... 9,073,309 13,458 -- 3,797,924 38 3,492,093 35 1,782 -- --
Issuance of
Series F stock. 2,687,168 14,300 -- -- -- -- -- -- -- --
Series F
issuance costs. -- -- -- -- -- -- -- (54) -- --
Issuance of
Series G stock. -- -- -- 375,830 4 -- -- 1,996 -- --
Series G
issuance costs. -- -- -- -- -- -- -- (14) -- --
Issuance of
Series H stock
and warrant.... 1,024,088 8,500 169 -- -- -- -- -- -- --
Series H
issuance costs. -- -- -- -- -- -- -- (29) -- --
Stock options
exercised...... -- -- -- -- -- 2,212,873 22 463 (192) --
Repurchase of
unvested stock. -- -- -- -- -- (28,116) -- (5) -- --
Deferred stock
compensation
related to
stock options.. -- -- -- -- -- -- -- 8,671 -- (8,671)
Amortization of
deferred stock
compensation... -- -- -- -- -- -- -- -- -- 2,475
Payments
received on
notes
receivable for
purchase of
common stock... -- -- -- -- -- -- -- -- 20 --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- -- --
Foreign
currency
translation
adjustment,
cumulative
translation
loss of $(11)
at December
31, 1998....... -- -- -- -- -- -- -- -- -- --
Total
comprehensive
loss...........
---------- ------- ----- --------- ----- ---------- ---- ------- ----- -------
Balance at
December 31,
1998........... 12,784,565 $36,258 $169 4,173,754 $ 42 5,676,850 $ 57 $12,810 $(172) $(6,196)
========== ======= ===== ========= ===== ========== ==== ======= ===== =======
Pro forma
redeemable
convertible
preferred stock
and
stockholders'
equity at
December 31,
1998
(unaudited).... -- $ -- $169 -- $ -- 22,635,169 $226 $48,941 $(172) $(6,196)
========== ======= ===== ========= ===== ========== ==== ======= ===== =======
<S> <C> <C> <C>
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Loss Deficit Equity (Deficit)
------------- ----------- ----------------
<S> <C> <C> <C>
Stock options
exercised...... $ -- $ -- $ 36
Issuance of
Series A stock. -- -- --
Series A
issuance costs. -- -- (18)
Issuance of
Series B stock. -- -- --
Series B
issuance costs. -- -- (2)
Issuance of
Series C stock. -- -- 1,865
Series C
issuance costs. -- -- (25)
Stock grants.... -- -- --
Comprehensive
loss:
Net loss........ -- (3,626) (3,626)
----------------
Total
comprehensive
loss........... (3,626)
------------- ----------- ----------------
Balance at
December 31,
1996........... -- (3,626) (1,770)
Exercise of
Series D
warrant........ -- -- 107
Issuance of
Series E stock. -- -- --
Series E
issuance costs. -- -- (126)
Stock options
exercised...... -- -- 24
Repurchase of
unvested stock. -- -- (11)
Compensation
expense from
stock options
granted........ -- -- 5
Comprehensive
loss:
Net loss........ -- (7,474) (7,474)
Foreign
currency
translation
adjustment..... (3) -- (3)
----------------
Total
comprehensive
loss........... -- -- (7,477)
------------- ----------- ----------------
Balance at
December 31,
1997........... (3) (11,100) (9,248)
Issuance of
Series F stock. -- -- --
Series F
issuance costs. -- -- (54)
Issuance of
Series G stock. -- -- 2,000
Series G
issuance costs. -- -- (14)
Issuance of
Series H stock
and warrant.... -- -- --
Series H
issuance costs. -- -- (29)
Stock options
exercised...... -- -- 293
Repurchase of
unvested stock. -- -- (5)
Deferred stock
compensation
related to
stock options.. -- -- --
Amortization of
deferred stock
compensation... -- -- 2,475
Payments
received on
notes
receivable for
purchase of
common stock... -- -- 20
Comprehensive
loss:
Net loss........ -- (26,197) (26,197)
Foreign
currency
translation
adjustment,
cumulative
translation
loss of $(11)
at December
31, 1998....... (8) -- (8)
----------------
Total
comprehensive
loss........... (26,205)
------------- ----------- ----------------
Balance at
December 31,
1998........... $ (11) $(37,297) $(30,767)
============= =========== ================
Pro forma
redeemable
convertible
preferred stock
and
stockholders'
equity at
December 31,
1998
(unaudited).... $ (11) $(37,297) $ 5,491
============= =========== ================
</TABLE>

See accompanying notes.

F-5
<PAGE>

VIGNETTE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss........................................... $(3,626) $(7,474) $(26,197)
Adjustment to reconcile net loss to cash used in
operating activities:
Depreciation..................................... 41 198 1,068
Noncash compensation expense..................... -- 5 2,475
Acquired in-process research and development..... 1,865 -- 2,000
Loss on disposal of fixed assets................. -- 29 101
Other noncash items.............................. -- -- 4
Changes in operating assets and liabilities:
Accounts receivable, net....................... -- (650) (6,838)
Note receivable from employee.................. -- -- (110)
Prepaid expenses and other assets.............. (88) (151) (783)
Accounts payable............................... 215 218 156
Accrued expenses............................... 86 1,700 5,716
Deferred revenue............................... -- 1,163 4,929
Other liabilities.............................. -- 28 251
------- ------- --------
Net cash used in operating activities........ (1,507) (4,934) (17,228)
Investing activities
Purchase of property and equipment................. (318) (694) (2,179)
------- ------- --------
Net cash used in investing activities........ (318) (694) (2,179)
Financing activities
Proceeds from long-term debt and capital lease
obligation........................................ 279 701 1,837
Payments on long-term debt and capital lease
obligation........................................ (40) (62) (56)
Proceeds from issuance of Series A Convertible
Preferred Stock, net.............................. 382 -- --
Proceeds from issuance of Series B Convertible
Preferred Stock, net.............................. 3,056 -- --
Series C Convertible Preferred Stock issuance
costs............................................. (25) -- --
Proceeds from exercise of Series D Convertible
Preferred Stock warrant........................... -- 107 --
Proceeds from issuance of Series E Convertible
Preferred Stock, net.............................. -- 9,874 --
Proceeds from issuance of Series F Convertible
Preferred Stock, net.............................. -- -- 14,246
Series G Convertible Preferred Stock issuance cost. -- -- (14)
Proceeds from issuance of Series H Convertible
Preferred Stock, net.............................. -- -- 8,471
Proceeds from exercise of stock options............ 16 24 312
Payments for repurchase of unvested common stock... -- (11) (5)
------- ------- --------
Net cash provided by financing activities.... 3,668 10,633 24,791
Effect of exchange rate changes on cash and cash
equivalents....................................... -- (3) (7)
------- ------- --------
Net increase in cash and cash equivalents.......... 1,843 5,002 5,377
Cash and cash equivalents at beginning of year..... 20 1,863 6,865
------- ------- --------
Cash and cash equivalents at end of year .......... $ 1,863 $ 6,865 $ 12,242
======= ======= ========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 7 $ 48 $ 250
======= ======= ========
Noncash activities:
Convertible preferred stock issued to acquire in-
process research and development................ $ 1,865 $ -- $ 2,000
======= ======= ========
</TABLE>

See accompanying notes.

F-6
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998

1. Business

Vignette Corporation, or "the Company" is a global provider of Internet
Relationship Management software products and services, a new category of
enterprise solutions designed to enable businesses to build sustainable online
customer relationships, increase returns on their Internet-related investments
and capitalize on Internet business opportunities. The consolidated financial
statements include the accounts of the Company and its wholly-owned foreign
subsidiary. All material intercompany accounts and transactions have been
eliminated in consolidation.

The Company was incorporated in Delaware on December 19, 1995. Operations
for the period from December 19, 1995 to December 31, 1995 were not
significant.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences could be material to the financial statements.

Revenue Recognition

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

Services revenue is primarily comprised of revenue from consulting fees,
maintenance agreements and training. Services revenue from consulting and
training billed on a time and materials basis is recognized as performed.
Services revenue on fixed price service arrangements is recognized upon
completion of specific contractual milestone events, or based on an estimated
percentage of completion as work progresses. Maintenance agreements include
the right to unspecified upgrades on an if-and-when available basis.
Maintenance revenue is deferred and recognized on a straight-line basis as
services revenue over the life of the related agreement, which is typically
one year.

Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.

The Company adopted Statement of Position 97-2, Software Revenue
Recognition, or SOP 97-2, and Statement of Position 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition, or
SOP 98-4, as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede SOP 91-1. The
adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the
Company's financial results. However, full implementation guidelines for this
standard have not yet been issued. Once available, the current revenue
accounting practices may need to change and such changes could affect the
Company's future revenues and earnings.

In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. The Company believes that
the adoption of SOP 98-9 will not have a material effect on the Company's
results of operations or financial condition.

F-7
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. Summary of Significant Accounting Policies (continued)

Cash Equivalents

Cash equivalents consist primarily of cash deposits and investments with
original maturities of ninety days or less when purchased.

Property and Equipment

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

Research and Development

Research and development expenditures are expensed to operations as
incurred. Statement of Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant. Through December 31, 1998, all software development
costs have been expensed.

Advertising Costs

The Company expenses advertising costs as incurred. These expenses were
approximately $1,000, $158,000 and $85,000 for the years ended December 31,
1996, 1997 and 1998, respectively.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This Statement prescribes the use of the liability method whereby deferred tax
asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

Foreign Currency Transactions

For the Company's foreign subsidiary, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at year end or period end exchange rates, and income statement
items are translated at average exchange rates prevailing during the year or
period. Such translation adjustments are recorded in aggregate as a component
of stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and are not material. No
foreign operations existed for the year ended December 31, 1996.

Stock-Based Compensation

FASB Statement No. 123, Accounting for Stock-Based Compensation, (SFAS 123)
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock options. As allowed by SFAS 123, the Company
has elected to continue to account for its employee stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25).

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist of short-term investments and trade
receivables. The Company's short-term investments, which are included in cash

F-8
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. Summary of Significant Accounting Policies (continued)

and cash equivalents for reporting purposes, are placed with high credit
quality financial institutions and issuers. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral. The following table summarizes the changes in
allowance for doubtful accounts for trade receivables (in thousands):

<TABLE>
<S> <C>
Balance at January 1, 1996......................................... $ --
Additions charged to costs and expenses............................ --
Write-off of uncollectible accounts................................ --
------
Balance at December 31, 1996....................................... --
Additions charged to costs and expenses............................ 92
Write-off of uncollectible accounts................................ (55)
------
Balance at December 31, 1997....................................... 37
Additions charged to costs and expenses............................ 273
Write-off of uncollectible accounts................................ (13)
------
Balance at December 31, 1998....................................... $ 297
======
</TABLE>

Customers A and B accounted for 13% and 11%, respectively, of the Company's
total revenue for the year ended December 31, 1997. No customers accounted for
more than 10% of the Company's total revenue during the years ended December
31, 1996 and 1998.

Net Loss Per Share

The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
loss per share has not been presented as the effect of the assumed exercise of
stock options, warrants and contingently issued shares is antidilutive due to
the Company's net loss.

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock and redeemable convertible preferred stock into
common stock concurrent with the closing of the Company's anticipated initial
public offering. Accordingly, a pro forma calculation assuming the conversion
of all outstanding shares as of December 31, 1998 of convertible preferred
stock and redeemable convertible preferred stock into common stock upon the
Company's initial public offering using the if-converted method from their
respective dates of issuance is presented.

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

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Net loss........................................... $(3,626) $(7,474) $(26,197)
======= ======= ========
Basic:
Weighted-average shares of common stock
outstanding...................................... 3,262 3,475 4,901
Weighted-average shares of common stock subject to
repurchase....................................... (2,632) (1,687) (2,052)
------- ------- --------
Shares used in computing basic net loss per share. 630 1,788 2,849
======= ======= ========
Basic net loss per share.......................... $ (5.76) $ (4.18) $ (9.20)
======= ======= ========
Pro forma:
Shares used above................................. 2,849
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred
stock............................................ 15,055
--------
Shares used in computing pro forma basic net loss
per share........................................ 17,904
========
Pro forma basic net loss per share................ $ (1.46)
========
</TABLE>

F-9
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. Summary of Significant Accounting Policies (continued)

Segments

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

Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on results of
operations or the financial position of the Company.

3. Redeemable Convertible Preferred Stock and Stockholders' Equity

Summary of Preferred Stock

As of December 31, 1998, there were 17,707,230 shares authorized to be
designated as preferred stock. The eight classes of preferred stock designated
as of December 31, 1998 are as follows (352,171 shares remain undesignated):

<TABLE>
<CAPTION>
Shares Issued Consideration per
Shares and Share Received on
Par Value Designated Outstanding Issuance
--------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
Redeemable convertible
preferred stock:
Series A.............. $.01 801,744 786,985 $ .51 cash
Series B.............. $.01 3,646,080 3,646,077 .84 cash
Series E.............. $.01 4,640,262 4,640,247 2.16 cash
Series F.............. $.01 2,687,186 2,687,168 5.33 cash
Series H.............. $.01 1,141,132 1,024,088 8.30 cash
---------- ----------
12,916,404 12,784,565
========== ==========
Convertible preferred
stock:
Series C.............. $.01 3,669,331 3,669,315 $ .51 technology
Series D.............. $.01 393,494 128,609 .84 cash
Series G.............. $.01 375,830 375,830 5.33 technology
---------- ----------
4,438,655 4,173,754
========== ==========
</TABLE>

F-10
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Redeemable Convertible Preferred Stock and Stockholders' Equity (continued)

Each holder of Series A, B, E, F and H Preferred Stock may elect to require
the Company to redeem on or after the dates specified below, and in the
amounts specified below, any such shares which were purchased by the
stockholder, net of any shares previously redeemed, plus any accrued and
unpaid dividends:

<TABLE>
<CAPTION>
Percentage of Shares
Acquired Which May Redemption
Mandatory Redemption Date be Redeemed Amount
------------------------- -------------------- --------------
(in thousands)
<S> <C> <C>
April 22, 2005 50% $18,129
April 22, 2006 75% 27,194
April 22, 2007 100% 36,258
</TABLE>

The Company's preferred stock has the following characteristics at December
31, 1998:

<TABLE>
<CAPTION>
Description Dividend Features Liquidation Preference Conversion Features Redemption Features
- ----------- ----------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Series A Cumulative at an $.51 per share One for one subject $.51 per share
annual rate of plus accrued to certain plus accrued and
$.03 per share and unpaid antidilution unpaid dividends
beginning dividends (1) adjustments, as
January 1, 1999 defined
payable upon
liquidation or
conversion
Series B Cumulative at an $.84 per share One for one subject $.84 per share
annual rate of plus accrued to certain plus accrued and
$.05 per share and unpaid antidilution unpaid dividends
beginning dividends (1) adjustments, as
January 1, 1999 defined
payable upon
liquidation or
conversion
Series C Cumulative at an $.51 per share One for one subject None
annual rate of plus accrued to certain
$.03 per share and unpaid antidilution
beginning dividends (1) adjustments, as
January 1, 1999 defined
payable upon
liquidation or
conversion
Series D Non-cumulative $.84 per share One for one subject None
at the same rate plus accrued to certain
as dividends and unpaid antidilution
paid on common dividends adjustments, as
stock payable defined
upon liquidation
or conversion
Series E Cumulative at an $2.16 per One for one subject $2.16 per share
annual rate of share plus to certain plus accrued and
$.13 per share accrued and antidilution unpaid dividends
beginning June unpaid adjustments, as
6, 2000 payable dividends (1) defined
upon liquidation
or conversion
Series F Cumulative at an $5.33 per One for one subject $5.33 per share
annual rate of share plus to certain plus accrued and
$.32 per share accrued and antidilution unpaid dividends
beginning April unpaid adjustments, as
22, 2001 payable dividends (1) defined
upon liquidation
or conversion
Series G Same as Series D $5.33 per One for one subject None
share plus to certain
accrued and antidilution
unpaid adjustments, as
dividends defined
Series H Cumulative at an $8.30 per One for one subject $8.30 per share
annual rate of share plus to certain plus accrued and
$.50 per share accrued and antidilution unpaid dividends
beginning unpaid adjustments, as
November 30, dividends (1) defined (2)
2001 payable
upon liquidation
or conversion
</TABLE>
- --------
(1) In addition to the liquidation preference amount shown, the preferred
stockholder also participates on a pro rata basis with common stockholders
in the liquidation of additional proceeds, if any, as specified by the
preferred stock agreement.

