UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

Commission File Number 000-26881

E.piphany, Inc.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  |  |  | 77-0443392                             
|-------------------------------------------------------------- |  |  |  | ---------------------------------------
|(State or
other jurisdiction of incorporation or organization) |  |  |  | (I.R.S. Employer Identification number)
|475 Concar
DriveSan Mateo, California                          |  |  |  | 94402                                  
|(Address of
principal executive offices)                       |  |  |  | (Zip code)                             

Registrants telephone number, including area code: (650) 356-3800
 Securities Registered Pursuant to Section 12(b) of the Act: None  Securities Registered Pursuant to Section 12(g) of the
Act: Common Stock, $0.0001 par value

(Title of Class)



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




Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes [X]  No [  ]




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




The approximate aggregate market value of the
registrants Common Stock held by non-affiliates on June 30, 2003 was $274,521,239. This amount excludes shares held by directors, executive
officers, and holders of 5% or more of the outstanding Common Stock since such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.




The number of common shares outstanding as of
January 31, 2004 was 74,881,955.


DOCUMENTS INCORPORATED BY REFERENCE:

|                                                                                                                                                                                                           |  |  |  | Form 10-K reference
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------
|(1) Portions
of the Registrants proxy statement to be filed pursuant to Regulation 14A for the stockholder meeting scheduled for May 28, 2004 are incorporated
by reference into Part III of this Report. |  |  |  | Part
III           

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PART I

Item 1.  Business

Overview



We develop, market and license the E.piphany®
E.6TM software suite, an integrated set of customer relationship management, or CRM, software products. These CRM products are used by large
companies to better manage their customer relationships by optimizing marketing, sales and customer service business processes and customer
interactions. Our products enable companies to collect and analyze customer data to interact with customers more efficiently and effectively across all
inbound and outbound touch points. A key strength of the E.6 Suite is its integration of operational CRM with analytical CRM. Our operational CRM
capabilities automate customer-related business processes, such as customer service or sales processes, across a variety of communications and
distribution channels. Our analytical CRM capabilities analyze large volumes of customer data, providing insight into customers characteristics
and preferences to deliver more effective marketing campaigns and customer interactions. Companies deploy these capabilities independently or as
blended applications that combine both operational and analytical CRM to grow revenue, increase profitability, and to improve customer
satisfaction.




The CRM industry has evolved substantially over the
past decade as customers have begun to require broader, more flexible solutions that address complex, enterprise-wide business problems.
First-generation CRM products have only been able to address the requirements of individual corporate divisions within larger enterprises. Typically,
these earlier generation products were not designed to address business processes that span multiple departments, end-users and external systems. If a
company wished to implement an integrated system, it would have to remove its existing systems and consolidate its data and functionality into a new
system, or alternatively, build highly complex integrations to existing systems. Many of these projects are expensive and have had low success rates.
In order to avoid many of these problems, today, companies are beginning to rely on more modular CRM software products that can be deployed gradually
and which are able to co-exist with, rather than replace, existing systems.




In order to provide modular application
functionality that can be deployed incrementally and leverage existing system and infrastructure investments, we have developed our products on a
software platform that we call the Customer Relationship Backbone, or CRB. CRB is based on an open standard programming framework that is interoperable
with most software and hardware platforms and which enables software to be written as separate but interrelated components of functionality. These
components, or Web services, may be combined with other internal components or with external systems to address specific application
requirements. Web services refer to open Internet standards that allow software components to provide their functionality and data as a
service to other components or applications. For example, a call center agent using E.piphany Service may be able to access an order status
by using Web services technology to access functionality in a back-office order fulfillment system. By leveraging the benefits of Web services
standards, E.piphany offers greater deployment flexibility, easier integration, and a broader choice of compatible software and hardware
platforms.




Companies are also increasingly demanding more
intelligent software applications that optimize business processes based on the analysis of customer data and interactions. Traditionally, these types
of analytical capabilities were primarily used by marketing departments to better understand customer trends and to design outbound marketing
campaigns. Many companies are now realizing the benefits of applying these same analytical capabilities to a wider range of business problems, and
integrating these capabilities into operational systems to enable better-informed decisions and optimized customer relationships.




The E.6 Suite also addresses companies
requirements for greater analytical capabilities and the integration of those capabilities with operational systems. We offer a range of analytical
components and applications for consolidating data from external systems into a central repository, analyzing that data for customer characteristics
and preferences, and building highly targeted lists of customers for marketing campaigns. We also provide a real-time analytical capability that is
able to make recommendations to optimize each interaction with a customer by performing analysis as the interaction is happening. All of these
analytical capabilities are built on Web services standards such that they can be integrated with our operational CRM components or external systems.
For example, analytical functionality can be integrated into a call center application to prompt an agent with a statistically optimal cross-sell offer
for the customer the agent is assisting.


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We were founded in November 1996 and were primarily
engaged in research and development activities until early 1998 when we shipped our first software product and generated our first revenues from
software license, professional services and maintenance fees. In September 1999 and January 2000 we raised a total of approximately $426 million
through the sale of our common stock in registered public offerings to fund growth and to acquire complementary businesses and technologies. During
2000 and 2001, we completed several acquisitions using stock consideration including the acquisition of RightPoint Software, Inc., Octane Software,
Inc. and Moss Software, Inc. In November 2003, we released version 6.5 of our product suite. This version was a major milestone in a multi-year
development effort to consolidate all of our acquired products onto a single, technically integrated technology platform which provides greater value
to our customers and increases our development productivity.


Products



The E.6 Suite consists of three principal product
lines: E.piphany Marketing, E.piphany Sales and E.piphany Service. With products from each of these product lines, customers may also license certain
analytical CRM capabilities, including our E.piphany Insight products for batch-based, on-line analytical processing and data mining analysis and our
E.piphany Interaction Advisor products for real-time data analysis. Our Interaction Advisor products use a combination of historical, personal and
contextual data to create a real-time customer profile, and then apply a unique combination of real-time analytics and business rules to deliver the
highest-impact communications at the moment of customer interaction. It then measures the results and continuously adjusts itself to improve
effectiveness over time.




The E.6 Suite of products is comprised of multiple
interoperable components or services, which can be combined with each other or third-party components to deploy composite applications that solve
specific business problems in marketing, sales and customer service. Our software products can be deployed simultaneously or in incremental steps as
our customers seek to address new business problems. Our customers can deploy our software solutions to enhance or replace previously installed
software products.


E.piphany Marketing



E.piphany Marketing allows employees in a
companys marketing department to collaborate on planning and designing both outbound and inbound marketing campaigns that target customers based
on their specific characteristics and preferences. Once a campaign is designed, our software applications are able to execute the campaign through
direct mail, personalized e-mail, customized web pages and other points of customer interaction. When campaigns are executed, E.piphany Marketing
analyzes response data to improve future campaigns. Our customers use our real-time decision-making capabilities with E.piphany Marketing to make
optimal marketing recommendations based on historical customer data, information generated during a customer interaction in real time, or other
information about the customers life cycle  enabling organizations to take advantage of each customer touch to extend the
customer relationship.


E.piphany Sales



E.piphany Sales enables a companys sales
personnel to be more effective in managing their customer relationships by enabling them to better manage their sales cycles, including identifying the
most promising leads, preparing for sales interactions and following up in the most appropriate manner. Companies use E.piphany Sales to achieve higher
sales success rates, deeper account penetration and increased revenue. E.piphany Sales provides sales professionals access to real-time information
through web browsers, disconnected laptop computers, wireless phones, personal digital assistants and other devices. Our customers use our real-time
decision-making capabilities with E.piphany Sales to intelligently guide sales personnel through the sales process with optimal recommendations for
delivery to customers.


E.piphany Service



E.piphany Service helps customer care
representatives and call center agents respond to customer requests, issues, inquiries and opportunities, as well as enables customers to help
themselves over the web. E.piphany Service provides an integrated view of a companys communication channels, including the internet, e-mail,
telephone, fax and other touch points. By incorporating our analytical and marketing technology, our intelligent customer service


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software solutions enable customer contact representatives to have a single view of
all of each customers data that has been collected from multiple sources, and make relevant offers and service recommendations based on that
information. Our customers use our real-time decision-making capabilities with E.piphany Service, for example, to optimize the routing of inbound
customer calls and prompt customer service agents with information to optimize the interaction with the customer.

Technology



Key elements of our software technology include the
following:




J2EE Development Framework.CRB is
based on the Java 2 platform, Enterprise Edition, or J2EE, development framework and leverages web services standards. The Java platform contains an open standard programming
language that is interoperable with most software and hardware platforms. These open standards enable E.piphany, our partners and our customers to
produce software applications that are easier to develop, configure and integrate with existing systems. These systems could include third party
software products or other E.piphany products, whether written natively in Java or in other programming languages. For example, this approach enables
customers to seamlessly deploy in their J2EE environments the E.piphany Interaction Advisor and Campaign Management for Email products which contain
components that are written in a non-java programming language, via standard Java interfaces.




Web-based user interfaces. Our
browser-based, web architecture allows all application functionality to be accessed through an easy-to-use web browser which requires no software
installation on the users computer. Instead, application logic is managed on a central application server, or series of servers. As a result,
systems administrators can make application changes in a single location and need not make numerous changes on each users
desktop.




Metadata configuration. Implementation
teams make changes to our applications using our E.piphany Studio graphical configuration tools. These configurations are stored in a central
repository of metadatadata that describes all the changes made to the applications user interface, data elements, business rules, and
business processes. As a result, maintenance, upgrades and changes to an application are easier than with earlier generation approaches where
customizations were made by writing new software code for each element of the application.




Dynamic processes. Our Dialogs and
Workflow process services allow managers and analysts to define and automate processes through visual designer tools. Our Intelligent Business Rules
capability enables our customers to define and enforce optimal business processes. Because we have designed these process management capabilities to be
dynamic, changes can be made rapidly to adapt to new business conditions or strategies. These dynamic processes can also leverage customer analytics
and real-time intelligence to inform and optimize interactive processes.




Advanced data integration
technologies. The data integration capabilities in the CRB enable our applications to obtain a single, consistent view of all customer
information, whether that information is stored in a local database or in external systems. To accomplish this, CRB provides a virtual
model of the application data, and then maps the virtual model to the physical location of the data using open standards such as web services, as well
as Enterprise Application Integration, or EAI, middleware from third-party vendors.




Batch and real-time analytics. We
provide a broad range of analytics  including online analytical processing, or OLAP, data mining, collaborative filtering and real-time
likelihood estimation  and integrate them tightly into marketing, service and sales applications. We have developed a number of proprietary
analytic capabilities which enable rapid performance of sophisticated analytic processes.




Multiple server support. The E.6 Suite
is designed to scale to meet the needs of the worlds largest enterprises  hundreds of millions of customer records, thousands of
simultaneous users and millions of transactions each day. For greater scalability and reliability, we support modern horizontal computing
architectures. A key capability that supports this scalability is our support for clusters of multiple application servers, so that during heavy use
there are additional and/or redundant application servers to handle application processing.




Unicode Support. Our products natively
support Unicode, an industry standard that makes it possible for an application to support multiple languages to meet the global requirements of large
companies. The Unicode industry standard provides support for almost every written language. We have taken advantage of this capability by translating
several of our applications into numerous languages.


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Sales, Marketing and Distribution



To date, we have sold our products primarily through
our direct sales force. We use a variety of marketing programs to build market awareness of our company, brand name and products, as well as to attract
potential customers. These programs include our own market research, product and strategy updates with industry analysts, public relations activities,
direct mail programs, telemarketing and telesales, seminars, trade shows, reseller programs, speaking engagements and web site marketing. Our marketing
organization also produces marketing materials to support sales campaigns to prospective customers that include brochures, data sheets, white papers,
presentations and demonstrations.




We have expanded our sales channels, however,
through additional relationships with system integrators and indirect channel vendors. We also seek to establish relationships and alliances with major
industry vendors that will add value to our products and expand our distribution opportunities.


