This is part 1 in a two-part series.

Call it the days of the living dead for a handful of once highflying software stocks.

Many software stocks have gotten battered in recent months, as their revenue has shrunk and net income has disappeared. But a select few in the software sector have been hammered so hard they're now trading at or below the amount of cash or securities the business has on hand -- a valuation that essentially ascribes zero worth to the companies' ongoing businesses.

Among the companies with this dubious distinction:

Commerce One

(CMRC)

,

E.piphany

(EPNY)

,

Marimba

(MRBA)

,

Vignette

(VIGN)

and

Vitria Technology

(VITR)

.

Given their price tags, now may provide an opportunity for patient investors to get in low and reap some rewards when the economy rebounds. But in some riskier cases, investors also must realize they'll be acting like public venture capitalists, banking on what are akin to early stage companies.

"A lot of these software companies have been walking dead," said Ian Murray, a portfolio manager with Straus Asset Management in New York. "The trick is to figure out which ones might reaccelerate -- who has a real product."

Some may have a real product that's more likely to be part of a larger offering, rather than sustaining a stand-alone company. Others may have a strong history of technology know-how, but are saddled with execution questions.

Their prospects are cloudy enough that some fund managers say they wouldn't touch them with a 10-foot pole. One buy-side analyst in San Francisco said he typically stays away from stocks that have fallen too low, because of their risk of going under.

"There is no visibility and no way to know how big their market is," said the analyst, who prefers to stick with leaders. "You're kind of uncovering the fact that management is weak," he added. "Everyone was lucky in '98 and '99, not smart."

Of those whose luck has started running out, Vignette is the most favored to last, analysts and fund managers say. Several analysts have used the word "survivor" to describe Vignette, which teamed up with

CNet Networks

in 1996 to develop its technology.

In addition, Vignette is the largest of the software stocks trading near cash, with quarterly revenue running between $45 million and $50 million. It's also in the midst of a product upgrade cycle.

But Vignette's revenue has dropped about 50% from a year ago and its stock is trading at $1.45, vs. cash per share of $1.48. It reported an operating cash burn rate of $22.6 million last quarter, but still had $368.4 million in cash left on its balance sheet as of March 31.

Fund managers say part of Vignette's problem relates to investor confusion about its market -- content management -- and whether it should have become history with the dot-com bubble.

Indeed, the field is in some trouble. "I would say that this group, content management, is completely washed out, and for a couple of reasons," said Michael Marzolf, an analyst with U.S. Bancorp Piper Jaffray, who has an outperform rating on Vignette. Among the reasons he cites: Deals have become smaller, and there are too many players, so the field has become incredibly competitive. (Marzolf's firm has done underwriting business with Vignette.)

To make matters worse,

Microsoft

entered the fray with its acquisition of NCompass Labs in April 2001. Content management, Marzolf says, is a natural and important part of an infrastructure suite that could be offered by the likes of big players like

IBM

(IBM) - Get Report

or

BEA Systems

(BEAS)

. He's expecting more consolidation.

Other pure-play content managers such as

Interwoven

(IWOV)

and

Documentum

(DCTM)

are in stronger positions than Vignette, with positive pro forma earnings expected earlier. Of course, their stocks reflect that, with both trading at more than two times 2002 sales, compared with Vignette's price-to-sales ratio at just under 2.

Dennis McKechnie, portfolio manager of the Pimco Innovation Fund, has reduced his holdings of Vignette because he's become less confident that the company will have the best product when the market recovers. But if it recovers before the first quarter of 2003 -- when most are now hoping a recovery will materialize -- then Vignette could prove to be a good trade, McKechnie said.

Eighteen months ago, Marzolf didn't think Vignette would be a survivor. But with a better product, he's changed his mind. "I think they'll definitely be one to weather the storm," he said. "Therefore, when the stock is trading at cash, I think that does form somewhat of a floor."

Checking Pulse of Vitria and E.piphany

Vitria and E.piphany are two other companies that some analysts and fund managers believe have strong technology, but have stumbled nonetheless. E.piphany took on customer relationship management powerhouse

Siebel Systems

(SEBL)

and did little to differentiate itself. Vitria initially went after the telecom market with its integration technology, and everyone knows what happened to that sector.

Both Vitria and E.piphany preannounced disappointing first-quarter results. Vitria cited economic conditions, but investors are becoming increasingly frustrated with management. E.piphany, meanwhile, suffered an earnings and revenue shortfall because one big customer,

Cisco

(CSCO) - Get Report

, decided to re-evaluate its CRM needs.

Despite such problems, fund managers describe both E.piphany CEO Roger Siboni and Vitria CEO JoMei Chang as "very smart." But one New York-based buy-side fund analyst said she thinks Chang's strong technology skills don't necessarily apply to running a company during tougher times and she believes Chang should step down.

Vitria has brought in a new CFO and executive VP of worldwide operations. Now the question is whether the new management can execute, said Erick Brethenoux, an analyst at Lazard Freres & Co. who calls Vitria a show-me story and has a buy rating on the company. (His firm hasn't done any banking business with the company.) He says Vitria, which created business process management software but has since been followed by the competition, would make a nice acquisition for IBM or

Hewlett-Packard

(HWP)

. The question investors should ask themselves, then, is if they want to risk buying shares of Vitria because they think it's a takeout opportunity.

Similarly, E.piphany could be "quite interesting as a takeout play," said Wedbush Morgan Securities analyst Nathan Schneiderman, who has a hold rating on E.piphany. "There are some good products here." (His firm hasn't done any banking with the company.)

While some suggest Vitria has fallen into a death spiral, Schneiderman said E.piphany is "absolutely not" on its deathbed. The stock is near bottom and ultimately is likely to move up through an acquisition or internal performance, he said.

But Schneiderman figures it will take more than six to nine months before the company shows some progress on the revenue side. So again, that means patience is a virtue here.

In Part 2 of this series, we look at two riskier investments in software companies trading at or below cash.