(2) The Series H Preferred Stock price of $8.30 per share is subject to
certain downward adjustments, through an adjustment in the shares of
common stock issuable upon conversion, in the event that the Company does
not complete a public offering at a price per share approximately 25%
higher than the price paid by the Series H preferred stockholders. The
adjustments can reduce the per share value of the Series H Preferred Stock
to as low as $5.33 per share.

F-11
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Redeemable Convertible Preferred Stock and Stockholders' Equity (continued)

Voting Rights

Each share of common stock has one voting right. Each series of redeemable
convertible preferred stock and convertible preferred stock have voting rights
equal to the number of common shares into which all shares of a particular
series of preferred stock could then be converted.

Stock Option/Stock Issuance Plan

The Company has a 1995 Stock Option/Stock Issuance Plan (the "Plan") whereby
employees, members of the Board of Directors, and independent advisors may be
granted options to purchase shares of the Company's common stock or may be
issued shares of the Company's common stock directly. Options are immediately
exercisable subject to a repurchase agreement. The stock options and the
related exercised stock will generally vest over a four year cumulative
period. The term of each option is no more than ten years from the date of
grant. Options for 11,924,836 shares were authorized under the Plan at
December 31, 1998. Stock issuances may be for purchase or as a bonus for
services rendered to the Company.

Upon certain events, the Company has repurchase rights for unvested shares
equal to the original exercise price. The Company also has the right of first
refusal for any proposed disposition of shares issued under the Plan.

In 1998, the Company recorded total deferred stock compensation of
$8,671,000 in connection with stock options granted during the year ended
December 31, 1998. This amount represents the difference between the exercise
price of stock options grants for 4,248,603 shares of common stock and the
deemed fair value of the Company's common stock at the time of such grants
which ranged from $.22 to $6.61 per share and $.30 to $13.22 per share,
respectively. Such amount is being amortized over the vesting periods of the
applicable options, resulting in amortization of $2,475,000 for the year ended
December 31, 1998.

A summary of the Company's stock option activity and related information
through December 31, 1998 follows:

<TABLE>
<CAPTION>
Range of Weighted-
Number of Exercise Average
Shares Prices Exercise Price
---------- ----------- --------------
<S> <C> <C> <C>
Options outstanding--January 1, 1996. -- $ -- $ --
Granted............................ 3,940,039 .01 - .09 .02
Exercised.......................... (3,374,442) .01 - .09 .01
Canceled........................... -- -- --
----------
Options outstanding--December 31,
1996................................ 565,597 .06 - .09 .08
Granted............................ 2,495,403 .09 - .22 .16
Exercised.......................... (258,837) .09 - .22 .09
Canceled........................... (625,687) .09 - .22 .10
----------
Options outstanding--December 31,
1997................................ 2,176,476 .06 - .22 .17
Granted............................ 5,853,234 .22 - 6.61 2.90
Exercised.......................... (2,212,873) .09 - 6.36 .23
Canceled........................... (396,260) .09 - 4.83 .39
----------
Options outstanding, December 31,
1998................................ 5,420,577 .06 - 6.61 3.09
==========
Options available for grant at
December 31, 1998................... 658,107
==========
</TABLE>

F-12
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Redeemable Convertible Preferred Stock and Stockholders' Equity (continued)

The following is a summary of options outstanding and exercisable as of
December 31, 1998:

<TABLE>
<CAPTION>
Number of Options Weighted-Average
Outstanding and Exercisable Remaining Contractual Life Weighted-Average
Range of Exercise Prices at December 31, 1998 (in years) Exercise Price
------------------------ --------------------------- -------------------------- ----------------
<S> <C> <C> <C>
$.06
to
$.13 225,954 6.0 $ .09
$ .22 998,526 7.2 $ .21
$1.07 1,423,141 7.5 $1.06
$2.55
to
$3.56 454,453 7.8 $3.38
$4.83 518,112 7.8 $4.83
$6.36
to
$6.61 1,800,391 8.0 $6.35
---------
5,420,577 7.6 $3.09
=========
</TABLE>

A total of 2,598,723 shares of outstanding common stock were unvested at
December 31, 1998 and may be repurchased by the Company should vesting
requirements not be fulfilled.

Pro forma information regarding net loss is required by Statement No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................. 6% 6% 6%
Weighted-average expected life of the options....... 4 years 4 years 4 years
Dividend rate....................................... 0% 0% 0%
Assumed volatility.................................. 0% 0% 0%
Weighted average fair value of options granted:
Exercise price equal to fair value of stock on
date of grant.................................... $.01 $.04 $2.19
Exercise price less than fair value of stock on
date of grant.................................... -- -- $1.77
</TABLE>

For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share data):

<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Pro forma stock-based compensation expense...... $ 1 $ 11 $ 259
Pro forma net loss.............................. $(3,627) $(7,485) $(26,456)
Pro forma basic net loss per share.............. $ (5.76) $ (4.19) $ (9.29)
</TABLE>

Stock Plans

In September 1998, the Board of Directors adopted the 1999 Equity Incentive
Plan ("1999 Plan") subject to stockholder approval. Under the 1999 Plan, the
eligible individuals are: employees, non-employee members of the Board of
Directors and consultants. The types of awards that may be made under the 1999
Plan are options to purchase shares of common stock, stock appreciation
rights, restricted shares and stock units. The Company has reserved 1,000,000
shares for issuance under the 1999 Plan subject to stockholder approval. As of
December 31, 1998, stockholder approval had not yet occurred and, accordingly,
no options had been granted under the 1999 Plan.

F-13
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In September 1998, the Board of Directors adopted the Employee Stock
Purchase Plan ("ESPP") subject to stockholder approval. The Company has
reserved 750,000 shares of common stock for issuance under the ESPP subject to
stockholder approval. As of January 1 each year, the number of shares reserved
for issuance under the ESPP will be increased automatically to 2% of the total
number of shares of common stock outstanding or, if less, 750,000 shares. As
of December 31, 1998, stockholder approval had not yet occurred and,
accordingly, no options had been granted under the ESPP.

In September 1998, the Board of Directors adopted the 1999 Non-Employee
Directors Option Plan subject to stockholder approval. Under the 1999 Non-
Employee Directors Option Plan, non-employee members of the Board of Directors
will be eligible for automatic option grants. A maximum of 250,000 shares of
common stock has been authorized for issuance under the 1999 Non-Employee
Directors Option Plan subject to stockholder approval. As of December 31,
1998, stockholder approval had not yet occurred and, accordingly, no options
had been granted under the 1999 Non-Employee Directors Option Plan.

Warrants

In connection with the issuance of Series A Redeemable Convertible Preferred
Stock in February 1996, the Company also issued a warrant to purchase 14,756
shares of Series A Redeemable Convertible Preferred Stock at $.51 per share to
a corporation. The warrant is exercisable at any time before the later to
occur of March 2006 or five years after a Qualified Public Offering, as that
term is defined.

A warrant to purchase 128,609 shares of Series D Convertible Preferred Stock
was granted to a Board member at $.84 per share during 1996. The warrant was
exercised in 1997.

No amount was allocated to the value of the above warrants as such amounts
were not significant.

F-14
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Redeemable Convertible Preferred Stock and Stockholders' Equity (continued)

In December 1998, the Company entered into agreements with a company
providing for available credit of up to $5 million and an equipment lease line
of $1.25 million. In connection with such agreements, the Company issued a
warrant to the company to purchase 90,358 shares of Series H Redeemable
Convertible Preferred Stock at an exercise price of $8.30. The Company valued
the warrant at $169,000 using the Black-Scholes model, an assumed volatility
of 51%, a risk-free interest rate of 6%, a weighted-average expected life of 1
year, and a dividend rate of 0%.

Reserved Shares of Common Stock

At December 31, 1998, the Company had reserved 17,063,433 shares of its
common stock for issuance upon conversion of its various series of preferred
stock and exercise of its warrants. At December 31, 1998, another 6,078,684
shares of common stock were reserved for issuance under the Company's 1995
Stock Option/Stock Issuance Plan.

4. Long-term Debt

Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
Bank line of credit of $8,000--outstanding principal
balance payable upon maturity in December 1999. Line bears
interest at prime + .75% and is due monthly. ............. $ -- $ 1,500
Bank line of credit of $2,000--outstanding principal
balance payable monthly in thirty-six equal installments
beginning December 1998. Line bears interest at prime +
.75% and is due monthly. ................................. 850 1,153
Subordinated line of credit of $5,000 from a company--
outstanding principal balance payable monthly in thirty
equal installments beginning six months after the
execution of an Advanced Request, as defined. Line bears
interest at 12% and is due monthly........................ -- --
Lease financing credit of $1,250 from a company--
outstanding principal balance payable monthly in thirty-
six equal installments beginning upon execution of an
Equipment Schedule under the Master Lease Agreement, as
defined. Line bears interest at 7.5% and is due monthly... -- --
------ -------
850 2,653
Less current portion....................................... (24) (1,895)
------ -------
Long-term portion.......................................... $ 826 $ 758
====== =======
Available for future borrowings............................ $2,150 $13,597
====== =======
</TABLE>

The borrowings under the lines of credit are collateralized by all tangible
and intangible property of the Company.

The aggregate maturities of long-term debt at December 31, 1998 are as
follows (in thousands):

As of December 31, 1997 and 1998, all of the Company's outstanding long-term
debt has a variable interest rate and, accordingly, the Company believes the
carrying value of the long-term debt approximates its fair value.

F-15
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Lease Commitments

The Company has financed the acquisition of certain computers and equipment
through sale-leaseback transactions which are accounted for as financings.
Included in property and equipment at December 31, 1997 and 1998 are the
following assets held under capital leases (in thousands):

<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Property and equipment........................................ $ 65 $ 65
Less accumulated depreciation................................. (31) (65)
----- ------
$ 34 $ --
===== ======
</TABLE>

Future minimum lease payments for assets under capital leases at December
31, 1998 are $7,000 all of which is due to be paid by December 31, 1999.

The Company leases its office facilities and office equipment under various
operating lease agreements. Future minimum payments as of December 31, 1998,
under these leases, are as follows (in thousands):

<TABLE>
<S> <C>
1999.................................. 2,058
2000.................................. 1,943
2001.................................. 1,957
2002.................................. 2,015
2003.................................. 1,847
Thereafter............................ --
------
$9,820
======
</TABLE>

Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$95,000, $263,000 and $1,512,000, respectively.

6. Income Taxes

As of December 31, 1998, the Company had net operating loss and research and
development credit carryforwards of approximately $27,023,000 and $560,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates, beginning in 2011, if not utilized.

The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. The Company's utilization of the net
operating losses will be subject to a substantial annual limitation due to an
"ownership change" resulting from the sales of private equity securities. The
annual limitation may result in the expiration of net operating losses before
utilization.

F-16
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Income Taxes (continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes as of December 31, 1997 and 1998 are as
follows (in thousands):

<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciable assets...................................... $ (19) $ --
Other................................................... (9) (47)
------- --------
(28) (47)
Deferred tax assets:
Depreciable assets...................................... -- 118
Deferred revenue........................................ -- 1,143
Tax carryforwards....................................... 3,704 10,558
Software development costs.............................. 383 153
Amortization of deferred stock compensation............. -- 918
Accrued liabilities and other........................... 92 440
------- --------
4,179 13,330
------- --------
Net deferred tax assets................................... 4,151 13,283
Valuation allowance for net deferred tax assets........... (4,151) (13,283)
------- --------
Net deferred taxes........................................ $ -- $ --
======= ========
</TABLE>

The Company has established a valuation allowance equal to the net deferred
tax asset due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $2,805,000 during the year ended December
31, 1997 and $9,132,000 during the year ended December 31, 1998.

Undistributed earnings of the Company's foreign subsidiary were immaterial
as of December 31, 1998. Those earnings are considered to be permanently
reinvested and, accordingly, no provision for U.S. federal and/or state income
taxes has been provided thereon.

The Company's provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of
34% to income before income taxes as a result of the following:

<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.. (34.0)% (34.0)% (34.0)%
State taxes, net of
federal benefit........ (3.0) (3.0) (2.7)
In-process research and
development............ -- -- 2.7
Change in valuation
allowance.............. 37.0 37.0 34.8
Other................... -- -- (.8)
----- ----- -----
0 % 0 % 0 %
===== ===== =====
</TABLE>

F-17
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Acquired In-Process Research and Development

During May 1998, the Company acquired from RandomNoise, Inc. certain in-
process research and development effort, a developed product and an
insignificant amount of equipment in exchange for $100,000 in cash and 375,830
shares of the Company's Series G Convertible Preferred Stock valued at $5.33
share or $2,000,000. Substantially all of the $2,100,000 purchase price was
allocated to the acquired in-process research and development efforts based
upon the following: (i) the Company assigned no value to the developed product
as the Company does not intend to sell, support or enhance such product and
the Company believes it has no alternative future use; (ii) the $5.33 per
share ascribed to the Company's Series G Convertible Preferred Stock was based
on the value per share received from the issuance of Series F Redeemable
Convertible Preferred Stock, which occurred in April 1998; and (iii) the
allocation of the entire $2,100,000 purchase price was determined to be
reasonable based on the Company's estimate of costs it would incur if it had
performed this effort internally.