Customers



As of December 31, 2003, we have sold our software
products and services to nearly 500 customers. Our customers represent entities of all sizes, but our sales focus is on large global enterprises, in
industries such as communications, financial services, manufacturing, retail, and travel and leisure. For each of the three years ended December 31,
2003, no customer accounted for more than 10% of our revenues.




Total international revenues for the years ended
December 31, 2003, 2002 and 2001 were $30.1 million, $25.0 million and $33.8 million, respectively. This represented 31%, 30% and 26% of total revenues
in 2003, 2002 and 2001, respectively. Please refer to Note 2 in the accompanying consolidated financial statements for further discussion of our
geographic operations.


Research and Development



Our research and development organization is
responsible for designing, developing and enhancing our software products, product testing, quality assurance and ensuring the compatibility of our
products with third-party hardware and software products. Our research and development organization is divided into teams consisting of development
engineers, product managers, quality assurance engineers, technical writers and support staff.




Our total research and development expenses were
$31.5 million, $34.0 million and $41.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.




We are in the process of establishing an offshore
development facility in the Peoples Republic of China, or PRC. We expect to continue to grow our research and development organization in this
facility. We believe that in the PRC we will be able to hire software development personnel at substantially lower costs than in the United
States.


Relationships and Alliances



An important element of our strategy is to establish
relationships and alliances to assist us in marketing, selling and implementing our software products. These relationships and alliances typically fall
into the following categories:




Consulting and implementation relationships.
We have system integrator relationships with Accenture, BearingPoint (formerly KPMG Consulting), Deloitte Consulting, eLoyalty and IBM, among others,
to implement our products and to assist us with sales lead generation. We have trained consultants in these organizations to implement and operate our
products.




Technology relationships. To help ensure that
our products are compatible with industry standards and take advantage of current and emerging technologies, we have formed relationships with vendors
of software and hardware technologies. We currently maintain relationships with vendors such as Avaya, BEA Systems, Business Objects, Cisco, Concerto
Software, Genesys, Hewlett-Packard, IBM, Microsoft, Oracle, SmartPath and Sun Microsystems. Many of these companies voluntarily provide us with early
releases of new products, education related to those products and in some cases, access to technical resources to facilitate adoption of their
products. As a result, we are able to integrate our products with these vendors products, and can anticipate required changes to our products
based on new versions of these vendors products.


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Distribution relationships. We have entered
into distribution agreements under which we license software products to other vendors for sublicensing to their customers, as well as outsourcing and
application service provider, or ASP, agreements under which such vendors install and use our software products to provide hosted CRM services to their
customers over the Internet. We believe that these relationships extend our sales presence in new and existing markets. We currently have reseller
relationships with Accenture, EDS, E.piphany Solutions Ltd., Harte-Hanks, Hewlett-Packard, IBM, Mitsucon, Satyam Computer Services and Unisys, among
others. We currently have outsourcing and ASP relationships with EDS, Harte-Hanks, Knowledgebase Marketing and Merkle, among others. Under these
agreements, we offer our software products to these companies at a discount from our list prices and provide sales, marketing, training and technical
support. Many of these companies have committed resources to training their employees, developing co-marketing programs and incorporating our products
into their CRM marketing.


Intellectual Property and Other Proprietary Rights



Our future success depends in part on the protection
of our technology. To protect our technology, we rely on a combination of patent, copyright, trademark and trade secret laws, as well as contractual
provisions and confidentiality procedures.




We hold twelve United States patents, which expire
between the years 2016 and 2020, and have applied for several other patents on our technology in the United States and internationally. We have also
applied for trademarks in the United States and internationally. We also seek to protect our technology by entering into written agreements with
customers and partners. Our customers who license our software products are required to sign a license agreement, which imposes restrictions on their
use of our products and underlying technology. We also enter into confidentiality agreements with our employees, consultants and other third parties in
order to restrict access to and use of our technology.


Competition



The market for our products is intensely
competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. We
compete principally with vendors of traditional CRM products, enterprise resource planning products, and data analysis and marketing software. Our
competitors include, among others, companies such as Chordiant, NCR, Oracle, PeopleSoft, SAP AG, SAS Institute, Siebel Systems and
Unica.




We compete on the basis of multiple factors,
including: the depth of our product features, our integrated analytics, the open and flexible nature of our CRB architecture, the speed of
implementation, scalability and ease of use.


Employees



As of December 31, 2003, we had 428 full-time
employees. Of these employees, 151 were engaged in research and development, 107 were engaged in sales and marketing, 117 were engaged in professional
services and 53 were engaged in general and administrative activities. Of these employees, 366 were located in the United States and 62 were located
outside the United States.




None of our employees are represented by a labor
union or a collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be
good.


Available Information



We file annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to
Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding E.piphany and other companies that file materials with the SEC electronically. You may also obtain copies of reports
filed with the SEC, free of charge, on our website at www.epiphany.com.


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RISK FACTORS



An investment in our common stock is very risky.
You should carefully consider the risks discussed below, together with all of the other information included in this Annual Report on Form 10-K before
investing in E.piphany. If any of the following risks actually occur, our business, financial condition or results of operations could be materially
adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment.


We have a history of losses, may incur losses in the future and may not be able
to sustain profitability.



We incurred net losses of $24.2 million for the year
ended December 31, 2003, $71.7 million for the year ended December 31, 2002, and $2.6 billion for the year ended December 31, 2001. We had an
accumulated deficit of $3.5 billion as of December 31, 2003. We may incur losses in the foreseeable future. These losses may be substantial and we may
not be able to sustain profitability. Our operating results will be harmed if our revenues do not keep pace with our expenses or are not sufficient for
us to achieve profitability. Although we achieved profitability in the quarter ended December 31, 2003, it cannot be certain that we will sustain or
increase profitability on a quarterly or annual basis.


Our revenues may be harmed if general and industry specific economic conditions
do not improve or worsen.



Our revenues are dependent on the health of the
economy and the growth of our customers and potential future customers. If the economies in the United States or in other territories in which we do
business worsen, or do not substantially improve, our customers may delay or reduce their spending on customer relationship management software. When
economic conditions weaken, sales cycles for software products tend to lengthen and companies information technology budgets tend to be reduced.
When this happens, our revenues suffer and our stock price may decline.


Competition from other software vendors could adversely affect our ability to
sell our products and services and could result in pressure to price our products in a manner that reduces our margins.



Competitive pressures could prevent us from growing,
reduce our market share or require us to reduce prices of our products and services, any of which could harm our business. We compete principally with
vendors of traditional customer relationship management software, enterprise resource planning software and data analysis and marketing software. Our
competitors include, among others, companies such as Chordiant, NCR, Oracle, PeopleSoft, SAP AG, SAS Institute, Siebel Systems and
Unica.




Many of these companies have significantly greater
financial, technical, marketing, sales, service and other resources than we do. Many of these companies also have a larger installed base of users,
have been in business longer and/or have greater name recognition than we do. In addition, some large companies have and will continue to attempt to
build capabilities into their products that are similar to the capabilities of our products. Some of our competitors products may be more
effective than our products at performing particular functions or be more customized for customers particular needs. Even if these functions are
more limited than those provided by our products, our competitors software products could discourage potential customers from purchasing our
products. Further, our competitors may be able to respond more quickly than we can to changes in customer requirements.




We have recently experienced price erosion with
respect to particular products as new competitors enter the market and existing competitors reduce prices. Our strategy is to develop, market and
support a broad set of customer relationship management products. If we are not able to effectively develop, market and support a diversified portfolio
of products, our revenues and operating margins will be harmed.




Our competitors have made and may continue to make
strategic acquisitions or establish cooperative relationships among themselves or with other software vendors. This may increase the capability of
their products and reduce or eliminate the need for our software products. Our competitors may also establish or strengthen cooperative relationships
with our current or future distributors, partners or other parties with whom we have relationships, thereby limiting our ability to sell through these
channels, reducing the promotion of our products and limiting the number of personnel available to implement our software.


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Variations in quarterly operating results may cause our operating results to
fall below the expectations of market analysts and investors and our stock price to decline.



We expect our quarterly operating results to
fluctuate. We believe, therefore, that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance,
and you should not rely on them to predict our future performance or the future performance of our stock price. Our short-term expense levels are
relatively fixed and are based on our expectations of future revenues. As a result, a reduction in revenues in a quarter may harm our operating results
for that quarter. Our quarterly revenues and operating results could vary significantly from quarter to quarter. If our operating results in future
quarters fall below the expectations of market analysts and investors, the trading price of our common stock will fall. Factors that may cause our
operating results to fluctuate on a quarterly basis or fall below the expectations of market analysts and investors in a particular quarter
are:


| |  | varying size, timing and contractual terms of orders for our
products and services,
|- |  | -----------------------------------------------------------------------------------

| |  | our ability to timely complete our service obligations related
to product sales,
|- |  | --------------------------------------------------------------------------------

| |  | changes in the mix of revenue attributable to higher-margin
product license revenue as opposed to substantially lower-margin service revenue,
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | customers decisions to defer or cancel orders or
implementations, particularly large orders or implementations, from one quarter to the next,
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes in demand for our software or for enterprise software
generally,
|- |  | ------------------------------------------------------------------------

| |  | reductions in the rate at which opportunities in our pipeline
convert into binding license agreements,
|- |  | ------------------------------------------------------------------------------------------------------

| |  | announcements or introductions of new products by us or our
competitors,
|- |  | ------------------------------------------------------------------------

| |  | software defects and other product quality problems,
|- |  | ----------------------------------------------------

| |  | our ability to release new, competitive products on a timely
basis,
|- |  | -------------------------------------------------------------------

| |  | any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting organizations to help provide implementation services when our own capacity is
constrained,
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | restructuring and other non-recurring costs, including severance
and lease abandonment costs,
|- |  | ---------------------------------------------------------------------------------------------

| |  | changes in accounting, legal and regulatory requirements,
and
|- |  | -------------------------------------------------------------

| |  | our ability to hire, train and retain qualified engineering,
professional services, training, sales and other personnel.
|- |  | ------------------------------------------------------------------------------------------------------------------------

Our financial results for a particular quarter may be materially adversely
affected by the delay or cancellation of large transactions.



Although no single customer accounted for more than
10% of total revenues for the three and twelve months ended December 31, 2003, a few large license transactions may from time to time account for a
substantial amount of our license revenues. For example, for the quarter ended March 31, 2002, revenues from one customer accounted for 12% of total
revenues. For the quarter ended December 31, 2002, revenues from one customer accounted for 17% of total revenues. If a customer or potential customer
cancels or does not enter into a large transaction that we may anticipate in a certain quarter, or delays the transaction beyond the end of the
quarter, our financial results in that quarter may be materially adversely affected.


If our internal professional services organization does not provide
implementation services effectively and according to schedule, our revenues and profitability would be harmed.



Customers that license our products typically
require consulting and implementation services and can obtain them from our internal professional services organization, or from outside consulting
organizations. When we are primarily responsible for implementation services, we generally recognize software license revenue as the


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implementation services are performed. If our internal professional services
organization does not effectively implement our products, or if we are unable to maintain our internal professional services organization as needed to
meet our customers needs, the recognition of revenue from such transactions will be delayed. In addition, our ability to sell software, and
accordingly our revenues, will be harmed. We may be required to increase our use of subcontractors to help meet our implementation and service
obligations, which would result in lower gross margins. In addition, we may be unable to negotiate agreements with subcontractors to provide a
sufficient amount and quality of services. If we fail to retain sufficient qualified subcontractors, our ability to sell software for which these
services are required will be harmed and our revenues will suffer.

Many of our products are new, and if they contain defects, or our services are
not perceived as high quality, we could lose potential customers or be subject to damages.



We released version 6.5 of our suite of products in
November 2003. Our products are complex and may contain currently unknown errors, defects or failures, particularly since many are new and recently
released. In the past, we have discovered software errors in our products after introduction. We may not be able to detect and correct errors before
releasing our products commercially. If our commercial products contain errors, we may be required to:


| |  | expend significant resources to locate, correct or work around
the error,
|- |  | -------------------------------------------------------------------------

| |  | delay introduction of new products or commercial shipment of
products, or
|- |  | -------------------------------------------------------------------------

| |  | experience reduced sales and harm to our reputation from
dissatisfied customers.
|- |  | --------------------------------------------------------------------------------



Our customers also may encounter system
configuration problems that require us to spend additional consulting or support resources to resolve these problems.