The in-process research and development effort relates to the development of
visual development tool technology using graphical user interface ("GUI")
technology not present in the developed product acquired from RandomNoise and
not possessed by the Company and at the time of purchase the results of the
in-process research and development effort had not progressed to a stage where
they met technological feasibility. At the time of the transaction, the
Company estimated that an additional 90 person months or $900,000 in costs
would be required to complete the beta version of the new GUI-based technology
tool, which is expected to be released in February 1999. The additional person
months were required to add certain key elements, including: the ability to
integrate with database oriented dynamic publishing systems; database
interfacing capabilities; enhanced and consistent application performance;
memory requirements consistent with those of the Company's other product;
multiple Internet browser recognition capabilities; standardized
documentation; and automated testing capabilities. As this was the Company's
first attempt to develop GUI-based technology, at the time of the transaction
there existed a significant amount of uncertainty as to the Company's ability
to complete the development of a new product within a timeframe acceptable to
the market and ahead of competitors. Additionally, the amount of development
required to enable the acquired in-process research and development to be
compatible with the Company's primary product was significant, which increased
the uncertainty surrounding its successful development. If the Company is not
successful in completing the development within the contemplated timeframe,
the Company believes that although sales of its primary product to certain
customers may be delayed, it will not have a significant adverse effect on the
Company's results from operations.

The Company has incurred approximately 92 person months or $920,000 in costs
related to development of the acquired in-process research and development and
estimates that approximately 13 person months or $130,000 in costs will be
required to complete the development. The Company currently anticipates
releasing the completed product in the first quarter of 1999.

During July 1996, the Company acquired from CNET, certain software and
related intellectual property rights for 3,669,315 shares of the Company's
Series C Convertible Preferred Stock valued at $1,865,000. At the time the
software technology was acquired, a significant amount of uncertainty
surrounded the successful development of the product as the Company was still
in its formation stage and was unproven in its ability to successfully develop
and market any software product. Also, a significant amount of technical risk
existed, as the viability of the intended product would be jeopardized if the
Company were not successful in programming a user interface, programming an
installation and configuration capability, porting the software to operate on
more recent versions or additional platforms such as Netscape browser, Sybase,
Oracle and Informix database software, and adding quality assurance test
suites. These key elements were subsequently developed by the Company and led
to a beta product released in December 1996. All of the $1,865,000 purchase
price was allocated to acquired in-process research and development efforts.

F-18
<PAGE>

VIGNETTE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Employee 401(k) Plan

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

9. Segments of Business and Geographic Area Information

The Company considers its business activities to constitute a single
segment.

A summary of the Company's operations by geographic area follows (in
thousands):

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue:
United States
Domestic..................................... $ -- $ 2,948 $ 12,471
Other........................................ -- 76 522
------- ------- --------
Total United States........................ -- 3,024 12,993
Europe and Australia........................... -- -- 3,212
------- ------- --------
Total revenue.............................. $ -- $ 3,024 $ 16,205
======= ======= ========
Net loss:
United States.................................. $(3,626) $(7,447) $(25,756)
Europe and Australia........................... -- (27) (441)
------- ------- --------
Total...................................... $(3,626) $(7,474) $(26,197)
======= ======= ========
Identifiable assets:
United States.................................. $ 8,417 $ 20,486
Europe and Australia........................... 82 2,295
------- --------
Total...................................... $ 8,499 $ 22,781
======= ========
</TABLE>

10. Subsequent Event

In connection with the Company's anticipated public offering the Company
will effect a 1.9674701-for-1 stock split of common and preferred stock to be
effective immediately prior to the effective date of the Company's initial
public offering. All common and preferred stock information has been adjusted
to reflect the stock split as if such split had taken place at the inception
of the Company.

F-19
<PAGE>

[Logo of The Red Herring magazine, with the words "DIGITAL UNIVERSE TOP 100
COMPANIES," "Best Overall" and "Best Products;" graphic reading "UPSIDE'S 1998
HOT 100 PRIVATE COMPANIES;" graphic reading "SEYBOLD PUBLICATIONS 97 EDITORS'
AWARD."]

Our awards can't deliver the solutions that build online relationships and
maximize Web-based revenues, but our products can.

At Vignette, we realize that it takes more than awards to help businesses
build their online revenues. It takes a commitment to industry leadership as
well as top-notch products and services continuously provided to outstanding
clients. At Vignette, we take those commitments seriously. And yes, we'll
continue to take the awards.

Customers include: [Logos of National Semiconductor, Bank One, Bay Networks,
ZDNet, CBS Sports Line, Chicago Tribune, Lands' End, Citibank, CNET, Preview
Travel, AMD and Pathfinder]
<PAGE>

[LOGO OF VIGNETTE APPEARS HERE]
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.

<TABLE>
<S> <C>
SEC Registration fee................................................... $15,665
NASD fee............................................................... 6,135
Nasdaq National Market listing fee..................................... 17,500
Printing and engraving expenses........................................ 200,000
Legal fees and expenses................................................ 400,000
Accounting fees and expenses........................................... 250,000
Blue sky fees and expenses............................................. 10,000
Transfer agent fees.................................................... 13,700
Miscellaneous fees and expenses........................................ 37,000
--------
Total................................................................ $950,000
========
</TABLE>

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended, referred to below as the Securities Act. Article VII, Section 6,
of the Registrant's Bylaws provides for mandatory indemnification of its
directors and officers and permissible indemnification of employees and other
agents to the maximum extent permitted by the Delaware General Corporation
Law. The Registrant's Certificate of Incorporation provides that, pursuant to
Delaware law, its directors shall not be liable for monetary damages for
breach of the directors' fiduciary duty as directors to the Registrant and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities laws or state or federal
environmental laws. The Registrant has entered into Indemnification Agreements
with its officers and directors, a form of which is attached as Exhibit 10.1
hereto and incorporated herein by reference. The Indemnification Agreements
provide the Registrant's officers and directors with further indemnification
to the maximum extent permitted by the Delaware General Corporation Law.
Reference is made to the Underwriting Agreement contained in Exhibit 1.1
hereto, which contains provisions indemnifying officers and directors of the
Registrant against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

Since inception, the Registrant has issued and sold the following
securities:

1. The Registrant granted stock options to purchase 12,288,676 shares of
common stock at exercise prices ranging from $.01 to $6.61 per share to
employees, consultants and directors pursuant to its 1995 Stock
Option/Stock Issuance Plan.

II-1
<PAGE>

2. From inception through December 31, 1998, the Registrant issued and
sold an aggregate of 5,846,152 shares of its common stock to employees,
consultants and directors for aggregate consideration of approximately
$569,495 pursuant to exercises of options granted under its 1995 Stock
Option/Stock Issuance Plan.

3. In February 1996, the Registrant issued and sold 786,985 shares of its
Series A Preferred Stock for an aggregate purchase price of $400,000 to a
group of investors pursuant to a Stock Purchase Agreement.

4. In February, June and July 1996, the Registrant issued and sold
3,646,077 shares of its Series B Preferred Stock for an aggregate purchase
price of approximately $3,057,750 to CNET, Inc. pursuant to a Stock
Purchase Agreement.

5. In July 1996, the Registrant issued and sold 3,669,315 shares of its
Series C Preferred Stock and for technology valued at approximately
$1,865,000 to CNET, Inc. pursuant to a Stock Purchase Agreement.

6. In December 1996, the Registrant issued a warrant to purchase 128,609
shares of its Series D Preferred Stock to James Treybig. In August 1997,
this warrant was exercised in full for an aggregate purchase price of
approximately $107,857.

7. In June and July 1997, the Registrant issued and sold 4,640,247 shares
of its Series E Preferred Stock for an aggregate purchase price of
approximately $10,000,006 to a group of investors pursuant to Stock
Purchase Agreements.

8. In April 1998, the Registrant issued and sold 2,687,168 shares of its
Series F Preferred Stock for an aggregate purchase price of approximately
$14,300,010 to a group of investors pursuant to a Stock Purchase Agreement.

9. In May 1998, the Registrant issued and sold 375,830 shares of its
Series G Preferred Stock valued at approximately $2,000,000 to RamdomNoise,
Inc. for technology pursuant to a Stock Purchase Agreement.

10. In November 1998, the Registrant issued and sold 1,024,088 shares of
its Series H Preferred Stock for an aggregate purchase price of
approximately $8,500,000 to a group of investors pursuant to a Stock
Purchase Agreement.

11. In December 1998, the Registrant issued warrants to purchase 90,358
shares of its Series H Preferred Stock at an exercise price of $8.30 per
share to Comdisco, Inc. in connection with a loan and equipment lease.

The issuances described in Items 15(1) and (2) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
under the Securities Act or Section 4(2) of the Securities Act. The issuances
of the securities described in Items 15(3)-(11) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act
as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.

II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit No Description
---------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended to date.
3.2 Form of Amended and Restated Certificate of Incorporation to be
filed on the closing of the offering made hereby.
3.3+ Bylaws of the Registrant.
3.4+ Form of Bylaws to be filed on the closing of the offering made
hereby.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2+ Specimen common stock certificate.
4.3+ Sixth Amended and Restated Stockholders Agreement dated November
30, 1998.
4.4+ Fifth Amended and Restated Registration Rights Agreement dated
November 30, 1998.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1+ Form of Indemnification Agreements.
10.2+ 1995 Stock Option/Stock Issuance Plan and forms of agreements
thereunder.
10.3+ 1999 Equity Incentive Plan.
10.4+ Employee Stock Purchase Plan.
10.5+ 1999 Non-Employee Directors Option Plan.
10.6+ Security and Loan Agreement dated March 24, 1998 between the
Registrant and Imperial Bank.
10.7+ Lease Agreement dated June 20, 1996 between the Registrant and
David B. Barrow, Jr.
10.8+ First Supplement to Lease Agreement dated November 4, 1997 between
Registrant and 3410 Far West, Ltd.
10.9+ Second Supplement to Lease Agreement dated February 23, 1998
between Registrant and 3410 Far West, Ltd.
10.10+ Office Lease Agreement dated August 4, 1998 between Registrant and
B.O. III, Ltd.
10.11+** "Prism" Development and Marketing Agreement dated July 19, 1996
between the Registrant and CNET, Inc.
10.12+** Letter Amendment to "Prism" Development and Marketing Agreement
between the Registrant and CNET, Inc. dated August 15, 1998 and
attachments thereto.
10.13+** Software License Agreement dated April 6, 1998 between Registrant
and Net Perceptions, Inc.
10.14+** StoryServer Q2 Volume Purchase Agreement between Registrant and
Tribune Interactive Inc.
10.15+** Protege Software (Holdings) Confidential Professional Services
Agreement dated November 15, 1997.
10.16+ Subordinated Loan and Security Agreement dated December 3, 1998
between Registrant and Comdisco, Inc.
10.17+ Master Lease Agreement dated December 3, 1998 between Registrant
and Comdisco, Inc.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- --------

+ Previously filed.

** Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.

II-3
<PAGE>

(b) Financial Statement Schedules

All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.

Item 17. Undertakings

The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate
of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance on Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Austin, State of Texas, on this 1st day of February, 1999.

Vignette Corporation

/s/ Gregory A. Peters
By: _________________________________
Gregory A. Peters
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Gregory A. Peters President, Chief Executive February 1, 1999
______________________________________ Officer and Director
Gregory A. Peters (Principal Executive
Officer)

Jack F. Lynch* Vice President, Finance February 1, 1999
______________________________________ and Operations (Principal
Jack F. Lynch Financial and Accounting
Officer) and Secretary

Ross B. Garber* Chairman of the Board and February 1, 1999
______________________________________ Director
Ross B. Garber

Neil Webber* Chief Technology Officer February 1, 1999
______________________________________ and Director
Neil Webber

Robert E. Davoli* Director February 1, 1999
______________________________________
Robert E. Davoli

Steven G. Papermaster* Director February 1, 1999
______________________________________
Steven G. Papermaster

John D. Thornton* Director February 1, 1999
______________________________________
John D. Thornton
</TABLE>

/s/ Gregory A. Peters
*By: ____________________________
Gregory A. Peters
Attorney-in-Fact

II-5
<PAGE>

EXHIBIT INDEX

+ Previously filed.

** Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.

<PAGE>

EXHIBIT 3.1

FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

VIGNETTE CORPORATION,
A DELAWARE CORPORATION

(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)

Vignette Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "General Corporation Law")

DOES HEREBY CERTIFY:

FIRST: That the name of this corporation is Vignette Corporation, and
that this corporation was originally incorporated on December 19, 1995, pursuant
to the General Corporation Law.

SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Third Amended and Restated Certificate of
Incorporation and Certificate of Designation of Preferences of Series G
Convertible Preferred Stock (collectively, the "Prior Certificate") of this
corporation, declaring said amendment and restatement to be advisable and in the
best interests of this corporation and its stockholders, and authorizing the
appropriate officers of this corporation to solicit the consent of the
stockholders therefore, which resolution setting forth the proposed amendment
and restatement is as follows:

"RESOLVED, that the Prior Certificate of this corporation be amended
and restated in its entirety as follows:

ARTICLE I.

The name of this Corporation shall be: Vignette Corporation.

ARTICLE II.

The address of the registered office of the Corporation in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, Delaware. The name of the registered agent at
that address is The Corporation Trust Company.

ARTICLE III.

The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
<PAGE>

ARTICLE IV.

The name and mailing address of the incorporator of the Corporation is:

Ross B. Garber
One Far West Plaza
3410 Far West Boulevard, Suite 300
Austin, Texas 78731

ARTICLE V.

A. Authorized Shares. The aggregate number of shares that the
Corporation shall have authority to issue is 26,000,000 shares, (i) 17,000,000
shares of which shall be Common Stock, with a par value of $0.01 per share, and
(ii) 9,000,000 shares of which shall be Preferred Stock, with a par value of
$0.01 per share.

B. Preferred Stock. The Preferred Stock may be issued from time to time
in one or more series. All shares of Preferred Stock shall be of equal rank and
shall be identical, except in respect of the matters that may be fixed by the
Board of Directors as hereinafter provided, and each share of each series shall
be identical with all other shares of such series. Subject to the provisions of
Part 4, the Board of Directors of the Corporation is expressly authorized to
provide for the issuance of all or any of the shares of Preferred Stock in one
or more series, and to fix the number of shares and to determine or (so long as
no shares of such series are then outstanding) alter for each such series, such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other rights and such
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such shares and as may be permitted by the General
Corporation Law of the State of Delaware. Subject to the provisions of Part 4,
the Board of Directors is also expressly authorized to increase or decrease (but
not below the number of shares of such series then outstanding) the number of
shares of any series of Preferred Stock subsequent to the issuance of shares of
that series. In case the number of shares of any such series is so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution or resolutions originally fixing the
number of shares of such series. The rights, preferences, restrictions and
other matters relating to the Series A Convertible Preferred Stock (the "Series
A Preferred Stock"), which series shall consist of 407,500 shares, the Series B
Convertible Preferred Stock (the "Series B Preferred Stock"), which series shall
consist of 1,853,182 shares, the Series C Convertible Preferred Stock (the
"Series C Preferred Stock"), which series shall consist of 1,865,000 shares, the
Series D Convertible Preferred Stock (the "Series D Preferred Stock"), which
series shall consist of 200,000 shares, the Series E Convertible Preferred Stock
(the "Series E Preferred Stock"), which series shall consist of 2,358,492
shares, the Series F Convertible Preferred Stock (the "Series F Preferred
Stock"), which series shall consist of 1,365,808 shares, the Series G
Convertible Preferred Stock (the "Series G Preferred Stock"), which series shall
consist of 191,022 shares, and the Series H Convertible Preferred Stock (the
"Series H Preferred Stock"), which series shall consist of 580,000 shares, are
as set forth below in this Article V.B.

2
<PAGE>

Part 1. Dividends.

1A. (i) From and after January 1, 1999, (a) the holders of the then
outstanding Series A Preferred Stock shall be entitled to receive, when and as
declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the annual rate of $0.06 per share, (b) the holders of
the then outstanding Series B Preferred Stock shall be entitled to receive, when
and as declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the annual rate of $0.10 per share and (c) the holders
of the then outstanding Series C Preferred Stock shall be entitled to receive,
when and as declared by the Board, and out of any funds legally available
therefor, cumulative dividends at the annual rate of $0.06 per share. Dividends
on the shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall accumulate and accrue on each such share from January 1,
1999 and shall accumulate and accrue from day to day thereafter, whether or not
earned or declared. Such dividends shall be cumulative so that, except as
provided in paragraph 1B, if such dividends in respect of any previous or
current quarterly dividend period, at the annual rate specified above, shall not
have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be fully paid before any dividend or other
distribution shall be paid or declared and set apart for the Common Stock.

(ii) The holders of the outstanding Series D Preferred Stock shall be
entitled to receive dividends on such shares when and as declared by the Board,
and out of any funds legally available therefor; provided, however, that
dividends shall accumulate and accrue at the same time or times and the same
rate as dividends are paid on the Corporation's outstanding Common Stock.
Dividends payable with respect to the Series D Preferred Stock shall be non-
cumulative.

(iii) From and after June 6, 2000, the holders of the then
outstanding Series E Preferred Stock shall be entitled to receive, when and as
declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the annual rate of $0.254 per share. Dividends on the
Series E Preferred Stock shall accumulate and accrue on each such share from
June 6, 2000 and shall accumulate and accrue from day to day thereafter, whether
or not earned or declared. Such dividends shall be cumulative so that, except
as provided in paragraph 1B, if such dividends in respect of any previous or
current quarterly dividend period, at the annual rate specified above, shall not
have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be fully paid before any dividend or other
distribution shall be paid or declared and set apart for the Common Stock.

(iv) From and after April 22, 2001, the holders of the then
outstanding Series F Preferred Stock shall be entitled to receive, when and as
declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the annual rate of $0.628 per share. Dividends on the
Series F Preferred Stock shall accumulate and accrue on each such share from
April 22, 2001 and shall accumulate and accrue from day to day thereafter,
whether or not earned or declared. Such dividends shall be cumulative so that,
except as provided in paragraph 1B, if such dividends in respect of any previous
or current quarterly dividend period, at the annual rate specified above, shall
not have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be fully paid before any dividend or other
distribution shall be paid or declared and set apart for the Common Stock.

3
<PAGE>

(v) The holders of the outstanding Series G Preferred Stock shall be
entitled to receive dividends on such shares when and as declared by the Board,
and out of any funds legally available therefor; provided, however, that
dividends shall accumulate and accrue at the same time or times and the same
rate as dividends are paid on the Company's outstanding Common Stock. Dividends
payable with respect to the Series G Preferred Stock shall be non-cumulative.

(vi) From and after November 30, 2001, the holders of the then
outstanding Series H Preferred Stock shall be entitled to receive, when and as
declared by the Board, and out of any funds legally available therefor,
cumulative dividends at the annual rate of $.98 per share. Dividends on the
Series H Preferred Stock shall accumulate and accrue on each such share from
November 30, 2001 and shall accumulate and accrue from day to day thereafter,
whether or not earned or declared. Such dividends shall be cumulative so that,
except as provided in paragraph 1B, if such dividends in respect of any previous
or current quarterly dividend period, at the annual rate specified above, shall
not have been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be fully paid before any dividend or other
distribution shall be paid or declared and set apart for the Common Stock.

1B. Each share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series H Preferred Stock shall rank equally in all respects with respect to
dividends; provided, however, that, except as set forth in paragraphs 2A and 3C,
the Corporation shall not declare or pay dividends which are insufficient to pay
all accrued dividends on each class or series of Preferred Stock outstanding
unless such dividends are declared and paid to each class or series of Preferred
Stock pro rata based on the accrued dividends with respect to such class or
series as a percentage of accrued dividends for all classes or series of
Preferred Stock. Unless full dividends on the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series H Preferred Stock for all past dividend periods and
the then current dividend period shall have been paid or declared and a sum
sufficient for the payment thereof set apart, (i) no dividend whatsoever other
than a dividend payable solely in Common Stock shall be paid or declared, and no
distribution shall be made, on any Common Stock, and (ii) no shares of Common
Stock shall be purchased, redeemed or acquired by the Corporation and no monies
shall be paid into or set aside or made available for a sinking fund for the
purchase, redemption or acquisition thereof; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock from
directors or employees of or consultants or advisors to the Corporation or any
Subsidiary pursuant to any Approved Plan or under the terms of the Stockholders
Agreement, as amended.

Part 2. Liquidation Preference.

2A. In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series H
Preferred Stock shall be entitled to receive, prior and in preference to any
payment or distribution and setting apart for payment or distribution of any of
the assets or surplus funds of the Corporation to the holders of the Common
Stock, (i) an amount for each share of Series A Preferred Stock then held by
them equal to $1.00 (as adjusted for any stock dividends, combinations or splits
with respect to such shares), (ii) an amount for each share of Series B

4
<PAGE>

Preferred Stock then held by them equal to $1.65 (as adjusted for any stock
dividends, combinations or splits with respect to such shares), (iii) an amount
for each share of Series C Preferred Stock then held by them equal to $1.00 (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), (iv) an amount for each share of Series D Preferred Stock then held by
them equal to $1.65 (as adjusted for any stock dividends, combinations or splits
with respect to such shares), (v) an amount for each share of Series E Preferred
Stock then held by them equal to $4.24 (as adjusted for any stock dividends,
combinations or splits with respect to such shares, (vi) an amount for each
share of Series F Preferred Stock then held by them equal to $10.47 (as adjusted
for any stock dividends, combinations or splits with respect to such shares) and
(vii) an amount for each share of Series H Preferred Stock then held by them
equal to $16.33 (as adjusted for any stock dividends, combinations or splits
with respect to such shares), plus, in each case, any accrued and unpaid
dividends on each such series of Preferred Stock, whether or not earned or
declared, up to and including the date of full payment of such amount. If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of each such series of Preferred Stock shall be insufficient to permit
the payment to such holders of the full respective preferential amounts due with
respect to the shares held by each such holder, then the entire assets and funds
of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series H Preferred Stock in proportion to
the relative liquidation preference of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series H Preferred Stock
then held by them.

2B. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, if the assets and surplus funds of the
Company available for distribution to the Company's stockholders exceed the
aggregate amount payable to the holders of the Company's Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series H Preferred
Stock, pursuant to paragraph 2A, then after the payments required by paragraph
2A shall have been made or irrevocably set apart for payment, the holders of the
Series G Preferred Stock shall be entitled to receive, prior and in preference
to any payment or distribution and setting apart for payment or distribution of
any of the assets or surplus funds of the Company to the holders of the Common
Stock and any other series of Preferred Stock, an amount for each share of
Series G Preferred Stock then held by them equal to $10.47 plus any declared but
unpaid dividends on the Series G Preferred Stock, up to and including the date
of full payment of such amount. If, after the distribution of assets and funds
to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series H Preferred Stock pursuant to paragraph 2A, the
assets and funds thus distributed among the holders of the Series G Preferred
Stock shall be insufficient to permit the payment to such holders of Series G
Preferred Stock of the full respective preferential amounts due with respect to
the shares held by each such holder, then the entire assets and funds of the
Company legally available for distribution remaining after such distribution
pursuant to paragraph 2A shall be distributed ratably among the holders of the
Series G Preferred Stock in proportion to the shares of Series G Preferred Stock
then held by them.

5
<PAGE>

2C. If the assets of the Corporation available for distribution to the
Corporation's stockholders exceed the aggregate amount payable to the holders of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock and Series H Preferred Stock pursuant to paragraphs 2A and 2B above, then
after the payments required by paragraphs 2A and 2B shall have been made or
irrevocably set apart for payment, such assets shall be distributed ratably
among the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series H Preferred Stock (as if fully converted into Common Stock pursuant to
part 5 hereof) and the holders of Common Stock; provided, that the amount which
the holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series H
Preferred Stock shall be entitled to receive (including any accrued and unpaid
dividends) pursuant to paragraph 2A above and this paragraph 2C, if any, in the
aggregate shall not exceed $3.00 for each share of Series A Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), $4.95 for each share of Series B Preferred Stock (as adjusted for any
stock dividends, combinations or splits with respect to such shares), $2.00 for
each share of Series C Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares), $8.48 for each share of
Series E Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares), $20.94 for each share of Series F Preferred
Stock (as adjusted for any stock dividends, combinations, or splits with respect
to such shares) and $32.66 for each share of Series H Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares).

2D. (i) A consolidation, merger or share exchange of the Corporation in
which the holders of the Corporation's voting stock outstanding immediately
prior to such consolidation, merger or share exchange do not hold a majority of
the voting stock of the surviving or resulting entity outstanding immediately
following such consolidation, merger or share exchange, and (ii) a sale, lease
or transfer of all or substantially all of the assets of the Corporation, shall
in any case be deemed to be a liquidation, dissolution or winding up within the
meaning of this part 2.

2E. The Corporation will give written notice of any liquidation,
dissolution or winding up (or any transaction deemed to be a liquidation,
dissolution or winding up pursuant to paragraph 2C above) to each record holder
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock not less than 60 days
prior to the date stated therein for the distribution and payment of the amounts
provided in this part 2. Such notice shall include an estimate of the amounts
distributable in respect of each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H
Preferred Stock (assuming no conversion of outstanding shares of any class or
series of Preferred Stock) and each share of Common Stock (assuming conversion
of all outstanding shares of each class or series of convertible Preferred
Stock). Each holder of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred, Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock
may convert all or any portion of each such series of Preferred Stock into
Common Stock pursuant to part 5 at any time on or prior to the date fixed in
such notice for distribution and payment or the date of a merger, consolidation,
share

6
<PAGE>

exchange or sale, lease or transfer of assets deemed to be a liquidation,
dissolution or winding up of the Corporation as described in paragraph 2C above.

Part 3. Redemptions.

3A. Each holder of Series A Preferred Stock with respect to Series A
Preferred Stock only, each holder of Series B Preferred Stock with respect to
Series B Preferred Stock only, each holder of Series E Preferred Stock with
respect to Series E Preferred Stock only, each holder of Series F Preferred
Stock with respect to Series F Preferred Stock only and each holder of Series H
Preferred Stock with respect to Series H Preferred Stock only may elect to
require the Corporation to redeem (the "Mandatory Redemptions") on or after the
dates specified below (each a "Mandatory Redemption Date") up to (i) with
respect to such holder of Series A Preferred Stock (A) that percentage of the
shares of Series A Preferred Stock acquired by such holder (or its predecessors)
pursuant to the February Purchase Agreement as set forth below opposite such
Mandatory Redemption Date, less (B) the number of shares of Series A Preferred
Stock redeemed by the Corporation pursuant to this paragraph 3A from such holder
(or its predecessors) prior to the date of such election, (ii) with respect to
such holder of Series B Preferred Stock (A) that percentage of the shares of
Series B Preferred Stock acquired by such holder (or its predecessors) pursuant
to the February Purchase Agreement or the July Purchase Agreement, as the case
may be, as set forth below opposite such Mandatory Redemption Date, less (B) the
number of shares of Series B Preferred Stock redeemed by the Corporation
pursuant to this paragraph 3A from such holder (or its predecessors) prior to
the date of such election, (iii) with respect to such holder of Series E
Preferred Stock (A) that percentage of the shares of Series E Preferred Stock
acquired by such holder (or its predecessors) pursuant to the June Purchase
Agreement as set forth below opposite such Mandatory Redemption Date, less (B)
the number of shares of Series E Preferred Stock redeemed by the Corporation
pursuant to this paragraph 3A from such holder (or its predecessors) prior to
the date of such election, (iv) with respect to such holder of Series F
Preferred Stock (A) that percentage of the shares of Series F Preferred Stock
acquired by such holder (or its predecessors) pursuant to the April Purchase
Agreement as set forth below opposite such Mandatory Redemption Date, less (B)
the number of shares of Series F Preferred Stock redeemed by the Corporation
pursuant to this paragraph 3A from such holder (or its predecessors) prior to
the date of such election and (v) with respect to such holder of Series H
Preferred Stock (A) that percentage of the shares of Series H Preferred Stock
acquired by such holder (or its predecessors) pursuant to the November Purchase
Agreement as set forth below opposite such Mandatory Redemption Date, less (B)
the number of shares of Series H Preferred Stock redeemed by the Corporation
pursuant to this paragraph 3A from such holder (or its predecessors) prior to
the date of such election:

Mandatory Percentage of Shares Acquired
Redemption Date Which May be Redeemed
--------------- ---------------------
April 22, 2005 50%
April 22, 2006 75%
April 22, 2007 100%

7
<PAGE>

A holder of shares of Series A Preferred Stock, Series B Preferred Stock, Series
E Preferred Stock, Series F Preferred Stock or Series H Preferred Stock may
require the Corporation to make a Mandatory Redemption by giving written notice
to the Corporation of such election not less than 30 nor more than 90 days prior
to a Mandatory Redemption Date. Upon receipt of such election, the Corporation
(and such holder) will be obligated as provided in this paragraph 3A to redeem
the number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series H Preferred Stock
as applicable, specified therein on such Mandatory Redemption Date. The Series
C Preferred Stock, Series D Preferred Stock and Series G Preferred Stock shall
not be redeemable hereunder.