Because our software products are used for important
decision-making processes and enable our customers to interact with their customers, product defects may also give rise to liability claims. Although
our license agreements with customers typically contain provisions designed to limit our exposure, some courts may not enforce all or part of these
limitations. Although we have not experienced any such liability claims to date, we may encounter these claims in the future. Liability claims, whether
or not successful, could:


| |  | divert the attention of our management and key personnel from
our business,
|- |  | ---------------------------------------------------------------------------

| |  | be expensive to defend, and
|- |  | ---------------------------

| |  | result in large damages awards.
|- |  | -------------------------------



Our liability insurance may not be adequate to cover
all of the expenses resulting from a claim. In addition, if our customers do not find our services to be of high quality or are otherwise dissatisfied
with our services, we may lose revenue.


If customers do not contract directly with third party consulting organizations
to implement our products, our revenues, profitability and margins may be harmed.



We focus on providing software products rather than
services. As a result, we encourage our customers to purchase consulting and implementation services directly from third-party consulting organizations
instead of purchasing these services from us. While we do not receive any fees directly from these consulting organizations when they contract directly
with our customers, we believe that these consulting organizations increase market awareness and acceptance of our software products and allow us to
focus on software development, marketing, licensing and support.




From time to time, our customers nonetheless require
that we provide services directly to them, especially when such customers have licensed new releases of our products. If consulting organizations are
unwilling or unable to provide a sufficient amount and quality of services directly to our customers or if customers are unwilling to contract directly
with these consulting organizations, we may not realize these benefits and our revenues and profitability may be harmed.




When we provide consulting and implementation
services to our customers, we do so either directly through our internal professional services organization or indirectly through subcontractors we
hire to perform these services


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on our behalf. Because our margins on service revenues are less than our margins on
license revenues, our overall margins decline when we provide these services to customers. This is particularly true if we hire subcontractors to
perform these services because it costs us more to hire subcontractors to perform these services than to provide the services ourselves.

Our products have long sales cycles that make it difficult to plan expenses and
forecast results.



It typically takes us between six and twelve months
to complete a sale of our products, but it can take us longer. It is difficult, therefore, to predict if, and the quarter in which, a particular sale
will occur and to plan expenditures accordingly. The period between initial contact with a potential customer and such customers purchase of
products and services is relatively long due to several factors, including:


| |  | the complex nature of our products,
|- |  | -----------------------------------

| |  | our need to educate potential customers about the uses and
benefits of our products,
|- |  | ------------------------------------------------------------------------------------

| |  | the purchase of our products requires a significant investment
of resources by a customer,
|- |  | ------------------------------------------------------------------------------------------

| |  | our customers have budget cycles which affect the timing of
purchases,
|- |  | ----------------------------------------------------------------------

| |  | uncertainty regarding future economic conditions,
|- |  | -------------------------------------------------

| |  | many of our potential customers require competitive evaluation
and internal approval before purchasing our products,
|- |  | --------------------------------------------------------------------------------------------------------------------

| |  | potential customers delay purchases due to announcements or
planned introductions of new products by us or our competitors, and
|- |  | -------------------------------------------------------------------------------------------------------------------------------

| |  | many of our potential customers are large organizations, which
may require a long time to make decisions.
|- |  | ---------------------------------------------------------------------------------------------------------



The delay or failure to complete sales in a
particular quarter could reduce our revenues in that quarter, as well as subsequent quarters over which revenues for the sale would likely be
recognized. Our sales cycles lengthen when economic conditions worsen and spending on information technology declines. If our sales cycles unexpectedly
lengthen in general, or for one or more large orders, our revenues could be adversely affected.




In addition, some customers receive the right to
perform acceptance testing after the sale of our products with respect to some or all of the products licensed. If these customers do not accept the
products or otherwise terminate their customer agreements, our revenues could be adversely affected.




Also, some customers elect to initially license our
products on a preliminary or proof of concept basis to enable them to evaluate the extent to which such products meet their specific needs
within their technical environment. If such customers conclude the products meet their needs, they may elect to expand the scope of usage rights to
deploy our products more broadly within their enterprises. Our customers election to license our products on this basis could delay or place at
risk our receipt of revenue with respect to such transactions.


If the market for our products does not grow, our revenues will not
increase.



If the market for customer relationship management
software does not grow as quickly, or become as large, as we anticipate, our revenues will be lower than our expectations. Our market is still
emerging, and our success depends, in part, on its growth. Our potential customers may:


| |  | not understand or see the benefits of using these
products,
|- |  | -----------------------------------------------------------

| |  | not achieve favorable results using these products,
|- |  | ---------------------------------------------------

| |  | experience technical difficulty in implementing or using these
products,
|- |  | ------------------------------------------------------------------------

| |  | use alternative methods to solve the same or similar business
problems, or
|- |  | --------------------------------------------------------------------------

| |  | attribute less priority to customer relationship management
products relative to other enterprise software products and services.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------

9

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If we fail to establish, maintain or enhance our relationships with third
parties, our ability to grow revenues could be harmed.



In order to grow our business, we must generate,
retain and strengthen relationships with third parties. To date, we have established relationships with several companies, including consulting
organizations and system integrators that implement our software, including Accenture, BearingPoint (formerly KPMG Consulting), Deloitte Consulting,
eLoyalty and IBM; resellers, including Accenture, EDS, Harte-Hanks and Hewlett-Packard; hardware and software technology partners, including BEA
Systems, IBM and Sun Microsystems, as well as outsourcing or application services providers that use our software products to provide hosted services
to their customers over the internet, including Harte-Hanks. If the third parties with whom we have relationships do not provide sufficient,
high-quality service or integrate and support our software correctly, our revenues may be harmed. In addition, the third parties with whom we have
relationships may offer products of other companies, including products that compete with our products. We typically enter into contracts with third
parties that generally set out the nature of our relationships. Our contracts, however, do not typically require these third parties to devote
substantial resources to promoting, selling or supporting our products. We, therefore, have little control over the actions of these third parties. We
cannot assure you that we can generate and maintain relationships that offset the significant time and effort that are necessary to develop these
relationships. In addition, our pricing policies and contract terms with our distribution partners are designed to support each partner with a minimum
level of channel conflict. If we fail to minimize channel conflicts between our direct sales force and our channel partners, or among our channel
partners, our operating results and financial condition could be harmed.


Doing business abroad exposes us to greater management, intellectual property
and other risks and our development, marketing and sales activities in international markets may require us to incur significant additional
expenses.



We market and sell our products and services abroad.
Our revenue from the sale of our products and services outside of the United States accounted for 31% percent of our total revenues in 2003. In
addition, in the fourth quarter of 2003, we began the process of establishing certain research and development operations in the PRC. Doing business
internationally involves greater expense and many additional risks and challenges, particularly:


| |  | unexpected changes in regulatory requirements, taxes, trade laws
and tariffs,
|- |  | -----------------------------------------------------------------------------

| |  | differing intellectual property rights,
|- |  | ---------------------------------------

| |  | differing labor regulations,
|- |  | ----------------------------

| |  | changes in a specific countrys or regions political
or economic conditions,
|- |  | -----------------------------------------------------------------------------

| |  | limited experience and greater difficulty in managing certain
foreign operations,
|- |  | ---------------------------------------------------------------------------------

| |  | the complexity and cost of developing and maintaining
international versions of our products, and
|- |  | -------------------------------------------------------------------------------------------------

| |  | fluctuating exchange rates.
|- |  | ---------------------------



Our international business operations require a
significant amount of attention from our management and substantial financial resources. As of December 31, 2003, we had 62 employees located in Europe
and Canada


If we fail to develop new products or improve our existing products to meet or
adapt to the changing needs and standards of our industry, sales of our products may decline.



Our future success depends on our ability to address
the rapidly changing needs of our customers and potential customers. We must maintain and improve our existing products and develop new products that
include new technological developments, keep pace with products of our competitors and satisfy the changing requirements of our customers. If we are
not successful in achieving these goals, we may not gain market acceptance of our products and we may be unable to attract new customers. We may also
lose existing customers to whom we seek to sell additional software products and services. To achieve increased market acceptance of our products, we
must, among other things, continue to:


| |  | introduce new and improved customer relationship management
software products,
|- |  | ------------------------------------------------------------------------------

10

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| |  | improve the effectiveness and performance of our software,
particularly in implementations involving very large databases and large numbers of simultaneous users,
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | enhance the flexibility and configurability of our software to
enable our customers to better address their needs at a lower cost of deployment and maintenance,
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | enhance our softwares ease of use and
administration,
|- |  | ------------------------------------------------------

| |  | develop software for vertical markets,
|- |  | --------------------------------------

| |  | improve our softwares ability to extract data from
existing software systems, and
|- |  | ----------------------------------------------------------------------------------

| |  | adapt to rapidly evolving computer operating system and database
standards and Internet technology.
|- |  | ---------------------------------------------------------------------------------------------------



We may not be successful in developing and marketing
new or improved products. If we are not successful, we may lose sales to competitors and our revenues will be harmed.


If our products do not stay compatible with currently popular software programs,
we may lose sales and revenues.



Our products must work with commercially available
software programs that are currently popular. If these software programs do not remain popular, or we do not update our software to be compatible with
newer versions of these programs, we may lose customers.




We have made a strategic decision to base our
product architecture on the J2EE family of technologies. This capability affords our customers greater flexibility in the deployment of our software
products. Although J2EE is a widely adopted industry standard, a competing technology from Microsoft called .NET seeks to challenge J2EE as an
enterprise IT architecture. If .NET gains competitive advantage over J2EE in the marketplace at large, we may be competitively disadvantaged, and may
need to re-engineer our products to adopt the .NET architecture.




If we fail to successfully develop and maintain
products compatible with currently popular operating systems, database versions or programming standards, we may lose sales and revenues. In addition,
users access our products on their network through standard Internet browsers such as Microsoft Internet Explorer. If we fail to obtain access to
developer versions of any of these software products, we may be unable to build and enhance our products on schedule. After installation, our products
interface directly with a variety of other enterprise applications, including systems from Oracle, PeopleSoft, Siebel Systems and SAP, running on a
variety of computer operating systems. If we fail to enhance our software to interface with new versions of these products, we may lose potential and
existing customers. If we lose customers, our revenues and profitability may be harmed.


If we fail to enhance our market awareness and sales effectiveness, we will not
be able to increase revenues.



In order to grow our business, we need to increase
market awareness of our company and products and enhance the effectiveness and productivity of our direct sales force and indirect sales channels. If
we fail to do so, this failure could harm our revenues. We currently receive substantially all of our revenues from direct sales, but we may increase
sales through indirect sales channels in the future.


If we acquire additional companies or technologies in the future, they could
prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect our operating results.



In addition to the acquisitions that we have already
completed, we may acquire or make investments in other complementary companies, services and technologies in the future. If we fail to successfully
integrate acquired technologies and employees, our business and operating results will be harmed. To successfully integrate acquired technologies and
employees, we must:


| |  | properly evaluate the business, personnel and technology of the
company to be acquired,
|- |  | ---------------------------------------------------------------------------------------

| |  | accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses,
|- |  | -------------------------------------------------------------------------------------------------------------------

11

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| |  | integrate and retain appropriate personnel,
|- |  | -------------------------------------------

| |  | geographic complexity,
|- |  | ----------------------

| |  | combine potentially different corporate cultures,
|- |  | -------------------------------------------------

| |  | effectively integrate products, research and development, sales,
marketing and support operations, and
|- |  | ------------------------------------------------------------------------------------------------------

| |  | maintain focus on our day-to-day operations.
|- |  | --------------------------------------------



Further, the financial consequences of our
acquisitions and investments may include potentially dilutive issuances of equity securities, consumption of cash, one-time write-offs, impairment
charges, amortization expenses related to other intangible assets and assumption of contingent liabilities.