3B. The holders of Series A Preferred Stock who elect to redeem shares of
Series A Preferred Stock as provided in paragraph 3A shall be entitled to
receive from the Corporation on a Mandatory Redemption Date cash in an amount
equal to $1.00 plus any accrued and unpaid dividends on the Series A Preferred
Stock for each share of Series A Preferred Stock to be redeemed on such
Mandatory Redemption Date. The holders of Series B Preferred Stock who elect to
redeem shares of Series B Preferred Stock as provided in paragraph 3A shall be
entitled to receive from the Corporation on a Mandatory Redemption Date cash in
an amount equal to $1.65 plus any accrued and unpaid dividends on the Series B
Preferred Stock for each share of Series B Preferred Stock to be redeemed on
such Mandatory Redemption Date. The holders of Series E Preferred Stock who
elect to redeem shares of Series E Preferred Stock as provided in paragraph 3A
shall be entitled to receive from the Corporation on a Mandatory Redemption Date
cash in an amount equal to $4.24 plus any accrued and unpaid dividends on the
Series E Preferred Stock for each share of Series E Preferred Stock to be
redeemed on such Mandatory Redemption Date. The holders of Series F Preferred
Stock who elect to redeem shares of Series F Preferred Stock as provided in
paragraph 3A shall be entitled to receive from the Corporation on a Mandatory
Redemption Date cash in an amount equal to $10.47 plus any accrued and unpaid
dividends on the Series F Preferred Stock for each share of Series F Preferred
Stock to be redeemed on such Mandatory Redemption Date. The holders of Series H
Preferred Stock who elect to redeem shares of Series H Preferred Stock as
provided in paragraph 3A shall be entitled to receive from the Corporation on a
Mandatory Redemption Date cash in an amount equal to $16.33 plus any accrued and
unpaid dividends on the Series H Preferred Stock for each share of Series H
Preferred Stock to be redeemed on such Mandatory Redemption Date.

3C. If the funds of the Corporation legally available for redemption of
Series A Preferred Stock, Series B Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series H Preferred Stock on any Mandatory
Redemption Date are insufficient to redeem the total number of shares of Series
A Preferred Stock, Series B Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series H Preferred Stock to be redeemed on such Mandatory
Redemption Date, those funds that are legally available shall be used to redeem
the maximum possible number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series E Preferred

8
<PAGE>

Stock, Series F Preferred Stock and Series H Preferred Stock ratably among the
holders of such shares of Preferred Stock electing to have their shares redeemed
on the basis of the respective redemption amounts due with respect to the shares
held by each such holder. At any time and from time to time thereafter when
additional funds of the Corporation are legally available for redemption of
shares of Series A Preferred Stock, Series B Preferred Stock Series E Preferred
Stock, Series F Preferred Stock and Series H Preferred Stock such funds
immediately will be used to redeem the balance of the shares of such Preferred
Stock which the Corporation has become obligated to redeem on any Mandatory
Redemption Date but which it has not redeemed and such funds will not be used
for any other purpose, including to redeem any shares of Series A Preferred
Stock, Series B Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series H Preferred Stock or any other series of Preferred Stock which the
Corporation is obligated to redeem on any subsequent date.

3D. No share of Series A Preferred Stock, Series B Preferred Stock, Series
E Preferred Stock, Series F Preferred Stock or Series H Preferred Stock is
entitled to any dividends accruing after the date on which the redemption amount
as provided in paragraph 3B with respect to such share of Preferred Stock is
paid. On such date, all rights of the holder of such share of Series A
Preferred Stock, Series B Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series H Preferred Stock will cease, and such shares of
Preferred Stock will not be deemed to be outstanding.

3E. Any shares of Series A Preferred Stock, Series B Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series H Preferred Stock
which are redeemed or otherwise acquired by the Corporation will be canceled and
will not be reissued, sold or transferred. If fewer than the total number of
shares of Series A Preferred Stock, Series B Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock or Series H Preferred Stock represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed shares of such Preferred Stock will be issued to the holder thereof
without cost to such holder within three business days after surrender of the
certificate representing the redeemed shares.

3F. Neither the Corporation nor any Subsidiary will redeem or otherwise
acquire any shares of Series A Preferred Stock, Series B Preferred Stock, Series
E Preferred Stock, Series F Preferred Stock or Series H Preferred Stock except
as expressly authorized herein or pursuant to a purchase offer made pro-rata to
all holders of such shares of Preferred Stock electing to be redeemed hereunder
on the basis of the respective redemption amounts due with respect to the shares
of Series A Preferred Stock, Series B Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series H Preferred Stock owned by each such holder.

Part 4. Voting Rights.

4A. Each holder of shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred
Stock shall be entitled to vote on all matters to come before the stockholders
of the Corporation and, except as otherwise expressly provided herein, shall be
entitled to the number of votes equal to the largest number of full shares of
Common Stock into which all shares of each such series of Preferred Stock held
of record by such holder could then be converted, pursuant to part 5, at the
record date for the determination of the stockholders entitled to vote on such
matters or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is first executed. Except as
otherwise expressly provided herein, in the Stockholders Agreement, in the
resolutions establishing any other class or series of Preferred Stock or as
required by law, the holders of Preferred Stock and Common

9
<PAGE>

Stock shall vote together and not as a separate class on all matters to come
before the stockholders of the Corporation.

4B. Without the affirmative vote of the holders of shares of Preferred
Stock and Common Stock representing at least a majority of the votes represented
by all shares of Preferred Stock and Common Stock outstanding, voting together
as a single class, the Corporation shall not:

(i) purchase, redeem or otherwise acquire for value (or pay into or
set aside as a sinking fund for such purpose) any of the Common Stock; provided,
that this provision shall not apply to the repurchase of shares of Common Stock
from directors, officers, employees or consultants of or advisors to the
Corporation or any Subsidiary pursuant to any Approved Plan or under the terms
of the Stockholders Agreement; or

(ii) increase or decrease (other than by the redemption or conversion
of the Preferred Stock) the total number of authorized shares of Common Stock.

4C. Without the affirmative vote of (i) the holders of then outstanding
shares of Preferred Stock and Common Stock representing at least a majority of
the votes represented by all then outstanding shares of Preferred Stock and
Common Stock, voting together as a single class, (ii) the holders of 95% the
shares of Series E Preferred Stock then outstanding, voting as a separate class,
(iii) the holders of 95% of the shares of Series F Preferred Stock then
outstanding, voting as a separate class, and (iv) the holders of 80% of the
shares of Series H Preferred Stock then outstanding, voting as a separate class,
the Corporation shall not increase or decrease (other than by the redemption or
conversion of the Preferred Stock) the total number of authorized shares of
Preferred Stock or any series of Preferred Stock.

4D. Without the affirmative vote of the holders of at least a majority of
the then outstanding shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, each voting as a separate class, the
Corporation shall not authorize the issuance of any new class or series of stock
or reclassify any existing stock into stock having rights and preferences prior
and superior to each such series of Preferred Stock.

4E. Without the affirmative vote of the holders of at least 95% of the
shares of Series E Preferred Stock then outstanding, voting as a separate class,
the Corporation shall not:

(i) authorize the issuance of any new class or series of stock or
reclassify any existing stock into stock having rights and preferences prior and
superior to such series of Preferred Stock; or

(ii) make any amendment to the Certificate of Incorporation of the
Corporation that would adversely affect the rights, preferences, privileges or
restrictions of or on the holders of the Series E Preferred Stock.

4F. Without the affirmative vote of the holders of at least 80% of the
shares of Series F Preferred Stock then outstanding, voting as a separate class,
the Corporation shall not:

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<PAGE>

(i) authorize the issuance of any new class or series of stock or
reclassify any existing stock into stock having rights and preferences prior and
superior to such series of Preferred Stock; or

4G. Without the affirmative vote of the holders of at least 80% of the
shares of Series H Preferred Stock then outstanding, voting as a separate class,
the Corporation shall not:

(i) authorize the issuance of any new class or series of stock or
reclassify any existing stock into stock having rights and preferences prior and
superior to such series of Preferred Stock; or

Part 5. Conversion.

5A. Conversion Procedure.

(i) Any holder of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H
Preferred Stock may convert all or any portion of the shares of each such series
of Preferred Stock (including any fraction of a share) held by such holder into
a number of shares of Common Stock computed (i) with respect to shares of Series
A Preferred Stock, by multiplying the number of shares of Series A Preferred
Stock to be converted by an amount equal to $1.00 plus any accrued and unpaid
dividends on each such share and dividing the result by the "Series A Conversion
Price" (as defined below) then in effect; (ii) with respect to shares of Series
B Preferred Stock, by multiplying the number of shares of Series B Preferred
Stock to be converted by an amount equal to $1.65 plus any accrued and unpaid
dividends on each such share and dividing the result by the "Series B Conversion
Price" (as defined below) then in effect, (iii) with respect to shares of Series
C Preferred Stock, by multiplying the number of shares of Series C Preferred
Stock to be converted by an amount equal to $1.00 and dividing the result by the
"Series C Conversion Price" (as defined below) then in effect, (iv) with respect
to shares of Series D Preferred Stock, by multiplying the number of shares of
Series D Preferred Stock to be converted by an amount equal to $1.65 and
dividing the result by the "Series D Conversion Price" (as defined below) then
in effect, (v) with respect to shares of Series E Preferred Stock, by
multiplying the number of shares of Series E Preferred Stock to be converted by
an amount equal to $4.24 plus any accrued and unpaid dividends on each such
share and dividing the result by the "Series E Conversion Price" (as defined
below) then in effect (vi) with respect to shares of Series F Preferred Stock,
by multiplying the number of shares of Series F Preferred Stock to be converted
by an amount equal to $10.47 plus any accrued and unpaid dividends on each such
share and dividing the result by the "Series F Conversion Price" (as defined
below) then in effect, (vii) with respect to

11
<PAGE>

shares of Series G Preferred Stock, by multiplying the number of shares of
Series G Preferred Stock to be converted by an amount equal to $10.47 and
dividing the result by the "Series G Conversion Price" then in effect and (viii)
with respect to shares of Series H Preferred Stock, by multiplying the number of
shares of Series H Preferred Stock to be converted by an amount equal to $16.33
plus any accrued and unpaid dividends on each such share and dividing the result
by the "Series H Conversion Price" (as defined below) then in effect.

(ii) Each conversion of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H
Preferred Stock will be deemed to have been effected as of the close of business
on the date on which the certificate or certificates representing the shares of
such Preferred Stock to be converted, together with properly executed conversion
instructions or powers, have been surrendered for conversion at the principal
office of the Corporation. At such time as such conversion has been effected,
the rights of the holder of such shares of Preferred Stock as such holder will
cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock are to be issued upon such conversion
will be deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby.

(iii) As soon as possible after a conversion has been effected (but
in any event within three business days in the case of subparagraph (a) below),
the Corporation will deliver to the converting holder:

(a) a certificate or certificates representing the number of
shares of Common Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified; and

(b) a certificate representing any shares of Preferred Stock
which were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not converted.

(iv) The issuance of certificates for shares of Common Stock upon
conversion of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock or Series H Preferred Stock
will be made without charge to the holders of such shares of Preferred Stock for
any issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such conversion and the related issuance of shares of Common
Stock. Upon conversion of each share of each such series of Preferred Stock,
the Corporation will take all such actions as are necessary in order to insure
that the Common Stock issuable with respect to such conversion will be validly
issued, fully paid and nonassessable.

(v) If any fractional interest in a share of Common Stock would,
except for the provisions of this subparagraph (v), be deliverable upon any
conversion of shares of Series A Preferred Stock, Series B Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock the Corporation, in lieu of delivering the

12
<PAGE>

fractional share therefor, will pay an amount to the holder thereof equal to the
Fair Market Value of such fractional interest as of the date of conversion.

5B. Conversion Price.

(i) The initial "Series A Conversion Price" will be $1.00 per share
of Series A Preferred Stock. The initial "Series B Conversion Price" will be
$1.65 per share of Series B Preferred Stock. The initial "Series C Conversion
Price" will be $1.00 per share of Series C Preferred Stock. The initial "Series
D Conversion Price" will be $1.65 per share of Series D Preferred Stock. The
initial "Series E Conversion Price" will be $4.24 per share of Series E
Preferred Stock. The initial "Series F Conversion Price" will be $10.47 per
share of Series F Preferred Stock. The initial "Series G Conversion Price" will
be $10.47 per share of Series G Preferred Stock. The initial "Series H
Conversion Price" will be $16.33 per share of Series H Preferred Stock. In order
to prevent dilution of the conversion rights granted under this subdivision, the
Series A Conversion Price, the Series B Conversion Price, the Series E
Conversion Price, the Series F Conversion Price and the Series H Conversion
Price (but not the Series C Conversion Price, the Series D Conversion Price or
the Series G Conversion Price) also will be subject to adjustment from time to
time pursuant to this part 5B.

(ii) If and whenever on or after the date hereof, the Corporation
issues or sells, or is deemed to have issued or sold, any shares of its Common
Stock for consideration per share less than the Series A Conversion Price in
effect immediately prior to the time of such issue or sale, then immediately
upon such issue or sale the Series A Conversion Price will be reduced to the
price determined by multiplying the Series A Conversion Price then in effect by
a fraction, the numerator of which shall be (a) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, plus (b) the number
of shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of additional shares of Common Stock so issued
or sold would purchase at such Series A Conversion Price, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue or sale plus the number of additional shares of Common Stock
so issued. For example, if there are 1,600,000 shares of Common Stock
outstanding and, after the date hereof, the Corporation issues 1,000,000 shares
of Common Stock for consideration per share of $0.50, the Series A Conversion
Price immediately would be reduced to the price determined by multiplying $1.00,
the Series A Conversion Price then in effect, by the following fraction:

1,600,000.00 + $ 500,000.00
------------------
$ 1.00
---------------------------------------
1,600,000.00 + 1,000,000

= 1,600,000.00 + 500,000.00
---------------------------------------
2,600,000

= 2,100,000.00
------------------
2,600,000

= 0.8077,

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<PAGE>

resulting in an adjusted Series A Conversion Price of $0.8077 ($1.00 x 0.8077).
The following transactions shall not result in any adjustment of the Series A
Conversion Price: (i) the issuance of Common Stock and the grant of options,
warrants or rights and the issuance of Common Stock upon exercise thereof
pursuant to any Approved Plan; (ii) the grant of warrants and the issuance of
Common Stock upon exercise thereof pursuant to paragraph 8E(ii)(c) of the
February Purchase Agreement; (iii) the issuance of shares of the Corporation's
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock and the issuance of Common Stock upon conversion
thereof and (iv) the issuance of Common Stock upon conversion of the Series A
Preferred Stock.