If others claim that we are infringing their intellectual property, we could
incur significant expenses or be prevented from selling our products.



We cannot assure you that other companies will not
claim that we are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. We have not
conducted a search for existing intellectual property registrations and we may be unaware of intellectual property rights of others that may cover our
technology.




From time to time, patent holders contact us for the
purpose of licensing to us various intellectual property rights that they claim we infringe. We cannot assure you that the holder of such patents will
not file litigation against us or that we would prevail in the case of such litigation. Any litigation regarding intellectual property rights could be
costly and time-consuming and divert the attention of our management and key personnel from our business operations. This is true even if we are
ultimately successful in defending against such litigation. The complexity of the technology involved and the uncertainty of intellectual property
litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements
or result in infringement claims against our licensees, giving rise to an obligation by us to indemnify and hold our licensees harmless against such
claims. Further, in the event of a successful infringement claim, we may not be able to obtain royalty or license agreements on terms acceptable to us,
or at all. We also may be subject to significant damages or an injunction limiting or prohibiting the distribution or use of our products. A successful
claim of patent or other intellectual property infringement against us would have an immediate material adverse effect on our business and financial
condition.


If we are unable to protect our intellectual property rights, this inability
could weaken our competitive position, reduce our revenues and increase our costs.



Our success depends in large part on our proprietary
technology. We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights. We may be required to spend significant resources to monitor and police our intellectual property rights.
If we fail to successfully enforce our intellectual property rights, our competitive position may be significantly harmed.




Our pending patent and trademark applications may
not be allowed or competitors may successfully challenge the validity or scope of these applications. In addition, our patents may not provide us with
a significant competitive advantage. Other software providers could copy or otherwise obtain and use our products or technology without authorization.
They also could develop similar technology independently, which may infringe our proprietary rights. We may not be able to detect infringement and may
lose a competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies.
The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States, which could impair our
ability to protect our intellectual property rights in such jurisdictions.




In addition, we typically charge for our software
based on the number of users that are authorized to use the software or by restricting other rights, such as the number of servers. Customers that have
licenses to use our products could allow unauthorized use of our software. Unauthorized use of our software is difficult to detect and, to the extent
that our software is used without authorization, we may lose potential license fees.


12

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The loss of key personnel, or inability to attract and retain additional
personnel, could affect our ability to successfully grow our business.



Our future success will depend in large part on our
ability to hire and retain a sufficient number of qualified personnel, particularly in sales, marketing, research and development, service and support.
If we are unable to do so, our ability to advance our business could be affected. Our future success also depends upon the continued service of our
executive officers and other key sales, engineering and technical staff. The loss of the services of our executive officers and other key personnel
would harm our operations. None of our officers or key personnel is bound by an employment agreement and we do not maintain key person insurance on any
of our employees. We would also be harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with
us.




The market price of our common stock has fluctuated
substantially since our initial public offering in September 1999. Consequently, potential employees may perceive our equity incentives, such as stock
options, as less attractive and current employees whose stock options are priced above market value may choose not to remain employed by us. In that
case, our ability to attract or retain employees will be adversely affected.


Privacy and security concerns, particularly related to the use of our software,
may limit the effectiveness of, and reduce the demand for, our products.



The effectiveness of our software products relies on
the storage and use of customer data collected from various sources, including information collected on web sites, as well as other data derived from
customer registrations, billings, purchase transactions and surveys. The collection and use of such data for customer profiling may raise privacy and
security concerns. Our customers generally have implemented security measures to protect customer data from disclosure or interception by third
parties. However, the security measures may not be effective against all potential security threats. If a well-publicized breach of customer data
security were to occur, our software products may be perceived as less desirable, impacting our future sales and profitability. In addition,
governments in some jurisdictions have enacted or are considering enacting legislation that governs and restricts the use of personal identifying
information or limits companies from marketing directly to particular individuals through certain means. Any such legislation could limit the
usefulness of our software products in such jurisdictions, which could impair our ability to license our software.


Provisions in our charter documents and Delaware law may delay or prevent an
acquisition of E.piphany.



Our certificate of incorporation and bylaws contain
provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential
acquirer were to make a hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove members of our board of
directors or act by written consent without a meeting. In addition, the members of our board of directors have staggered terms, which makes it
difficult to remove them all at once. The acquirer also would be required to provide advance notice of its proposal to remove directors at an annual
meeting. The acquirer also would not be able to cumulate votes at a meeting, which would require the acquirer to hold more shares to gain
representation on our board of directors than if cumulative voting were permitted.




Our board of directors also has the ability to issue
preferred stock without stockholder approval. As a result, we could adopt a shareholder rights plan that could significantly dilute the equity
ownership of a hostile acquirer. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15%
stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third
party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some
stockholders.




Our board of directors could choose not to negotiate
with an acquirer that it did not feel was in the strategic interests of our company. If the acquirer was discouraged from offering to acquire us, or
prevented from successfully completing a hostile acquisition by the anti-takeover measures, you could lose the opportunity to sell your shares at a
favorable price.


13

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Item 2.  Properties



We currently lease approximately 50,000 square feet
of office space for our headquarters in one building in San Mateo, California. We also lease approximately 83,000 square feet of office space in three
other buildings in San Mateo, California. In addition, we lease sales and support offices in or near Atlanta, Boston, Chicago, Dallas, Detroit, Los
Angeles, New York, Philadelphia, Phoenix, Seattle and Toronto that comprise approximately 123,000 square feet. We also lease sales and support offices
outside of North America including locations in Australia, France, Singapore, Spain, Switzerland, the Netherlands and the United Kingdom that total
approximately 36,000 square feet. Approximately 60% of the square footage of our U.S. facilities is currently subleased to third parties and
approximately 11% is available for sublease. Approximately 27% of the square footage of our international facilities is currently subleased to third
parties and 46% is available for sublease. We believe that our facilities are adequate to meet our current and anticipated business
needs.


Item 3.  Legal Proceedings



As of the date hereof, there is no material
litigation pending against us other than as disclosed in Note 6 of Notes to Consolidated Financial Statements. From time to time, we may become a party
to litigation and subject to claims incident to the ordinary course of our business. Although the results of litigation and claims cannot be predicted
with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, results of operations or
financial condition.


Item 4.  Submission of Matters to a Vote of Security
Holders



No matters were submitted to a vote of security
holders during the fourth quarter of 2003.


PART II

Item 5.  Market for Registrants Common Equity and Related
Stockholder Matters



Our common stock has been traded on the Nasdaq Stock
Markets National Market under the symbol EPNY since September 22, 1999, the date of our initial public offering. The following table
sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq Stock Markets National
Market:


|                    |  |  |  | High |       | Low
|------------------- |  |  |  | ---- | ----- | ---
|Fourth Quarter
2003 |  |  |  | $    | 8.30  |    
|Third Quarter
2003  |  |  |  | $    | 6.17  |    
|Second Quarter
2003 |  |  |  | $    | 5.83  |    
|First Quarter
2003  |  |  |  | $    | 5.47  |    
|Fourth Quarter
2002 |  |  |  | $    | 5.20  |    
|Third Quarter
2002  |  |  |  | $    | 4.50  |    
|Second Quarter
2002 |  |  |  | $    | 7.35  |    
|First Quarter
2002  |  |  |  | $    | 12.26 |    



The last reported sale price for our common stock on
the Nasdaq Stock Markets National Market on January 30, 2004 was $8.58 per share. As of January 30, 2004, there were 603 holders of record of our
common stock. This does not include persons whose stock is held in nominee or street name accounts through brokers.


Dividend Policy



We have never declared nor paid any dividends on our
capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future.


14

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Item 6.  Selected Financial Data



The following selected financial data should be read
in conjunction with our consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition
and Results of Operations, which are included elsewhere in this report.


|                                                                  |  |  |  | Year Ended December 31, |        
|----------------------------------------------------------------- |  |  |  | ----------------------- | -------
|
|
|Statement
of Operations Data                                      |  |  |  |                         |        
|Revenues                                                          |  |  |  | $                       | 96,132 
|Cost of
product license                                           |  |  |  |                         | 1,557  
|Cost of
services                                                  |  |  |  |                         | 28,825 
|Amortization
of purchased technology                              |  |  |  |                         | 4,808  
|Gross
profit                                                      |  |  |  |                         | 60,942 
|Restructuring
charges                                             |  |  |  |                         | 3,929  
|In-process
research and development charge                        |  |  |  |                         |       
|Amortization
and write-down of goodwill and purchased Intangibles |  |  |  |                         | 261    
|Loss from
operations                                              |  |  |  |                         | (28,967
|Net
loss                                                          |  |  |  |                         | (24,244
|Basic and
diluted net loss per share                              |  |  |  | $                       | (0.33  
|Shares used
in computing basic and diluted net loss per share (1) |  |  |  |                         | 73,499 






|                                                  |  |  |  | As of December 31, |        
|------------------------------------------------- |  |  |  | ------------------ | -------
|
|
|Balance
Sheet Data                                |  |  |  |                    |        
|Cash, cash
equivalents and short-term investments |  |  |  | $                  | 157,580
|Working
capital                                   |  |  |  |                    | 130,463
|Long-term
investments                             |  |  |  |                    | 105,171
|Total
assets                                      |  |  |  |                    | 376,999
|Long-term
obligations, net of current portion     |  |  |  |                    | 20,674 
|Total
stockholders equity                        |  |  |  | $                  | 311,969






|(1) |  | See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the calculation of shares used in computing per share data.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

15

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Item 7.  Managements Discussion and Analysis of Financial
Condition and Results of Operations



The following discussion of our financial
condition and results of operations should be read in conjunction with our financial statements and related notes. This document contains
forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause
our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without
limitation, projections of expenses or other financial items; statements regarding our plans, strategies, and objectives for future operations,
including the timing, execution costs and potential cost-savings of restructuring plans; statements concerning proposed new products, services,
developments, or the anticipated performance of products or services; statements regarding future economic conditions or performance; statements of
belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include, but are
not limited to, those discussed under the heading Risk Factors in this annual report and the risks discussed from time to time in our other
public filings. We assume no obligation to update any forward-looking statements.


Overview



We were founded in November 1996 and were primarily
engaged in research and development activities until early 1998 when we shipped our first software product and generated our first revenues from
software license, professional services and maintenance fees. In September 1999 and January 2000, we raised a total of approximately $426 million
through the sale of our common stock in registered public offerings to fund growth and to acquire complementary businesses and technologies. During
2000 and 2001, we completed several acquisitions in exchange for our stock consideration including the acquisitions of RightPoint Software, Inc.,
Octane Software, Inc. and Moss Software, Inc. These acquisitions increased our customer base, increased the number of our employees and expanded our
product suite. As a result of these acquisitions, we recorded goodwill and purchased intangible assets of approximately $3.3 billion, representing the
difference between the value of the consideration paid in our stock and the value of the net assets acquired.




From the shipment of our first software product in
early 1998 through the fourth quarter of 2000, our revenues increased steadily each quarter due primarily to the market acceptance and success of our
products such as E.piphany Insight and E.piphany Marketing, as well as the shipment of new products such as E.piphany Service, which were introduced
through a combination of acquisitions and internal development. Our annual revenues grew to $131 million in 2000 from $19 million in 1999 and $3
million in 1998.




During 2001 and 2002, the worldwide economy weakened
and a slowdown in technology spending by businesses occurred. As a result, our revenues declined from $131 million in 2000 to $129 million in 2001 and
to $84 million in 2002. During this period of economic slowdown, we initiated restructuring plans to reduce our workforce and consolidate our operating
facilities. We also reviewed the impact of the change in market conditions on the carrying value of our goodwill and intangible assets. We determined
that these assets were impaired and wrote down their fair value by recording a non-cash charge of $1.7 billion in September 2001. Net losses for the
years ended December 31, 2000, 2001 and 2002 were $768 million, $2.6 billion and $72 million, respectively. The net losses in 2000 and 2001 included
non-cash impairment and amortization of goodwill and purchased intangibles of $697 million and $2.5 billion, respectively.