(iii) If and whenever on or after the date hereof, the Corporation
issues or sells, or is deemed to have issued or sold, any shares of its Common
Stock for consideration per share less than the Series B Conversion Price in
effect immediately prior to the time of such issue or sale, then immediately
upon such issue or sale the Series B Conversion Price will be reduced to the
price determined by multiplying the Series B Conversion Price then in effect by
a fraction, the numerator of which shall be (a) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, plus (b) the number
of shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of additional shares of Common Stock so issued
or sold would purchase at such Series B Conversion Price, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue or sale plus the number of additional shares of Common Stock
so issued. For example, if there are 1,600,000 shares of Common Stock
outstanding and, after the date hereof, the Corporation issues 1,000,000 shares
of Common Stock for consideration per share of $0.50, the Series B Conversion
Price immediately would be reduced to the price determined by multiplying $1.65,
the Series B Conversion Price then in effect, by the following fraction:

1,600,000.00 + $ 500,000.00
------------------
$ 1.65
----------------------------------------
1,600,000.00 + 1,000,000

= 1,600,000.00 + 303,030.30
----------------------------------------
2,600,000

= 1,903,030.30
------------------
2,600,000

= 0.7319,

resulting in an adjusted Series B Conversion Price of $1.21 ($1.65 x 0.7319).
The following transactions shall not result in any adjustment of the Series B
Conversion Price: (i) the issuance of Common Stock and the grant of options,
warrants or rights and the issuance of Common Stock upon exercise thereof
pursuant to any Approved Plan; (ii) the issuance of shares of the Corporation's
Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock and the issuance of Common Stock upon conversion
thereof and (iii) the issuance of Common Stock upon conversion of the Series B
Preferred Stock.

14
<PAGE>

(iv) (a) If and whenever on or after the date hereof, the
Corporation issues or sells, or is deemed to have issued or sold, any shares of
its Common Stock for consideration per share less than the Series E Conversion
Price in effect immediately prior to the time of such issue or sale, then
immediately upon such issue or sale the Series E Conversion Price will be
reduced to the price determined by multiplying the Series E Conversion Price
then in effect by a fraction, the numerator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to such issue or sale, plus
(b) the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of additional shares of Common
Stock so issued or sold would purchase at such Series E Conversion Price, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue or sale plus the number of
additional shares of Common Stock so issued. For example, if there are 1,600,000
shares of Common Stock outstanding and, after the date hereof, the Corporation
issues 1,000,000 shares of Common Stock for consideration per share of $0.50,
the Series E Conversion Price immediately would be reduced to the price
determined by multiplying $4.24, the Series E Conversion Price then in effect,
by the following fraction:

1,600,000.00 + $ 500,000.00
------------------
$ 4.24
----------------------------------------
1,600,000.00 + 1,000,000

= 1,600,000.00 + 117,924.53
----------------------------------------
2,600,000

= 1,717,924.53
------------------
2,600,000

= 0.6607,

resulting in an adjusted Series E Conversion Price of $2.80 ($4.24 x 0.6607).
The following transactions shall not result in any adjustment of the Series E
Conversion Price: (i) the issuance of Common Stock and the grant of options,
warrants or rights and the issuance of Common Stock upon exercise thereof
pursuant to any Approved Plan; (ii) the issuance of shares of Common Stock upon
conversion of the Corporation's Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock; (iii) the issuance
of up to 7,500 shares of the Corporation's Series A Preferred Stock and up to
65,368 shares of the Corporation's Series D Preferred Stock pursuant to
outstanding warrants and the issuance of Common Stock upon conversion thereof
and (iv) the issuance of Common Stock upon conversion of the Series E Preferred
Stock.

(b) Notwithstanding the foregoing subparagraph (a), if (X) the
gross proceeds of sales of Series E Preferred Stock on or within 60 days
following June 6, 1997 are less than $6,000,000 and (Y) prior to the earlier of
(1) June 6, 1998 or (2) a subsequent equity financing of the Corporation at a
price per share of at least $4.24 and in which the gross proceeds to the
Corporation are at least $4,000,000, the Corporation issues or sells, or is
deemed to have issued or sold, any shares of its Common Stock for consideration
per share less than the Series E Conversion

15
<PAGE>

Price in effect immediately prior to the time of such issue or sale (a "Lesser
Issuance"), then immediately upon such Lesser Issuance the Series E Conversion
Price will be reduced to a price equal to the price paid per share in such
Lesser Issuance; provided, however, that the following transactions shall not
result in any adjustment of the Series E Conversion Price: (i) the issuance of
Common Stock and the grant of options, warrants or rights and the issuance of
Common Stock upon exercise thereof pursuant to any Approved Plan; (ii) the
issuance of shares of Common Stock upon conversion of the Corporation's Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock; (iii) the issuance of up to 7,500 shares of the Corporation's
Series A Preferred Stock and up to 65,368 shares of the Corporation's Series D
Preferred Stock pursuant to outstanding warrants and the issuance of Common
Stock upon conversion thereof and (iv) the issuance of Common Stock upon
conversion of the Series E Preferred Stock; and provided, further, that the
provisions of this subparagraph (b) shall apply to each Lesser Issuance until
the occurrence of the first Lesser Issuance, if any, in which the gross proceeds
to the Corporation are at least $4,000,000. The adjusted Series E Conversion
Price following any subsequent Lesser Issuance shall be determined by the
foregoing subparagraph (a).

(v) (a) Subject to the application of subsection (v)(b) below, if
and whenever on or after the date hereof, the Corporation issues or sells, or is
deemed to have issued or sold, any shares of its Common Stock for consideration
per share less than the Series F Conversion Price in effect immediately prior to
the time of such issue or sale, then immediately upon such issue or sale the
Series F Conversion Price will be reduced to the price determined by multiplying
the Series F Conversion Price then in effect by a fraction, the numerator of
which shall be (a) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, plus (b) the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total number of
additional shares of Common Stock so issued or sold would purchase at such
Series F Conversion Price, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue or sale plus
the number of additional shares of Common Stock so issued. For example, if
there are 1,600,000 shares of Common Stock outstanding and, after the date
hereof, the Corporation issues 1,000,000 shares of Common Stock for
consideration per share of $0.50, the Series F Conversion Price immediately
would be reduced to $8.38 per share pursuant to subparagraph (v)(b) below and
would be further reduced pursuant to this subparagraph (v)(a) to the price
determined by multiplying $8.38, the Series F Conversion Price then in effect,
by the following fraction:

1,600,000 + $ 500,000.00
------------------
$ 8.38
--------------------------------------
1,600,000 + 1,000,000

= 1,600,000 + 59,665.87
--------------------------------------
2,600,000

= 1,659,665.87
------------------
2,600,000

= 0.6383,

16
<PAGE>

resulting in an adjusted Series F Conversion Price of $5.35 ($8.38 x 0.6383).
The following transactions shall not result in any adjustment of the Series F
Conversion Price: (i) the issuance of Common Stock and the grant of options,
warrants or rights and the issuance of Common Stock upon exercise thereof
pursuant to any Approved Plan; (ii) the issuance of shares of Common Stock upon
conversion of the Corporation's Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock; (iii) the issuance of up to 7,500 shares of the Corporation's Series A
Preferred Stock and up to 65,368 shares of the Corporation's Series D Preferred
Stock pursuant to outstanding warrants and the issuance of Common Stock upon
conversion thereof and (iv) the issuance of Common Stock upon conversion of the
Series F Preferred Stock.

(b) If at any time during which the Series F Conversion Price
is greater than $8.38 the Corporation shall issue additional shares of Common
Stock without consideration or for a consideration per share less than the
Series F Conversion Price in effect on the date of and immediately prior to such
issue, then and in such event, such Series F Conversion Price shall be reduced,
concurrently with such issue, to a price equal to the greater of (i) the price
per share for such additional shares of Common Stock or (ii) $8.38. In the event
that the price per share for such additional shares of Common Stock is lower
than $8.38, then the Series F Conversion Price shall first be adjusted to $8.38
pursuant to this subsection (b), and any additional adjustment shall be made
pursuant to the provisions of subsection (a). For example, if 1,000,000
additional shares of Common Stock are issued at price per share of $5.00 at a
time when the Series F Conversion Price is $10.47, then (x) the Series F
Conversion Price shall first be reduced to $8.38 pursuant to the application of
this subsection (b), then (y) the Series F Conversion Price (as so adjusted)
shall be subject to further adjustment under subsection (a) above, assuming an
initial Series F Conversion Price of $8.38 for the purposes of applying the
formula required thereby. All per share prices in this subsection shall be
appropriately adjusted to reflect any stock dividends, combinations or splits
with respect to such shares.

(vi) (a) If and whenever on or after the date hereof, the
Corporation issues or sells, or is deemed to have issued or sold, any shares of
its Common Stock for consideration per share less than the Series H Conversion
Price in effect immediately prior to the time of such issue or sale, then
immediately upon such issue or sale the Series H Conversion Price will be
reduced to the price determined by multiplying the Series H Conversion Price
then in effect by a fraction, the numerator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to such issue or sale, plus
(b) the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of additional shares of Common
Stock so issued or sold would purchase at such Series H Conversion Price, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue or sale plus the number of
additional shares of Common Stock so issued. For example, if there are 1,600,000
shares of Common Stock outstanding and, after the date hereof, the Corporation
issues 1,000,000 shares of Common Stock for consideration per share of $0.50,
the Series H Conversion Price immediately would be reduced to the price
determined by multiplying $16.33, the Series H Conversion Price then in effect,
by the following fraction:

17
<PAGE>

1,600,000.00 + $ 500,000.00
------------------
$ 16.33
---------------------------------------
1,600,000.00 + 1,000,000

= 1,600,000.00 + 30,618.49
---------------------------------------
2,600,000

= 1,630,618.49
------------------
2,600,000

= .6272,

resulting in an adjusted Series H Conversion Price of $10.24 ($16.33 x .6272).
The following transactions shall not result in any adjustment of the Series H
Conversion Price: (i) the issuance of Common Stock and the grant of options,
warrants or rights and the issuance of Common Stock upon exercise thereof
pursuant to any Approved Plan; (ii) the issuance of Common Stock upon conversion
of the Corporation's Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, and Series G Preferred Stock and (iii) the issuance of Common
Stock upon conversion of the Series H Preferred Stock.

(b) (i) If, on or prior to June 30, 1999, the Corporation
issues shares of Common Stock (or securities convertible into or exchangeable
for Common Stock) in its first underwritten offering by the Corporation of
shares of Common Stock to the public pursuant to an effective registration
statement under the Securities Act of 1933, as amended, then in effect, or any
comparable statement under any similar federal statute then in effect (an
"IPO"), the Series H Conversion Price will be adjusted to the greater of $10.47
and a price equal to 80% of the per share IPO price; provided, however, that the
Series H Conversion Price will not be adjusted to a number greater than a price
equal to $230 million divided by the number of shares of Common Stock of the
Corporation then outstanding (assuming the conversion or exchange of all
outstanding securities convertible into or exchangeable for Common Stock of the
Corporation, the issuance of all shares reserved for issuance under an Approved
Plan and the exercise of all outstanding warrants to purchase capital stock of
the Corporation but excluding the shares issued by the Corporation in the IPO)
(for purposes of this subsection (b), the "Fully Diluted Shares Outstanding").

(ii) If the Corporation completes the IPO after June 30,
1999 the Series H Conversion Price will be adjusted to the greater of $10.47 and
a price equal to (x) the sum of (1) $137 million and (2) the product of .40611
and the amount by which the valuation of the Corporation in the IPO exceeds $171
million, divided by (y) the Fully Diluted Shares Outstanding; provided, however,
that the Series H Conversion Price will not be adjusted to a number greater than
a price equal to $230 million divided by the Fully Diluted Shares Outstanding.

18
<PAGE>

(iv) For purposes of this subsection (b), the valuation of
the Corporation in the IPO is equal to the product of (A) the per share IPO
price and (B) the Fully Diluted Shares Outstanding.

5C. Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Series A Conversion Price, Series B Conversion Price,
Series E Conversion Price, Series F Conversion Price and Series H Conversion
Price under paragraph 5B, the following will be applicable:

(i) If the Corporation in any manner grants any Options or Options to
purchase Convertible Securities and the price per share for which Common Stock
is issuable upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities is less than the Series A Conversion Price in effect
immediately prior to the time of the granting of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options will be deemed
to be outstanding and to have been issued and sold by the Corporation for such
price per share. If the Corporation in any manner grants any Options or Options
to purchase Convertible Securities and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities is less than the Series B Conversion
Price in effect immediately prior to the time of the granting of such Options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
will be deemed to be outstanding and to have been issued and sold by the
Corporation for such price per share. If the Corporation in any manner grants
any Options or Options to purchase Convertible Securities and the price per
share for which Common Stock is issuable upon the exercise of such Options or
upon conversion or exchange of such Convertible Securities is less than the
Series E Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options will be deemed to be outstanding and to have been
issued and sold by the Corporation for such price per share. If the Corporation
in any manner grants any Options or Options to purchase Convertible Securities
and the price per share for which Common Stock is issuable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities is
less than the Series F Conversion Price in effect immediately prior to the time
of the granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options will be deemed to be outstanding and to have
been issued and sold by the Corporation for such price per share. If the
Corporation in any manner grants any Options or Options to purchase Convertible
Securities and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Series H Conversion Price in effect immediately
prior to the time of the granting of such Options, then the total maximum number
of shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options will be deemed to be
outstanding and to have been issued and sold by

19
<PAGE>

the Corporation for such price per share. For purposes of this paragraph, the
"price per share for which Common Stock is issuable" will be determined by
dividing (a) the total amount, if any, received or receivable by the Corporation
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon exercise of
all such Options, plus, in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance of sale or such Convertible
Securities and the conversion or exchange thereof, by (b) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options and
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Series A Conversion
Price will be made when Convertible Securities are actually issued upon the
exercise of such Options or when Common Stock is actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities. No further adjustment of the Series B Conversion Price will be made
when Convertible Securities are actually issued upon the exercise of such
Options or when Common Stock is actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities. No further
adjustment of the Series E Conversion Price will be made when Convertible
Securities are actually issued upon the exercise of such Options or when Common
Stock is actually issued upon the exercise of such Options or the conversion or
exchange of such Convertible Securities. No further adjustment of the Series F
Conversion Price will be made when Convertible Securities are actually issued
upon the exercise of such Options or when Common Stock is actually issued upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities. No further adjustment of the Series H Conversion Price will be made
when Convertible Securities are actually issued upon the exercise of such
Options or when Common Stock is actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.

(ii) If the Corporation in any manner issues or sells any Convertible
Securities and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Series A Conversion Price in effect
immediately prior to the time of such issue or sale, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of such Convertible
Securities will be deemed to be outstanding and to have been issued and sold by
the Corporation for such price per share. If the Corporation in any manner
issues or sells any Convertible Securities and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Series B Conversion Price in effect immediately prior to the time of such issue
or sale, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such

20
<PAGE>

Convertible Securities will be deemed to be outstanding and to have been issued
and sold by the Corporation for such price per share. If the Corporation in any
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon such conversion or exchange is less than the
Series E Conversion Price in effect immediately prior to the time of such issue
or sale, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities will be deemed to be
outstanding and to have been issued and sold by the Corporation for such price
per share. If the Corporation in any manner issues or sells any Convertible
Securities and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Series F Conversion Price in effect
immediately prior to the time of such issue or sale, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of such Convertible
Securities will be deemed to be outstanding and to have been issued and sold by
the Corporation for such price per share. If the Corporation in any manner
issues or sells any Convertible Securities and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Series H Conversion Price in effect immediately prior to the time of such issue
or sale, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities will be deemed to be
outstanding and to have been issued and sold by the Corporation for such price
per share. For the purposes of this paragraph, the "price per share for which
Common Stock is issuable" will be determined by dividing (a) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (b) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Series A Conversion Price will be made when Common
Stock is actually issued upon the conversion or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustments of the Series A Conversion
Price had been or are to be made pursuant to other provisions of this part 5, no
further adjustment of the Series A Conversion Price will be made by reason of
such issue or sale. No further adjustment of the Series B Conversion Price will
be made when Common Stock is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Series B Conversion Price had been or are to be made pursuant to other
provisions of this part 5, no further adjustment of the Series B Conversion
Price will be made by reason of such issue or sale. No further adjustment of the
Series E Conversion Price will be made when Common Stock is actually issued upon
the conversion or exchange of such Convertible Securities, and if any such issue
or sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Series E Conversion Price had been or are to be made
pursuant to other provisions of this part 5, no further adjustment of the Series
E Conversion Price will be made by reason of such issue or sale. No further
adjustment of the Series F Conversion Price will be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Series F Conversion Price
had been or are to be made pursuant to other provisions of this part 5, no
further adjustment of the Series F Conversion Price will be made by reason of
such issue or sale. No further adjustment of the Series H Conversion Price will
be made when Common Stock is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Series H Conversion Price had been or are to be made pursuant to other
provisions of this part 5, no further adjustment of the Series H Conversion
Price will be made by reason of such issue or sale.

(iii) If the purchase price provided for in any Options, the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock changes at any time, the
Series A Conversion Price in effect at the time of such change will be
readjusted to the Series A Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Series B Conversion Price
in effect at the time of such change will be readjusted to the Series B
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price,

21
<PAGE>

additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold. If the purchase price provided for in
any Options, the additional consideration, if any, payable upon the conversion
or exchange of any Convertible Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock changes at any
time, the Series E Conversion Price in effect at the time of such change will be
readjusted to the Series E Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Series F Conversion Price
in effect at the time of such change will be readjusted to the Series F
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold. If the purchase price provided
for in any Options, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
changes at any time, the Series H Conversion Price in effect at the time of such
change will be readjusted to the Series H Conversion Price which would have been
in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold.

(iv) Upon the expiration of any Option or the termination of any right
to convert or exchange any Convertible Security without the exercise of any such
Option or right, the Series A Conversion Price then in effect hereunder will be
adjusted to the Series A Conversion Price which would have been in effect at the
time of such expiration or termination had such Option or Convertible Security,
to the extent outstanding immediately prior to such expiration or termination,
never been issued. Upon the expiration of any Option or the termination of any
right to convert or exchange any Convertible Security without the exercise of
any such Option or right, the Series B Conversion Price then in effect hereunder
will be adjusted to the Series B Conversion Price which would have been in
effect at the time of such expiration or termination had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration or termination,

22
<PAGE>

never been issued. Upon the expiration of any Option or the termination of any
right to convert or exchange any Convertible Security without the exercise of
any such Option or right, the Series E Conversion Price then in effect hereunder
will be adjusted to the Series E Conversion Price which would have been in
effect at the time of such expiration or termination had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration or termination, never been issued. Upon the expiration of any Option
or the termination of any right to convert or exchange any Convertible Security
without the exercise of any such Option or right, the Series F Conversion Price
then in effect hereunder will be adjusted to the Series F Conversion Price which
would have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued. Upon the expiration of any
Option or the termination of any right to convert or exchange any Convertible
Security without the exercise of any such Option or right, the Series H
Conversion Price then in effect hereunder will be adjusted to the Series H
Conversion Price which would have been in effect at the time of such expiration
or termination had such Option or Convertible Security, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.

(v) If any Common Stock, Option or Convertible Security is issued
or sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the
Corporation therefor. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation will be the Fair
Market Value thereof as of the date of receipt. If any Common Stock, Option or
Convertible Security is issued in connection with any merger in which the
Corporation is the surviving corporation, the amount of consideration therefor
will be deemed to be the Fair Market Value of such portion of the net assets and
business of the non-surviving corporation as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be.

(vi) In case any Option is issued in connection with the issue or
sale of other securities of the Corporation, together comprising one integrated
transaction in which no specific consideration is allocated to such Option by
the parties thereto, the Option will be deemed to have been issued for a
consideration of $0.01.

(vii) The number of shares of Common Stock outstanding at any given
time does not include shares owned or held by or for the account of the
Corporation or any Subsidiary, and the disposition of any shares so owned or
held will be considered an issue or sale of Common Stock.

(viii) If the Corporation takes a record of the holders of Common
Stock for the purpose of entitling them (a) to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or (b)
to subscribe for or purchase Common Stock, Options or Convertible Securities,
then such record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or upon the making of such other distribution or the date of
the granting of such right of subscription or purchase, as the case may be.

5D. Subdivision or Combination of Common Stock. If the Corporation at
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E Conversion
Price, Series F Conversion Price, Series G Conversion Price and Series H
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced, and if the

23
<PAGE>

Corporation at any time combines (by reverse stock split or otherwise) one or
more classes of its outstanding shares of Common Stock into a smaller number of
shares, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price, Series G Conversion Price and Series H Conversion Price in
effect immediately prior to such combination will be proportionately increased.

5E. Certain Events. If any event occurs of the type contemplated by the
provisions of this part 5 but not expressly provided for by such provisions
(excluding for purposes of the Series C Conversion Price, the Series D
Conversion Price and the Series G Conversion Price the matters described in
subparts 5B and 5C), then the Board of Directors will make an appropriate
adjustment in the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price, Series G Conversion Price and Series H Conversion Price so as
to protect the rights of the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock; provided that no such adjustment will increase the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series D Conversion Price, Series E Conversion Price, Series F Conversion Price,
Series G Conversion Price or Series H Conversion Price as otherwise determined
pursuant to this part 5 or decrease the number of shares of Common Stock
issuable upon conversion of each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H
Preferred Stock.

5F. Notices.

(i) Immediately upon any adjustment of the Series A Conversion
Price, the Corporation will give written notice thereof to all holders of shares
of Series A Preferred Stock. Immediately upon any adjustment of the Series B
Conversion Price, the Corporation will give written notice thereof to all
holders of shares of Series B Preferred Stock. Immediately upon any adjustment
of the Series C Conversion Price, the Corporation will give written notice
thereof to all holders of shares of Series C Preferred Stock. Immediately upon
any adjustment of the Series D Conversion Price, the Corporation will give
written notice thereof to all holders of shares of Series D Preferred Stock.
Immediately upon any adjustment of the Series E Conversion Price, the
Corporation will give written notice thereof to all holders of shares of Series
E Preferred Stock. Immediately upon any adjustment of the Series F Conversion
Price, the Corporation will give written notice thereof to all holders of shares
of Series F Preferred Stock. Immediately upon any adjustment of the Series G
Conversion Price, the Corporation will give written notice thereof to all
holders of shares of Series G Preferred Stock. Immediately upon any adjustment
of the Series H Conversion Price, the Corporation will give written notice
thereof to all holders of shares of Series H Preferred Stock.

(ii) The Corporation will give written notice to all holders of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock at least 10 days
prior to the date on which the Corporation closes its books or takes a record
(a) with respect to any dividend or distribution upon Common Stock, (b) with
respect to any pro

24
<PAGE>

rata subscription offer to holders of Common Stock or (c) for determining rights
to vote with respect to any matter referred to in paragraph 4B, 4C, 4D, 4E or 4F
hereof, as applicable.

5G. Automatic Conversion. All of the outstanding shares of Series A
Preferred Stock shall be converted into Common Stock at the Series A Conversion
Price then in effect without any further action on the part of the Corporation
or any holder at the earlier to occur of (i) the closing and funding of a
Qualified Public Offering or (ii) the date that through the redemption or
conversion of Series A Preferred Stock, fewer than 266,666 shares of Series A
Preferred Stock remain outstanding. All of the outstanding shares of Series B
Preferred Stock shall be converted into Common Stock at the Series B Conversion
Price then in effect without any further action on the part of the Corporation
or any holder at the earlier to occur of (i) the closing and funding of a
Qualified Public Offering or (ii) the date that through the redemption or
conversion of Series B Preferred Stock, fewer than 55-2/3% of the total number
of shares of Series B Preferred Stock issued and sold pursuant to paragraph 1C
of the February Purchase Agreement remain outstanding. All of the outstanding
shares of Series C Preferred Stock shall be converted into Common Stock at the
Series C Conversion Price then in effect without any further action on the part
of the Corporation or any holder at the earlier to occur of (i) the closing and
funding of a Qualified Public Offering or (ii) upon the date that the Series B
Preferred Stock is otherwise automatically converted into Common Stock. All of
the outstanding shares of Series D Preferred Stock shall be converted into
Common Stock at the Series D Conversion Price then in effect without any further
action on the part of the Corporation or any holder at the earlier to occur of
(i) the closing and funding of a Qualified Public Offering or (ii) the date that
the Series B Preferred Stock is otherwise automatically converted into Common
Stock. All of the outstanding shares of Series E Preferred Stock shall be
converted into Common Stock at the Series E Conversion Price then in effect
without any further action on the part of the Corporation or any holder at the
closing and funding of a Qualified Public Offering. All of the outstanding
shares of Series F Preferred Stock shall be converted into Common Stock at the
Series F Conversion Price then in effect without any further action on the part
of the Corporation or any holder at the closing and funding of a Qualified
Public Offering. All of the outstanding shares of Series H Preferred Stock
shall be converted into Common Stock at the Series H Conversion Price then in
effect without any further action on the part of the Corporation or any holder
at the closing and funding of a Qualified Public Offering. All of the
outstanding shares of Series G Preferred Stock shall be converted into Common
Stock at the Series G Conversion Price then in effect without any further action
on the part of the Company or any holder at the earlier to occur of (i) the
closing and funding of a Qualified Public Offering, (ii) the date that the
Series F Preferred Stock is automatically converted into Common Stock or (iii)
such time as fewer than 25,000 shares of Series G Preferred Stock remain
outstanding.

Part 6. Registration of Transfer.

The Corporation will keep at its principal office a register for the
registration of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock.
Upon the surrender of any certificate representing shares of any such series of
Preferred Stock at such place, the Corporation will, at the request of the
record holder of such certificate, execute and deliver (at the Corporation's
expense) a new certificate or certificates in exchange therefor representing in
the aggregate the number of shares of Preferred Stock represented

25
<PAGE>

by the surrendered certificate. Each such new certificate will be registered in
such name and will represent such number of shares of Preferred Stock as is
requested by the holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate, and dividends will accrue on
the shares of Preferred Stock represented by such new certificate from the date
to which dividends have been fully paid on such shares of Preferred Stock
represented by the surrendered certificate.

Part 7. Replacement.

Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation or, in the case of any mutilation, upon
surrender of such certificate the Corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the number of shares of Preferred Stock represented by such lost, stolen,
destroyed or mutilated certificate, and dividends will accrue on the shares of
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.

Part 8. Definitions.

"Approved Plan" means the Corporation's 1995 Stock Option/Stock Issuance
Plan as in effect as of the date hereof, as amended from time to time, and any
other written stock option, stock purchase or similar incentive plan; provided
that any such amendment or other plan is approved by a majority of the Board of
Directors, with a majority of the Purchaser Directors concurring.

"April Purchase Agreement" means the Stock Purchase Agreement, dated as of
April 22, 1998 by and among the Corporation, the original purchasers of the
Series F Preferred Stock, as such agreement may from time to time be amended in
accordance with its terms.

"Board of Directors" shall mean the board of directors of the Corporation.

"Common Stock" means, collectively, the Corporation's Common Stock, par
value $0.01 per share, and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.

"Convertible Securities" means securities convertible into or exchangeable
for Common Stock or other Equity Securities.

"Equity Security" means any stock or similar security, including without
limitation, securities containing equity features and securities containing
profit participation features, or any security convertible or exchangeable, with
or without consideration, into or for any stock or similar

26
<PAGE>

security, or any security carrying any warrant or right to subscribe for or
purchase any stock or similar security, or any such warrant or right; provided,
that the term "Equity Security" shall exclude the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock and the Common Stock issuable upon conversion thereof.

"February Purchase Agreement" means the Stock Purchase Agreement, dated as
of February 5, 1996, by and among the Corporation, the original purchasers of
the Series A Preferred Stock and Series B Preferred Stock and certain other
persons named therein, as such agreement may from time to time be amended in
accordance with its terms.

"Fair Market Value" means the fair market value as determined by a majority
of the Board of Directors with a majority of the Purchaser Directors concurring.

"July Purchase Agreement" means the Stock Purchase Agreement, dated as of
July 19, 1996, by and among the Corporation and CNET, Inc., as such agreement
may from time to time be amended in accordance with its terms.

"June Purchase Agreement" means the Stock Purchase Agreements, dated as of
June 6, 1997 and July 17, 1997, by and among the Corporation and the original
purchasers of the Series E Preferred Stock, as each such agreement may be
amended from time to time in accordance with its terms.

"November Purchase Agreement" means the Stock Purchase Agreement, dated as
of November 30, 1998, by and among the Corporation and the original purchasers
of the Series H Preferred Stock, as each such agreement may be amended from time
to time in accordance with its terms.

"Options" means any rights or options to subscribe for or to purchase
Common Stock or other Equity Securities.

"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, an unincorporated organization
and a governmental entity or any department, agency or political subdivision
thereof.

"Purchaser Directors" means the directors designated by the holders of
Preferred Stock pursuant to the Stockholders Agreement.

"Qualified Public Offering" means any underwritten offering by the
Corporation of shares of Common Stock to the public pursuant to an effective
registration statement under the Securities Act of 1933, then in effect, or any
comparable statement under any similar federal statute then in force, in which
(i) the aggregate cash proceeds to be received by the Corporation and selling
stockholders from such offering (without deducting underwriting discounts,
expenses and commissions) are at least $20,000,000, and (ii) the price per share
paid by the public for such shares is at least $3.00 if determined with respect
to Series A Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock (as adjusted for any stock dividends, combinations or splits with respect
to

27
<PAGE>

such shares), $4.95 if determined with respect to Series B Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), $8.48 if determined with respect to Series E Preferred Stock (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), $13.09 if determined with respect to Series F Preferred Stock or Series
G Preferred Stock (as adjusted for any stock dividends, combinations or splits
with respect to such shares) or $13.07 if determined with respect to Series H
Preferred Stock (as adjusted for any stock dividends, combinations or splits
with respect to such shares).