During 2002, we released version 6.0 of our product
suite. This release generated an increase in demand for our product licenses which helped increase revenues in 2003. Our total revenues for 2003
increased to $96 million, an increase of 15% over 2002, while our product license revenues increased to $44 million in 2003 from $34 million in 2002,
an increase of 29% year over year. During 2003, we continued to focus on cost containment and reduced our annual net loss to $24 million in 2003 from
$72 million in the prior year. The combination of increased revenue and decreased costs resulted in declining net losses in the first three quarters of
the year and net income of $0.4 million in the fourth quarter.


Sources of Revenue



We generate revenues principally from licensing our
software products directly to customers and providing related services including implementation, professional, maintenance and training services.
Through December 31, 2003, substantially all of our revenues were generated by our direct sales force. Our license agreements
generally


16

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provide that customers pay a software license fee to perpetually use one or more
software products within specified limits. The amount of the license fee varies depending on which software products are purchased, the number of
software products purchased and the scope of usage rights. Customers can subsequently pay additional license fees to expand the right to use previously
licensed software products, or to purchase additional software products. Our software products are made available to our customers electronically via
Internet download or on compact disk.



Customers generally require consulting and
implementation services, which include evaluating their business needs, identifying the data sources necessary to meet these needs and installing the
software solution in a manner that fulfills their requirements. Customers can purchase these services directly from third party consulting
organizations, such as Accenture, BearingPoint (formerly KPMG Consulting), Deloitte Consulting, eLoyalty or IBM. Alternatively, in certain
circumstances, customers can purchase these services directly from us through our internal professional services organization. Consulting and
implementation services are generally sold to customers on a time and expense basis. We have also historically supplemented the capacity of our
internal professional services organization by subcontracting some of these services to third party consulting organizations.


Cost of Revenues and Operating Expenses



Cost of revenues includes the cost of product
license revenues, the cost of services revenues and the amortization of purchased technology. Our cost of product license revenues primarily consists
of license fees payable to third parties for technology integrated into our products. Our cost of services revenues primarily consists of salaries and
related expenses for our professional services, maintenance and training organizations, an allocation of facilities, information technology and
depreciation expenses, as well as the cost of reimbursable expenses and the cost of subcontracting professional services from third party consulting
organizations that provide consulting and implementation services to our customers. Cost of revenues also includes the amortization of purchased
technology arising from our acquisitions. Our operating expenses are classified into three general categories: sales and marketing, research and
development, and general and administrative. We classify all charges to these operating expense categories based on the nature of the expenditures. We
allocate the costs for overhead and facilities to each of the functional areas that use the overhead and facilities services based on headcount. These
allocated charges include facilities, information technology, communications and depreciation expenses.




Software development costs incurred prior to the
establishment of technological feasibility are included in research and development costs as they are incurred. Since license revenues from our
software solutions are not recognized until after technological feasibility has been established, software development costs are not generally expensed
in the same period in which license revenues for the developed products are recognized.


Critical Accounting Policies and Estimates



Accounting policies, methods and estimates are an
integral part of the consolidated financial statements prepared by management and are based upon managements current judgments. Those judgments
are based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods
and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events
affecting them may differ markedly from managements current judgments. While there are a number of accounting policies, methods and estimates
affecting our financial statements, areas that are particularly significant and subject to the exercise of judgment include revenue recognition
policies, allowances for doubtful accounts, the measurement and recoverability of goodwill and purchased intangible assets, restructuring accruals for
the abandonment of certain leased facilities, and stock-based compensation. These policies and our practices related to these policies are described
below and in Note 2 of Notes to Consolidated Financial Statements.


Revenue Recognition



We recognize revenue in accordance with generally
accepted accounting principles which have been prescribed for the software industry and we follow detailed guidelines discussed in Note 2 of Notes to
Consolidated Financial Statements. The accounting rules related to revenue recognition are complex and are affected by interpretations of the rules and
an understanding of industry practices, both of which are subject to change. Consequently, the revenue recognition accounting rules require management
to make significant judgments.


17

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We do not record revenue on sales transactions when
collectability is in doubt at the time of sale. Rather, revenue is recognized from these transactions as cash is collected. The determination of
collectability requires significant judgment.




To date, when we have been primarily responsible for
the implementation of the software under a customer contract, both product license revenues and service revenues are recognized under the percentage of
completion contract method in accordance with the provisions of Statement of Position 81-1, Accounting for Performance of Construction Type and
Certain Production-Type Contracts (SOP 81-1). This is based on our assessment that the implementation services for these arrangements
are essential to the functionality of our software. Throughout most of the three years ended December 31, 2003, third-party consulting organizations
have been primarily responsible for implementation services for the majority of our license arrangements. This trend reversed temporarily during the
second half of 2002 and during this time we were responsible for the implementation on the majority of contracts. This temporary change resulted in a
greater percentage of revenue being recognized under SOP 81-1 in the second half of 2002 and the first half of 2003. Approximately 24%, 19% and 37% of
license revenue was recognized under SOP 81-1 during 2003, 2002 and 2001, respectively.




We estimate the percentage of completion on
contracts utilizing hours incurred to date as a percentage of the total estimated hours to complete the project. The percentage of completion method of
accounting involves an estimation process and is subject to risks and uncertainties inherent in projecting future events. A number of internal and
external factors can affect our estimates, including the nature of the services being performed, the complexity of the customers information
technology environment and the utilization and efficiency of our professional services employees. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise
to the revision become known.


Allowances for Doubtful Accounts



A considerable amount of judgment is required when
we assess the realization of receivables, including assessing the probability of collection and the current creditworthiness of each customer. When we
believe a collectability issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we
believe is collectable. For all other receivables, we record an allowance based on an assessment of the aging of such receivables, our historical
experience with bad debts and the general economic environment. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required that would result in additional general and administrative expense
in the period such determination is made.


Acquisitions, Goodwill and Purchased Intangible Assets



We record goodwill and purchased intangible assets
when we acquire other companies. The cost of the acquisition is allocated to the assets and liabilities acquired, including purchased intangible
assets, and the remaining amount is classified as goodwill. Certain purchased intangible assets such as purchased technology and customer lists are
amortized to cost of revenues and operating expense over time, while in-process research and development is recorded as a one-time charge on the
acquisition date. Under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which became
effective on July 1, 2001, goodwill arising from transactions occurring after July 1, 2001 and any existing goodwill as of January 1, 2002 are not
amortized to expense, but rather periodically assessed for impairment. The allocation of the acquisition cost to purchased intangible assets and
goodwill, therefore, has a significant impact on our operating results. The allocation process involves an extensive use of estimates and assumptions,
including estimates of future cash flows to be generated by the acquired assets.




As a result of the adoption of SFAS 142 as of
January 1, 2002, we ceased amortization of approximately $81.8 million of goodwill. In lieu of amortization, we were required to perform a transitional
impairment test of goodwill. Further, we perform impairment tests annually or when impairment indicators are identified with respect to previously
recorded intangible assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair market value. Fair market value is determined by independent valuation experts using, among other things,
discounted future cash flow


18

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techniques. Estimating discounted future cash flows requires significant management
judgment concerning revenue, profitability and discount rates. Differences between forecasted and actual results as well as changes in the general
economic environment could result in material write downs of goodwill and purchased intangible assets. We performed the transitional impairment test on
January 1, 2002 and annual impairment tests on December 31, 2002 and 2003. We determined that no impairment existed at those times.

Restructuring Charges



As discussed in Note 5 of Notes to Consolidated
Financial Statements, we have recorded significant restructuring charges, primarily in connection with our abandonment of certain leased facilities.
The lease abandonment costs were estimated to include remaining lease liabilities and brokerage fees offset by estimated sublease income. Estimates
related to sublease costs and income are based on assumptions regarding the period required to sublease the facilities and the likely sublease rates.
These estimates are based on market trend information analyses provided by commercial real estate brokerage firms retained by us. We review these
estimates each reporting period and, to the extent that market conditions and our assumptions change, adjustments to the restructuring accrual are
recorded. If the real estate market continues to worsen and we are not able to sublease the properties as early as, or at the rates estimated, the
accrual will be increased, which would result in additional restructuring costs in the period in which such determination is made. If the real estate
market strengthens and we are able to sublease the properties earlier or at more favorable rates than projected, the accrual may be decreased, which
would increase net income in the period in which such determination is made. The accrued liability of $27.7 million at December 31, 2003 is net of
$31.2 million of estimated sublease income. Sublease income is comprised of future minimum sublease payments as well as the reimbursement of future
expected operating expenses. Of this total sublease income, $15.2 million represents future sublease income due under non-cancelable subleases and
$16.0 million represents our estimates of future sublease income on excess facilities we expect to sublease in the future.




Future expected payments of lease costs net of
expected sublease receipts which have been included in our accrued restructuring costs are as follows (in thousands):







|Year Ended December 31, |  |  |  | Lease Costs
|----------------------- |  |  |  | -----------
|2004                    |  |  |  | $          
|2005                    |  |  |  |            
|2006                    |  |  |  |            
|2007                    |  |  |  |            
|2008                    |  |  |  |            
|2009 and
thereafter     |  |  |  |            
|                        |  |  |  | $          

Stock-Based Compensation



We elect to account for compensation expense related
to stock options issued to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under APB 25, compensation expense for fixed stock options is based on the difference between the market value of
our stock and the exercise price of the option on the date of grant, if any. This election is available to companies under SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Had we elected to apply the fair value method for valuing stock options
under SFAS 123, our net loss and net loss per share would have been substantially higher as discussed in Note 2 of Notes to Consolidated Financial
Statements. The fair value method of option valuation was applied for disclosure purposes by utilizing the Black-Scholes option-pricing model. This
option-pricing model is commonly used by companies to calculate the fair value of options under SFAS 123 and utilizes certain variables including the
exercise price of the option, expected life of the option, the market value of the underlying stock as of the grant date, the expected volatility of
the underlying stock during the life of the option, and a risk-free interest rate of return. Although some of these variables are known at the date of
grant, other variables are based on estimates of future events. Changes in these estimates may have a material impact on the
compensation


19

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expense calculated under the fair value method. For example, an increase in the
estimated expected life of the option or the stock volatility would increase the fair market value of the option and result in an increase to
compensation expense calculated under the fair value method.

Results of Operations

Revenues



The following table sets forth our revenues, both in
absolute dollars and expressed as a percentage of total revenues, for the years ended December 31, 2003, 2002 and 2001 (in thousands, except
percentages):







|                |  |  |  | Years Ended December 31, |       
|--------------- |  |  |  | ------------------------ | ------
|
|Revenues:       |  |  |  |                          |       
|Product
license |  |  |  | $                        | 43,505
|Services        |  |  |  |                          | 52,627
|                |  |  |  | $                        | 96,132



The following table sets forth our revenues by
geography, both in absolute dollars and expressed as a percentage of total revenues, for the years ended December 31, 2003, 2002 and 2001 (in
thousands, except percentages):







|              |  |  |  | Years Ended December 31, |       
|------------- |  |  |  | ------------------------ | ------
|
|North
America |  |  |  | $                        | 68,905
|Europe        |  |  |  |                          | 19,898
|Rest of
world |  |  |  |                          | 7,329 
|              |  |  |  | $                        | 96,132



Total revenues for 2003 increased by $12.3 million,
or 15%, over total revenues for 2002. Excluding the impact of foreign currency fluctuations, the increase was approximately 11%. These foreign currency
fluctuations were a result of sales recorded in foreign currencies, particularly the British Pound and the Euro, which were stronger relative to the
U.S. dollar during 2003 compared to 2002. Total revenues for 2002 decreased by $45 million, or 35%, as compared with total revenues for 2001. Foreign
currency fluctuations did not have a material impact on the change in revenues from 2001 to 2002.




Product license revenues for 2003 increased by $9.7
million, or 29%, over product license revenues for 2002. As a percentage of total revenues, product license revenues increased to 45% in 2003 from 40%
in 2002. Following the release of E.6 in September 2002, we sold several licenses for which we were responsible for the implementation of the software.
The revenue on these transactions was recognized using the percentage of completion method under SOP 81-1 and contributed to the increase in revenues
in 2003 compared to 2002. The increase in product license revenues was also the result of an increase in the total number of product license sales.
Specifically, we increased our focus on our primary geographies, North America and Europe, and on product markets we believe are important to our
future revenue growth. During 2003, markets outside of North America and Europe were transitioned to an indirect sales model under our restructuring
plan to reduce sales and marketing costs. As a result, product license sales in regions outside of North America and Europe decreased compared to 2002.
However, these decreases were more than offset by increases in product license sales in North America and Europe. Product license revenues decreased in
2002 from 2001 due to fewer sales resulting primarily from the downturn in the economy and weakness in information technology
spending.




Services revenues consist of revenue from
professional services, maintenance and training services. Services revenues for 2003 increased by $2.6 million, or 5%, over 2002. The increase was
primarily due to an increase in maintenance revenues offset, in part, by a decrease in professional services revenues. The increase in maintenance
revenues was attributable to maintenance contracts sold with new licenses in addition to maintenance agreement renewals by our existing installed base.
The decrease in professional services revenues was attributable to more of our customers contracting directly with third party integrators. Services
revenues for 2002 decreased from 2001


20

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due primarily to a decrease in professional services revenues offset, in part, by
an increase in maintenance revenue attributable to maintenance contracts sold to our new customers. The decrease in professional services was primarily
the result of fewer services rendered due to a decrease in product sales.



The relative amount of services revenues as compared
to license revenues has varied historically depending on the extent to which third party consulting organizations have been engaged directly by
customers to provide professional services, the nature of products licensed, the complexity of our customers information technology environment,
the resources allocated by customers to implementation projects and the scope of licensed rights. Services revenues have substantially lower margins
than product license revenues. This is especially true when we are required to subcontract with consulting organizations to supplement our internal
professional services organization. To the extent that services revenues become a greater percentage of our total revenues, our overall gross margins
will decline.




Deferred revenue decreased to $19.2 million as of
December 31, 2003 from $20.5 million as of December 31, 2002. This balance consists of fees collected from customers for which revenue has not been
recognized. Deferred revenue fluctuates due to several factors and is, therefore, not a reliable indicator of future revenues. These factors include
the timing of collections from customers, the variation in the amount of revenue recognized under SOP 81-1 and the timing of customer renewals for
annual maintenance agreements. All of these factors contributed to the decline in deferred revenue compared to prior year.


Cost of Revenues



The following table sets forth our cost of revenues
and gross profit, both in absolute dollars and expressed as a percentage of total revenues, for the years ended December 31, 2003, 2002 and 2001 (in
thousands, except percentages):







|                                     |  |  |  | Years Ended December 31, |       
|------------------------------------ |  |  |  | ------------------------ | ------
|
|Cost of
revenues:                    |  |  |  |                          |       
|Product
license                      |  |  |  | $                        | 1,557 
|Services                             |  |  |  |                          | 28,825
|Amortization
of purchased technology |  |  |  |                          | 4,808 
|                                     |  |  |  |                          | 35,190
|Gross
profit                         |  |  |  | $                        | 60,942



The cost of revenues decreased in 2003 from 2002 due
primarily to a decrease in the amortization of purchased technology and a decrease in the cost of services revenues. Cost of product license revenues
consists primarily of license fees paid to third parties under technology license arrangements and, as a percentage of license revenues, has not been
significant to date.




Cost of services revenues consist primarily of
personnel and related costs of providing professional services, maintenance and training services. The decrease in cost of services revenues for 2003
and 2002 was due primarily to a reduction in the number of internal professional services employees and the related overhead and facilities costs
resulting from the restructuring of our operations. The number of services employees decreased from 174 at December 31, 2001 to 134 at December 31,
2002 to 117 at December 31, 2003. Of this total reduction, 25 related to the restructuring of our operations during 2002, 3 related to the
restructuring of our operations during 2003 and the remainder related to voluntary and other terminations. The decrease in cost of services revenues as
a percentage of revenues for 2003 and 2002 was due to the decrease in the number of services employees as well as an increase in the proportion of
maintenance revenues to services revenues. Maintenance revenues have more favorable margins than professional services and training
revenue.




The amortization of purchased technology consists of
amortization from technology purchased in the acquisitions of RightPoint, Octane, iLeverage, eClass Direct, Moss and certain intellectual property
assets of Radnet. The decrease in amortization of purchased technology from 2002 to 2003 was due to the full amortization of RightPoint, Octane and
eClass Direct assets during 2003. The decrease in amortization from 2001 to 2002 was primarily due to a write-down of the carrying value of the assets
during the third quarter of 2001. See discussion


21

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of Amortization and Write-Down of Goodwill and Purchased Intangibles below.
Purchased technology assets of $0.7 million are included in purchased intangibles on our Consolidated Balance Sheet and are being amortized on a
straight-line basis over their remaining useful lives. All purchased technology assets are expected to be fully amortized by March 31, 2004.

Operating Expenses

Research and Development



The following table sets
forth our research and development expenses for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute
dollars and as a percentage of total revenues (in thousands, except percentages):







|                         |  |  |  | Years Ended December 31, |       
|------------------------ |  |  |  | ------------------------ | ------
|
|Research and
development |  |  |  | $                        | 31,471



Research and development expenses consist primarily
of personnel and related costs associated with our product development efforts. The decrease from 2002 to 2003 was due primarily to a reduction of
facilities and overhead expenses. In addition, a reduction in localization costs related to the Japan market was offset, in part, by an increase in
consulting expenses related to the use of more overseas development resources. Similar to the decrease from 2002 to 2003, the decrease from 2001 to
2002 was due to the restructuring of our operations, which resulted in lower overhead and facilities costs. The number of research and development
employees decreased from 183 as of December 31, 2001 to 166 as of December 31, 2002 to 151 as of December 31, 2003. Of the total decrease, 10 related
to the restructuring of our operations during 2002 and the remainder related to voluntary and other terminations. No research and development employees
were terminated as a result of restructuring activities in 2003. We believe that investments in product development are essential to our future success
and, therefore, the cost reductions we implemented in 2003 did not reduce our research and development expenses as much as other expense items. We
anticipate that research and development expenses will increase over the long term in absolute dollars.


Sales and Marketing



The following table sets forth our sales
and marketing expenses for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total
revenues (in thousands, except percentages):







|                    |  |  |  | Years Ended December 31, |       
|------------------- |  |  |  | ------------------------ | ------
|
|Sales and
marketing |  |  |  | $                        | 43,208



Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of trade shows, seminars, promotional materials and other sales and marketing programs. The
decreases in 2003 and 2002 were primarily due to a reduction in the number of sales and marketing employees and lower overhead and facilities costs as
a result of our restructuring plans. The decreases were also due to lower spending on sales and marketing programs. The number of sales and marketing
employees decreased from 240 as of December 31, 2001 to 153 as of December 31, 2002 to 107 as of December 31, 2003. Of the total reduction, 53 related
to the restructuring of our operations in 2002, 12 related to the restructuring of our operations in 2003 and the remainder related to voluntary and
other terminations.


General and Administrative



The following table sets forth our general and
administrative expenses for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues
(in thousands, except percentages):







|                           |  |  |  | Years Ended December 31, |       
|-------------------------- |  |  |  | ------------------------ | ------
|
|General and
administrative |  |  |  | $                        | 10,985

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General and administrative expenses consist
primarily of employee salaries and related expenses for executive, finance, legal and administrative personnel. The decreases in 2003 and 2002 were
primarily due to a reduction in the number of general and administrative employees and lower overhead and facilities costs as a result of our
restructuring plans. The number of general and administrative employees decreased from 99 as of December 31, 2001 to 71 at December 31, 2002 to 53 at
December 31, 2003. Of this reduction, 22 related to the restructuring of our operations in 2002, 3 related to the restructuring of our operations in
2003 and the remainder related to voluntary and other terminations. The decrease from 2002 to 2003 was also due to a reduction in spending on external
legal services. The decrease from 2001 to 2002 was also due to a decrease in bad debt expense due to an increase in collection rates.


Restructuring Costs



The following table sets forth our restructuring
charges for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues (in thousands,
except percentages):







|                      |  |  |  | Years Ended December 31, |      
|--------------------- |  |  |  | ------------------------ | -----
|
|Restructuring
charges |  |  |  | $                        | 3,929



In the quarter ended September 30, 2001 we began
restructuring worldwide operations to reduce costs and improve efficiencies in response to a slower economic environment. Since that time, operations
have been streamlined, sales models have changed in certain geographies and facilities have been abandoned to align our cost structure to current
market conditions. In accordance with applicable accounting literature, specified activities are deemed the commencement of a separate restructuring
plan in the quarter in which those activities could be specifically identified. The first plan was initiated in the quarter ended September 30, 2001
(Plan 1). The second plan, initiated during the quarter ended June 30, 2002, consisted of actions which were primarily supplemental to Plan
1 (Plan 2) and a third plan was initiated during the quarter ended March 31, 2003 (Plan 3). Charges for these plans were based
on assumptions and related estimates that were appropriate for the economic environment that existed at the time these charges were recorded. However,
due to the continued deterioration of the commercial real estate market, primarily in the U.S. and the United Kingdom, we have made subsequent
adjustments to the initial restructuring charges. No significant adjustments have been made to the initial estimated severance charges. See Note 5 in
Notes to Consolidated Financial Statements for more details.


Amortization and Write-Down of Goodwill and Purchased Intangibles



The following table sets forth our amortization of goodwill
and purchased intangibles for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues
(in thousands, except percentages):







|                                                   |  |  |  | Years Ended December 31, |    
|-------------------------------------------------- |  |  |  | ------------------------ | ---
|
|Amortization
of goodwill and purchased intangibles |  |  |  | $                        | 261



Our acquisitions of Octane, eClass Direct, iLeverage
and Rightpoint in 2000 and the acquisitions of Moss and certain intellectual property assets of Radnet in 2001 were accounted for under the purchase
method of accounting. Accordingly, we recorded intangible assets and goodwill representing the excess of the purchase price paid over the fair value of
net assets acquired. The decrease in amortization of goodwill and purchased intangibles in 2002 compared to 2001 was due to the cessation of the
amortization of goodwill in accordance with SFAS 142 and to a $1.7 billion charge for the impairment of goodwill and intangible assets recorded in the
year ended December 31, 2001. The decrease in amortization in 2003 compared to 2002 was due to the full amortization of purchased intangibles related
to the RightPoint and Octane acquisitions.




We will continue to amortize purchased intangible
assets of $0.7 million on a straight-line basis over their remaining useful lives. This balance is comprised entirely of purchased technology assets as
of December 31, 2003. Related amortization expense will be recorded in cost of revenues and the asset will be fully amortized by March 31, 2004. See
Note 4 of Notes to Consolidated Financial Statements for more detailed information.


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Stock-Based Compensation



The following table sets forth our stock-based
compensation expenses for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues
(in thousands, except percentages):







|                         |  |  |  | Years Ended December 31, |   
|------------------------ |  |  |  | ------------------------ | --
|
|Stock-based
compensation |  |  |  | $                        | 55



Stock-based compensation consists of amortization of
deferred compensation in connection with stock option grants to employees at exercise prices below the deemed fair market value of our common stock at
the date of grant. This amount is being amortized over the respective vesting periods of these equity instruments in a manner consistent with Financial
Accounting Standards Board Interpretation No. 25. As of December 31, 2003, the deferred compensation balance was fully amortized. See Notes 2 and 7 of
Notes to Consolidated Financial Statements for further discussion regarding the accounting treatment for stock-based compensation.




We account for stock issued to employees in
accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and comply with
the disclosure provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation and SFAS No. 148 (SFAS
148), Accounting for Stock-Based Compensation  Transition and Disclosure. Under APB 25, compensation expense for fixed stock
options is based on the difference between the fair market value of our stock and the exercise price of the option on the date of grant, if any. Had we
recognized stock-based compensation expense under SFAS 123, our stock-based compensation expense would have been $34.7 million, $61.5 million and
$108.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.