"Significant Subsidiary" means any Subsidiary which would constitute a
significant subsidiary within the meaning of Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission or any successor rule.

"Stockholders Agreement" means the Sixth Amended and Restated Stockholders
Agreement dated November 30, 1998 by and among the Corporation, the original
purchasers of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series H
Preferred Stock, Ross B. Garber and Neil Webber and such other parties as may
from time to time and with the consent of the Corporation becomes parties
thereto, as such agreement may be amended from time to time.

"Subsidiary" means any corporation more than 50% of the outstanding voting
securities are owned by the Corporation or any Subsidiary, directly or
indirectly, or a partnership or limited liability company in which the
Corporation or any Subsidiary is a general partner or manager or holds interests
entitling it to receive more than 50% of the profits or losses of the
partnership or limited liability company.

Part 9. Amendment and Waiver.

No amendment, modification or waiver of this Article V.B will be binding or
effective with respect to any provision of these terms without the affirmative
vote of the holders of at least a majority of the shares of each such series of
Preferred Stock outstanding at the time such action is taken, in each case,
voting separately as a class and subject to any more protective requirements
contained in Part 4 hereof; provided that no such action will change (a) the
rate at which or the manner in which dividends on the shares of each such series
of Preferred Stock accrue or the times at which such dividends become payable,
(b) the amount payable to holders of each such series of Preferred Stock or the
participation by the holders of shares of each such series of Preferred Stock in
payments or distributions of any assets or surplus funds of the Corporation upon
the liquidation, dissolution or winding up of the Corporation (provided that
this clause (b) shall not require the approval of the holders of any such series
of Preferred Stock prior to the authorization, designation or issuance of any
class or series of stock ranking on a parity with any such series of Preferred
Stock as to participation in payments or distributions upon any such
liquidation, dissolution or winding up), (c) the amount payable on redemption of
the shares of Series A Preferred Stock, Series B Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series H Preferred Stock or the
times at which redemption of shares of Series A Preferred Stock, Series B
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series H
Preferred Stock is to occur, (d) the Series A Conversion Price, the Series B
Conversion Price, the Series C Conversion Price, the Series D Conversion Price,
the Series E Conversion Price, the Series F Conversion Price, the

28
<PAGE>

Series G Conversion Price or the Series H Conversion Price or the number of
shares or class of stock into which the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock are convertible, or (e) the percentage required to
approve any change described in this part 9, without (i) the affirmative vote of
the holders of all the shares of Series A Preferred Stock then outstanding,
voting separately as a class, as to such matters directly affecting the Series A
Preferred Stock, (ii) the affirmative vote of the holders of all the shares of
Series B Preferred Stock then outstanding, voting separately as a class, as to
such matters directly affecting the Series B Preferred Stock, (iii) the
affirmative vote of the holders of all of the shares of Series C Preferred Stock
then outstanding, voting separately as a class, as to such matters directly
affecting the Series C Preferred Stock, (iv) the affirmative vote of the holders
of all of the Series D Preferred Stock then outstanding, voting separately as a
class, as to such matters directly affecting the Series D Preferred Stock, (v)
the affirmative vote of the holders of all of the Series E Preferred Stock then
outstanding, voting separately as a class, as to such matters directly affecting
the Series E Preferred Stock, (vi) the affirmative vote of the holders of all of
the shares of Series F Preferred Stock then outstanding, voting separately as a
class, as to such matters directly affecting the Series F Preferred Stock, (vii)
the affirmative vote of the holders of all of the shares of Series G Preferred
Stock then outstanding, voting separately as a class, as to such matters
directly affecting the Series G Preferred Stock, (viii) the affirmative vote of
the holders of all of the shares of Series H Preferred Stock then outstanding,
voting separately as a class, as to such matters directly affecting the Series H
Preferred Stock; and provided further that no change in the terms of this part 9
may be accomplished by merger or consolidation of the Corporation with another
corporation unless the Corporation has obtained the prior approval of the
holders of the applicable percentage of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock then outstanding.

C. Common Stock. The Common Stock shall be subject to the prior and
superior rights of the Preferred Stock and of any series thereof. Each share of
Common Stock shall be equal to every other share of Common Stock. The holders
of shares of Common Stock shall be entitled to one vote of each share of such
stock upon matters presented to the stockholders.

ARTICLE VI.

A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize Corporation action
further eliminating or limiting the personal liability of directors then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.

29
<PAGE>

ARTICLE VII.

The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws of the Corporation.

ARTICLE VIII.

Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.

ARTICLE IX.

Election of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the Corporation shall so provide.

ARTICLE X.

The Corporation expressly elects not to be governed by Section 203 of the
Delaware General Corporation Law.

ARTICLE XI.

The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.

ARTICLE XII.

Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation."

* * *

THIRD: That the foregoing amendment and restatement was approved by
the holders of the requisite number of shares of said corporation in accordance
with Section 228 of the General Corporation Law.

FOURTH: That said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and 245 of the General Corporation
Law.

30
<PAGE>

IN WITNESS WHEREOF, Vignette Corporation has caused this Certificate
to be executed by Gregory A. Peters, its President, this 30th day of November,
1998.

VIGNETTE CORPORATION

By: /s/ Gregory A. Peters
---------------------------------------------
Gregory A. Peters,
President and Chief Executive Officer

31
<PAGE>

CERTIFICATE OF CORRECTION OF THE
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
VIGNETTE CORPORATION

Vignette Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY, AS FOLLOWS:

1. The name of the corporation is Vignette Corporation (the
"Company").

2. That the Fourth Amended and Restated Certificate of Incorporation
was filed with the Secretary of State of Delaware on November 30, 1998 and that
said Fourth Amended and Restated Certificate of Incorporation requires
correction as permitted by Section 103 of the General Corporation Law of the
State of Delaware.

3. Article V, paragraph 5B(vi)(b) of said Fourth Amended and Restated
Certificate of Incorporation is corrected to read in its entirety as follows:

"(b) (i) If, on or prior to June 30, 1999, the Corporation
issues shares of Common Stock (or securities convertible into or
exchangeable for Common Stock) in its first underwritten offering by the
Corporation of shares of Common Stock to the public pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, then in effect, or any comparable statement under any similar
federal statute then in effect (an "IPO"), the Series H Conversion Price
will be adjusted to the greater of $10.47 (the "Series H Conversion Price
Floor") and a price equal to 80% of the per share IPO price; provided,
however, that the Series H Conversion Price will not be adjusted to a
number greater than a price equal to (x) $230 million divided by (y) the
number of shares of Common Stock of the Corporation outstanding immediately
prior to giving effect to any adjustment in the Series H Conversion Price
under this subsection (b) (assuming the conversion or exchange of all
outstanding securities convertible into or exchangeable for Common Stock of
the Corporation, the issuance of all shares reserved for issuance under an
Approved Plan and the exercise of all outstanding warrants to purchase
capital stock of the Corporation but excluding (1) the shares issued by the
Corporation in the IPO, (2) the shares issuable upon conversion of the
Series H Preferred Stock issued by the Corporation on November 30, 1998 and
(3) the shares issuable upon conversion of the Series H Preferred Stock
issuable upon the exercise of warrants for
<PAGE>

Series H Preferred Stock issued by the Corporation on December 3, 1998)
(for purposes of this subsection (b), the "Fully Diluted Shares
Outstanding").

(ii) If the Corporation completes the IPO after June 30, 1999
the Series H Conversion Price will be adjusted to the greater of the Series
H Conversion Price Floor and a price equal to (x) the sum of (1) $137
million and (2) the product of .40611 and the amount by which the valuation
of the Corporation in the IPO (immediately prior to giving effect to the
adjustment to the Series H Conversion Price under this section 5B(vi)(b))
exceeds $171 million, divided by (y) the Fully Diluted Shares Outstanding;
provided, however, that the Series H Conversion Price will not be adjusted
to a number greater than a price equal to (x) $230 million divided by (y)
the Fully Diluted Shares Outstanding.

(iii) Adjustments made pursuant to the provisions of this
subsection (b) shall be effective immediately prior to the IPO and shall be
made before giving effect to any additional adjustments in connection with
the IPO pursuant to subsection (a). If the Corporation at any time
subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock
into a greater number of shares, the Series H Conversion Price Floor will
be proportionately reduced, and if the Corporation at any time combines (by
reverse stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Series H
Conversion Price Floor will be proportionately increased.

(iv) For purposes of this subsection (b), the valuation of the
Corporation in the IPO is equal to the product of (A) the per share IPO
price and (B) the Fully Diluted Shares Outstanding."

IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Correction to the Fourth Amended and Restated Certificate of Incorporation of
Vignette Corporation, this _____ day of January, 1999.

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

<PAGE>

Exhibit 3.2

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
VIGNETTE CORPORATION
A DELAWARE CORPORATION

(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)

Vignette Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "General Corporation Law")

DOES HEREBY CERTIFY:

FIRST: That this corporation was originally incorporated on December
19, 1995, pursuant to the General Corporation Law.

SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Amended and Restated Certificate of
Incorporation of this corporation, declaring said amendment and restatement to
be advisable and in the best interests of this corporation and its stockholders,
and authorizing the appropriate officers of this corporation to solicit the
consent of the stockholders therefor, which resolution setting forth the
proposed amendment and restatement is as follows:

"RESOLVED, that the Amended and Restated Certificate of Incorporation
of this corporation, as amended, be amended and restated in its entirety as
follows:

ARTICLE I

The name of the corporation is Vignette Corporation (the
"Corporation").

ARTICLE II

The address of the registered office of this corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
<PAGE>

ARTICLE IV

The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is Eighty
Million (80,000,000), par value $.01 per share, and the number of Preferred
Stock authorized to be issued is Ten Million (10,000,000) par value $.01 per
share.

Effective as of the filing of this Amended and Restated Certificate of
Incorporation (the "Restated Certificate"), each share of Common Stock issued
and outstanding immediately prior to the effective time shall be automatically
changed and converted, without any action on the part of the holder thereof,
into 1.967470068811114 shares of Common Stock, and each holder who upon the
effectiveness of this Restated Certificate would otherwise be entitled to
receive a fractional share of Common Stock shall be entitled to receive for such
fractional interest, and at the effective time of this Restated Certificate any
such fractional interest in shares of Common Stock of the Corporation shall be
converted into the right to receive, an amount in cash equal to the initial
public offering price of shares of Common Stock in the Corporation's public
offering times such fractional interest or if the Corporation's initial public
offering does not occur, an amount to be determined by the board of directors
times such fractional interest.

The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any wholly unissued series of Preferred Stock, within
the limitations and restrictions stated in this Restated Certificate, to fix or
alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.

ARTICLE V

Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.

ARTICLE VI

The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.

2
<PAGE>

The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III. Such classes shall be as nearly equal in
number of directors as possible. Each director shall serve for a term ending on
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to Class I shall
serve for a term ending on the annual meeting next following the end of fiscal
year 1999, the directors first elected to Class II shall serve for a term ending
on the second annual meeting next following the end of fiscal year 2000, and the
directors first elected to Class III shall serve for a term ending on the third
annual meeting next following the end of fiscal year 2001. The foregoing
notwithstanding, each director shall serve until such director's successor shall
have been duly elected and qualified, unless such director shall resign, become
disqualified, disabled or shall otherwise be removed.

At each annual election, directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless by
reason of any intervening changes in the authorized number of directors, the
Board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes.

Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
shall nevertheless continue as a director of the class of which the director is
a member until the expiration of the director's current term, or the director's
prior death, resignation or removal. If any newly created directorship may,
consistently with the rule that the three classes shall be as nearly equal in
number of directors as possible, be allocated to either class, the Board shall
allocate it to that of the available class whose term of office is due to expire
at the earliest date following such allocation.

ARTICLE VII

Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.

ARTICLE VIII

Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and may not be effected by any consent in writing of such stockholders.

ARTICLE IX

3
<PAGE>

any transaction from which the director derived any improper personal benefit.
If the Delaware General Corporation Law is amended after approval by the
stockholders of this Article to authorize corporate action further eliminating
or limiting the personal liability of directors then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law as so amended.

Any repeal or modification of the foregoing provisions of this Article
IX by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of, or
increase the liability of any director of this Corporation with respect to any
acts or omissions of such director occurring prior to, such repeal or
modification.

ARTICLE X

In addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Restated Certificate, the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend or repeal the provisions of Article I, Article II, and
Article III of this Restated Certificate. Notwithstanding any other provision
of this Certificate of Incorporation or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any vote of the
holders of any class or series of the stock of this Corporation required by law
or by this Restated Certificate, the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend or repeal any provision of this Restated Certificate not specified in the
preceding sentence.

* * * *

THIRD: The foregoing Restated Certificate of Incorporation has been
duly adopted by the Corporation's Board of Directors in accordance with the
applicable provisions of Section 245 of the General Corporation Law of the State
of Delaware.

4
<PAGE>

IN WITNESS WHEREOF, the undersigned has signed this Certificate this
_____ day of ____________, 1999.

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

ATTEST:

- -----------------------
Neil Webber
Secretary

<PAGE>

Exhibit 5.1

GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
8911 CAPITAL OF TEXAS HIGHWAY, SUITE 4240
AUSTIN, TEXAS 78759
(512) 342-2300 TELEPHONE
(512) 342-8181 - FACSIMILE

_______________, 1999

Vignette Corporation
901 South Mopac Expressway, Building 3
Austin, Texas 78746

Re: Registration Statement on Form S-1
----------------------------------

Ladies and Gentlemen:

We have examined the Registration Statement on Form S-1 (File No. 333-
68345) originally filed by Vignette Corporation (the "Company") with the
Securities and Exchange Commission (the "Commission") on December 3, 1998, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
4,025,000 shares of the Company's Common Stock (the "Shares"). The Shares,
which include an over-allotment option granted by certain stockholders of the
Company to the Underwriters to purchase up to 525,000 additional shares of the
Company's Common Stock, are to be sold to the Underwriters by the Company and
certain stockholders of the Company as described in the Registration Statement
for resale to the public. As your counsel in connection with this transaction,
we have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.

It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
and validly issued, fully paid and non-assessable. The Shares being sold by the
stockholders of the Company have been validly issued, are non-assessable and, to
our knowledge, are fully paid. Our opinion with respect to the Shares being
sold by the stockholders of the Company being fully paid is based solely upon
your written representations to us with respect to the consideration received
for such Shares.

We consent to the use of this opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.

Very truly yours,

Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 14, 1999 in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-68345) and related Prospectus of
Vignette Corporation for the registration of shares of its common stock.

/s/ Ernst & Young LLP

Austin, Texas

January 26, 1999