Other Income, Net



The following table sets forth our other income, net
for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except
percentages):







|                  |  |  |  | Years Ended December 31, |      
|----------------- |  |  |  | ------------------------ | -----
|
|Other income,
net |  |  |  | $                        | 5,249



The decreases in 2003 and 2002 were due to decreases
in interest income resulting primarily from decreases in the average rate of return on our investments. Interest income also declined in 2003 and 2002
as a result of lower average cash and investment balances. The decrease from 2002 to 2003 was offset, in part, by $0.8 million of other income recorded
in 2003, which reflected the termination of a partner agreement executed in October 1999 by one of the companies that we acquired.


Provision for Taxes



The following table sets forth our provision for
taxes for the years ended December 31, 2003, 2002 and 2001, expressed both in absolute dollars and as a percentage of total revenues (in thousands,
except percentages):







|                    |  |  |  | Years Ended December 31, |    
|------------------- |  |  |  | ------------------------ | ---
|
|Provision for
taxes |  |  |  | $                        | 526



Provision for taxes consists of withholding taxes
due on payments from certain foreign customers. From inception through December 31, 2003, we incurred net losses for federal and state tax purposes and
have not recognized any income tax provision or benefit. Due to uncertainties regarding realization of any deferred tax assets based on our limited
operating history, the lack of annual profitability to date, and the uncertainty of future profitability, we have a valuation allowance equal to the
total deferred tax assets of $134.7 million as of December 31, 2003 and therefore have no net deferred tax assets.


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Liquidity and Capital Resources

Cash Flow



As of December 31, 2003, our primary sources of
liquidity consisted of $157.6 million in cash, cash equivalents and short-term investments and $105.2 million in long-term investments for a total of
$262.8 million in cash and investments. Long-term investments generally consist of securities that we intend to hold for more than one year with
maturity dates of less than two years from the date of purchase.




Net cash used in operating activities totaled $21.3
million in 2003 and is a decrease from the $41.7 million used in 2002 and $69.5 million used in 2001. The decrease in cash used in operations is
primarily due to a reduction in our net loss adjusted for non-cash charges such as the amortization of purchased technology and depreciation. Our net
loss decreased primarily due to the restructuring of our operations and our continued focus on cost control as well as an increase in revenue. Net cash
used in operating activities in 2002 decreased from 2001 due primarily to a reduction in our net loss adjusted for non-cash charges such as the
write-down and amortization of goodwill and purchased intangibles. In addition, during 2001 we recorded an accrual for restructuring costs which offset
our use of cash from our net loss by $32.4 million.




We expect to incur significant operating expenses,
particularly research and development and sales and marketing expenses, for the foreseeable future in order to execute our business plan. We anticipate
that such operating expenses will comprise a material expenditure of our current cash resources. As a result, our net operating cash flows will depend
on the level of future revenues and our ability to effectively manage costs.




Net cash used in investing activities totaled $3.3
million for 2003 compared to net cash provided by investing activities of $5.7 million in 2002 and net cash provided by investing activities of $25.0
million in 2001. Cash used in investing activities during 2003 resulted primarily from the net movement from investments to cash and cash equivalents
for the purpose of funding operating activities. Cash provided by investing activities in 2002 and 2001 resulted primarily from the maturities of
investments. Investments purchased are primarily comprised of government sponsored enterprises, auction rate municipal securities and corporate debt
securities with maturities which do not exceed 24 months. To a lesser extent, cash was used in each of the three years ending December 31, 2003 for the
purchase of property and equipment.




Net cash provided by financing activities totaled
$7.6 million, $7.4 million and $7.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. Cash provided by financing activities
for each period resulted from the receipt of proceeds from the issuance of common stock pursuant to the exercise of stock options and our employee
stock purchase plan.


Restricted Cash



From time to time, we are required to obtain letters
of credit that serve as collateral for our obligations to third parties under facility lease agreements. These letters of credit are secured by cash
and cash equivalents and are recorded as restricted cash in the balance sheet. As of December 31, 2003, we had $8.0 million of restricted cash, $0.7
million of which are classified as short-term and relate to facility lease agreements that have expiration dates in 2004, and $7.3 million of which are
classified as long-term and relate to facility lease agreements that have expiration dates greater than twelve months from December 31,
2003.


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Contractual Obligations



Our contractual obligations as of December 31, 2003
are comprised of operating leases, purchase obligations and long-term liabilities:




Operating Leases.  We lease
certain facilities under operating lease agreements which expire at various dates through 2017. In addition, we receive sublease income from
non-cancelable subleases of excess facilities. Future minimum lease payments due and receivable under these leases as of December 31, 2003 were as
follows (in thousands):







|Year Ending December 31, |  |  |  | Operating Leases Due |        | Sublease Income Receivable |  | Total, Net
|------------------------ |  |  |  | -------------------- | ------ | -------------------------- |  | ----------
|2004                     |  |  |  | $                    | 11,581 |                            |  | $         
|2005                     |  |  |  |                      | 9,061  |                            |  |           
|2006                     |  |  |  |                      | 6,333  |                            |  |           
|2007                     |  |  |  |                      | 6,348  |                            |  |           
|2008                     |  |  |  |                      | 6,441  |                            |  |           
|2009 and
thereafter      |  |  |  |                      | 22,171 |                            |  |           
|                         |  |  |  | $                    | 61,935 |                            |  | $         



Net operating lease commitments shown above include
$33.6 million of operating lease commitments under leases for abandoned facilities which are recorded as restructuring costs in the accompanying
balance sheet as of December 31, 2003. We do not have commercial commitments under lines of credit, standby lines of credit, guarantees, standby
repurchase obligations or other such arrangements.




Purchase Obligations.  Our
purchase obligations are comprised primarily of agreements for the minimum purchase of telecommunications services and other miscellaneous marketing
and consulting services. These commitments total less than $2.0 million in 2004 and less than $1.0 million in 2005.




Long-term Liabilities.  As
of December 31, 2003 we have long-term liabilities of less than $0.2 million. These amounts are payable primarily during 2006 or
later.




We believe that our cash, cash equivalents and
investment balances will be sufficient to meet our anticipated liquidity needs for working capital and capital expenditures for at least 12 months. If
we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the
future, we may seek to liquidate our long-term investments, issue additional equity or debt securities or secure a bank line of credit. The sale of
additional equity or convertible debt securities could result in additional dilution to our stockholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us in the future.


Off-Balance Sheet Arrangements



We generally agree to indemnify our customers
against legal claims that our software products infringe certain third-party intellectual property rights and account for our indemnification
obligations under SFAS No. 5. In the event of such a claim, we are generally obligated to defend our customer against the claim and to either settle
the claim at our expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an
infringement, we agree to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the
software, as pro-rated over a five-year period. To date, we have not been required to make any payment resulting from infringement claims asserted
against our customers. As such, we have not provided for an infringement accrual as of December 31, 2003 or December 31, 2002 and have not deferred
revenue recognition on license agreements which provide for a pro-rated refund over a five-year period.




During the quarter ended September 30, 2003, we sold
all of the outstanding capital stock of its Japanese subsidiary, E.piphany Software, K.K. (E.piphany Japan), to Braxton Ltd. for
approximately $4.2 million in cash. The stock purchase agreement contained customary representations, warranties and covenants of the
parties,


26

---

including covenants to indemnify each other in the event of a breach of warranty or
representation. Claims under the indemnification covenants may be submitted within 6 months, and others within two years, from the date of closing, for
a maximum of $0.7 million, and only to the extent that losses exceed 10% of the purchase price. The fair value of these indemnification provisions were
not material to our financial position, results of operations or cash flows for the year ended December 31, 2003.



We indemnify our directors and officers in their
capacity as such. To date, we have not been required to make any payment resulting from these indemnification obligations. Additionally, the fair value
of these indemnification provisions was not material to our financial position, results of operations or cash flows for the year ended December 31,
2003.


Recent Accounting Pronouncements

Accounting for Revenue Arrangements with Multiple Deliverables



In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). EITF No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF No.
00-21 were effective to revenue arrangements entered into after October 1, 2003. The adoption of EITF No. 00-21 had no effect on our consolidated
financial statements.


Revenue Recognition



In December 2003, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104). SAB 104 revises or rescinds
portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 had no effect on
our results of operations or financial condition.


Consolidation of Variable Interest Entities



In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was amended by FIN 46R issued
in December 2003. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities (VIEs) that either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial support, or (2) for which the equity investors lack an essential
characteristic of a controlling financial interest. This interpretation applies immediately to VIEs created after January 31, 2003. It also applies in
the first fiscal year or interim period ending after March 15, 2004, to VIEs created before February 1, 2003 in which an enterprise holds a variable
interest. FIN 46 requires disclosure of VIEs in financial statements issued after January 31, 2003 if it is reasonably possible that as of the
transition date: (1) we are the primary beneficiary of an existing VIE that will require consolidation or, (2) we hold a significant variable interest
in, or have significant involvement with, an existing VIE. As of and for the year ended December 31, 2003, we have not held an interest in any entity
that requires disclosure or consolidation under FIN 46.


Related Party and Other Transactions



In connection with the employment of our former
chief executive officer, Roger Siboni, we agreed to extend to Mr. Siboni credit in the form of three personal loans in the aggregate principal amount
of $1,063,000, each of which was repaid in full as of December 31, 2003.




Mr. Siboni is currently a member of the board of
directors of two of our customers. Total revenues from these customers were $0.2 million, $0.2 million and $0.4 million for the years ended December
31, 2003, 2002, and 2001, respectively. We had accounts receivable balances from these customers totaling $0.1 million and $0.1 million as of December
31, 2003 and 2002, respectively.




In addition, four of our customers have board
members or executive officers that are also members of our board of directors. Total revenues from these customers were $2.1 million, $1.0 million and
$3.1 million for the years


27

---

ended December 31, 2003, 2002 and 2001, respectively. We had accounts receivable
balances from these customers totaling less than $0.1 million and $0.3 million as of December 31, 2003 and 2002, respectively.

Item 7A.  Quantitative and Qualitative Disclosures About Market
Risk



The following discusses our exposure to market risk
related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the Risk Factors section of
this annual report on Form 10-K.


Foreign Currency Exchange Rate Risk



The majority of our operations are based in the
United States and, accordingly, the majority of our transactions are denominated in U.S. dollars. We do have foreign-based operations, however, where
transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. As
of December 31, 2003, we had international operations in Asia, Australia, Europe, Canada and Latin America and conduct transactions in the local
currency of each location. Historically, our exposure to fluctuations in the relative value of other currencies has been limited because substantially
all of our assets are denominated in U.S. dollars, and those assets which are not denominated in U.S. dollars have generally been denominated in
historically stable currencies. The impact to our cash and investment balances has therefore not been material. Currency transaction gains or losses,
derived on monetary assets and liabilities stated in a currency other than the functional currency, are recognized in current operations and have not
been significant to our operating results in any period. To date, we have not entered into any foreign exchange hedges or other derivative financial
instruments. We will continue to evaluate our exposure to foreign currency exchange rate risk on a regular basis.


Interest Rate Risk



Our exposure to market risk for changes in interest
rates primarily affects our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields
without significantly increasing risk. This is accomplished by investing in diversified investments, consisting only of investment grade securities. We
do not use derivative financial instruments in our investment portfolio.




As of December 31, 2003, we held $31.2 million in
cash, cash equivalents and restricted cash consisting of highly liquid short-term investments having original maturity dates of no more than 90 days.
Declines of interest rates over time would reduce our interest income from our highly liquid short-term investments. Based upon our balance of cash and
cash equivalents, a decrease in interest rates of 100 basis points would cause a corresponding decrease in our annual interest income by $0.3 million.
Due to the nature of our highly liquid cash equivalents, a change in interest rates would not materially change the fair market value of our cash, cash
equivalents and restricted cash.




As of December 31, 2003, we held $232.3 million in
short-term investments and long-term investments, each of which consisted of taxable fixed income securities having original maturity dates between
three months and two years. A decline in interest rates over time would reduce our interest income from our short-term investments and long-term
investments. A decrease in interest rates of 100 basis points would cause a corresponding decrease in our annual interest income of approximately $2.3
million. An increase in interest rates over time would cause the fair market value of our portfolio to decline. An immediate and uniform increase in
interest rates of 100 basis points would cause the fair market value of these items to decrease by approximately $1.9 million.




As of December 31, 2003, we did not have any
outstanding debt.


28

---



The following summarizes our investments, weighted
average yields and expected maturity dates as of December 31, 2003 (in thousands, except interest rates):







|                            |  |  |  | 2004 |         | 2005 |  | Thereafter |         | Total
|--------------------------- |  |  |  | ---- | ------- | ---- |  | ---------- | ------- | -----
|Commercial
paper            |  |  |  | $    | 1,650   |      |  | $          |        |      
|Weighted
average yield      |  |  |  |      | 1.18    | %    |  |            |        |      
|Corporate
bonds             |  |  |  | $    | 18,484  |      |  | $          | 25,379  |      
|Weighted
average yield      |  |  |  |      | 2.04    | %    |  |            | 1.81    | %    
|Government
notes/bonds (1)  |  |  |  | $    | 27,453  |      |  | $          | 79,792  |      
|Weighted
average yield      |  |  |  |      | 1.91    | %    |  |            | 2.02    | %    
|Auction rate
securities (2) |  |  |  | $    | 79,525  |      |  | $          |        |      
|Weighted
average yield      |  |  |  |      | 1.23    | %    |  |            |        |      
|Total
investment securities |  |  |  | $    | 127,112 |      |  | $          | 105,171 |      






|(1) |  | Government notes/bonds consists primarily of government
sponsored enterprises and includes, to a lesser extent, investments in taxable municipal bonds.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Auction rate securities consist primarily of taxable municipal
bonds having reset dates of less than 45 days. A significant portion of our short term investments consist of these instruments as they typically
provide a higher rate of return than money market funds while maintaining a low level of risk and a high degree of liquidity.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

Item 8.  Financial Statements and Supplementary
Data

E.PIPHANY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                              |  |  |  | Page
|------------------------------------------------------------- |  |  |  | ----
|Report of
Ernst & Young LLP, Independent Auditors             |  |  |  | 31  
|Report of
Arthur Andersen LLP, Independent Public Accountants |  |  |  | 32  
|Consolidated
Balance Sheets                                   |  |  |  | 33  
|Consolidated
Statements of Operations                         |  |  |  | 34  
|Consolidated
Statements of Stockholders Equity               |  |  |  | 35  
|Consolidated
Statements of Cash Flows                         |  |  |  | 36  
|Notes to
Consolidated Financial Statements                    |  |  |  | 37  

30

---

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of E.piphany, Inc.



We have audited the accompanying consolidated
balance sheets of E.piphany, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders equity,
and cash flows for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of E.piphany,
Inc.s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of
E.piphany, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations and whose report dated January 21, 2002
expressed an unqualified opinion on those statements before the adjustments described below and in Note 4.




We conducted our audits in accordance with auditing
standards generally accepted in the United States. 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 E.piphany, Inc. at December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for each of the two years then ended, in conformity with accounting principles generally
accepted in the United States.




Effective January 1, 2002, E.piphany, Inc. changed
the manner in which it recognizes and presents reimbursements for out of pocket expenses, reflecting such items as services revenues and cost of
services revenues. As disclosed in Note 4, effective January 1, 2002, E.piphany, Inc. changed its method of accounting for goodwill. E.piphany, Inc.
has reclassified the amortization of purchased technology in the year ended December 31, 2001 to cost of revenues. As discussed above, the consolidated
financial statements of E.piphany, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Accordingly, we
have audited the reclassification adjustments described above. In addition, we have audited the adjustments in the transitional disclosures in Note 4.
In our opinion, all such adjustments and disclosures are appropriate and the adjustments have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the consolidated financial statements of the Company for the year ended December 31, 2001 other than with
respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the consolidated financial statements for
the year ended December 31, 2001 taken as a whole.




/s/ ERNST & YOUNG LLP


San Francisco, California January 21, 2004

31

---



This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with our filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued
by Arthur Andersen LLP in connection with this filing on Form 10-K. The consolidated balance sheets as of December 31, 2001 and 2000 and the
consolidated statements of operations, stockholders equity and cash flows and the information in the financial statement schedule for the years
ended December 31, 2000 and 1999 referred to in this report are not required to be and have not been included in the accompanying financial
statements.


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of E.piphany, Inc.:



We have audited the accompanying consolidated
balance sheets of E.piphany, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements
of operations, stockholders equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of E.piphanys management. Our responsibility is to express an opinion on these financial
statements based on our audits.




We conducted our audits in accordance with auditing
standards generally accepted in the United States. 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 financial position of E.piphany, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.




ARTHUR ANDERSEN LLP


San Jose, California January 21, 2002

32

---



E.PIPHANY, INC.  CONSOLIDATED BALANCE SHEETS

|                                                                                   |  |  |  | December 31, |           
|---------------------------------------------------------------------------------- |  |  |  | ------------ | ----------
|
|
|Current assets:                                                                    |  |  |  |              |           
|Cash and cash equivalents                                                          |  |  |  | $            | 30,468    
|Short-term investments                                                             |  |  |  |              | 127,112   
|Accounts receivable, net of allowance for doubtful accounts of $1,609 and $2,508   |  |  |  |              | 10,688    
|Prepaid expenses and other current assets                                          |  |  |  |              | 5,825     
|Short-term restricted cash and investments                                         |  |  |  |              | 726       
|Total current assets                                                               |  |  |  |              | 174,819   
|Long-term investments                                                              |  |  |  |              | 105,171   
|Long-term restricted cash and investments                                          |  |  |  |              | 7,274     
|Property and equipment, net                                                        |  |  |  |              | 6,710     
|Goodwill, net                                                                      |  |  |  |              | 81,499    
|Purchased intangibles, net                                                         |  |  |  |              | 679       
|Other assets                                                                       |  |  |  |              | 847       
|                                                                                   |  |  |  | $            | 376,999   
|Current liabilities:                                                               |  |  |  |              |           
|Current portion of capital lease obligations                                       |  |  |  | $            |          
|Accounts payable                                                                   |  |  |  |              | 1,367     
|Accrued compensation                                                               |  |  |  |              | 8,536     
|Accrued other                                                                      |  |  |  |              | 8,081     
|Current portion of restructuring costs                                             |  |  |  |              | 7,215     
|Deferred revenue                                                                   |  |  |  |              | 19,157    
|Total current liabilities                                                          |  |  |  |              | 44,356    
|Restructuring costs, net of current portion                                        |  |  |  |              | 20,489    
|Other long-term liabilities                                                        |  |  |  |              | 185       
|Total liabilities                                                                  |  |  |  |              | 65,030    
|Commitments and Contingencies (Note 6)                                             |  |  |  |              |           
|Stockholders equity:                                                              |  |  |  |              |           
|Preferred stock, $0.0001 par value;                                                |  |  |  |              |           
|Authorized  25,000 shares;                                                        |  |  |  |              |           
|None issued and outstanding                                                        |  |  |  |              |          
|Common stock, $0.0001 par value;                                                   |  |  |  |              |           
|Authorized  500,000 shares;                                                       |  |  |  |              |           
|Issued and outstanding  74,722 and 72,820 shares as of December 31, 2003 and 2002 |  |  |  |              | 7         
|Additional paid-in capital                                                         |  |  |  |              | 3,822,361 
|Stockholders notes receivable                                                     |  |  |  |              |          
|Accumulated other comprehensive income (loss)                                      |  |  |  |              | (683      
|Deferred compensation                                                              |  |  |  |              |          
|Accumulated deficit                                                                |  |  |  |              | (3,509,716
|Total stockholders equity                                                         |  |  |  |              | 311,969   
|                                                                                   |  |  |  | $            | 376,999   

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

33

---

E.PIPHANY, INC.  CONSOLIDATED STATEMENTS OF
OPERATIONS






|                                                              |  |  |  | Years Ended December 31, |        
|------------------------------------------------------------- |  |  |  | ------------------------ | -------
|
|
|Revenues:                                                     |  |  |  |                          |        
|Product
license                                               |  |  |  | $                        | 43,505 
|Services                                                      |  |  |  |                          | 52,627 
|                                                              |  |  |  |                          | 96,132 
|Cost of
revenues:                                             |  |  |  |                          |        
|Product
license                                               |  |  |  |                          | 1,557  
|Services                                                      |  |  |  |                          | 28,825 
|Amortization
of purchased technology                          |  |  |  |                          | 4,808  
|                                                              |  |  |  |                          | 35,190 
|Gross
profit                                                  |  |  |  |                          | 60,942 
|Operating
expenses:                                           |  |  |  |                          |        
|Research and
development                                      |  |  |  |                          | 31,471 
|Sales and
marketing                                           |  |  |  |                          | 43,208 
|General and
administrative                                    |  |  |  |                          | 10,985 
|Restructuring
charges                                         |  |  |  |                          | 3,929  
|Amortization
of goodwill and purchased intangibles            |  |  |  |                          | 261    
|Write-down of
goodwill and purchased intangibles              |  |  |  |                          |       
|Stock-based
compensation                                      |  |  |  |                          | 55     
|Total
operating expenses                                      |  |  |  |                          | 89,909 
|Loss from
operations                                          |  |  |  |                          | (28,967
|Other income,
net                                             |  |  |  |                          | 5,249  
|Net loss
before provision for taxes                           |  |  |  |                          | (23,718
|Provision for
taxes                                           |  |  |  |                          | 526    
|Net
loss                                                      |  |  |  | $                        | (24,244
|Basic and
diluted net loss per share                          |  |  |  | $                        | (0.33  
|Shares used
in computing basic and diluted net loss per share |  |  |  |                          | 73,499 

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

34

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E.PIPHANY, INC.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY






|                                                                    |  |  |  | Common
      Stock |       
|------------------------------------------------------------------- |  |  |  | ------------------ | ------
|
|Balance,
        December 31, 2000                                  |  |  |  |                    | 68,444
|Exercise
        of common stock options                            |  |  |  |                    | 690   
|Issuance
        of common stock under employee stock purchase plan |  |  |  |                    | 896   
|Issuance
        of stock in connection with acquisitions           |  |  |  |                    | 1,608 
|Repurchase
        of stock                                         |  |  |  |                    | (666  
|Payments
        received on notes receivable                       |  |  |  |                    |      
|Acceleration
        of common stock option vesting                 |  |  |  |                    |      
|Deferred
        stock compensation                                 |  |  |  |                    |      
|Amortization
        of deferred stock compensation                 |  |  |  |                    |      
|Comprehensive
        loss:                                         |  |  |  |                    |       
|Foreign
        currency translation adjustment                     |  |  |  |                    |      
|Unrealized
        gain on investments                              |  |  |  |                    |      
|Net
        loss                                                    |  |  |  |                    |      
|Total
        comprehensive loss                                    |  |  |  |                    |       
|Balance
        at December 31, 2001                                |  |  |  |                    | 70,972
|Exercise
        of common stock options                            |  |  |  |                    | 667   
|Issuance
        of common stock under employee stock purchase plan |  |  |  |                    | 1,222 
|Repurchase
        of stock                                         |  |  |  |                    | (41   
|Payments
        received on notes receivable                       |  |  |  |                    |      
|Deferred
        stock compensation                                 |  |  |  |                    |      
|Amortization
        of deferred stock compensation                 |  |  |  |                    |      
|Comprehensive
        loss:                                         |  |  |  |                    |       
|Foreign
        currency translation adjustment                     |  |  |  |                    |      
|Unrealized
        gain on investments                              |  |  |  |                    |      
|Net
        loss                                                    |  |  |  |                    |      
|Total
        comprehensive loss                                    |  |  |  |                    |       
|Balance
        at December 31, 2002                                |  |  |  |                    | 72,820
|Exercise
        of common stock options                            |  |  |  |                    | 755   
|Issuance
        of common stock under employee stock purchase plan |  |  |  |                    | 1,148 
|Repurchase
        of stock                                         |  |  |  |                    | (1    
|Payments
        received on notes receivable                       |  |  |  |                    |      
|Deferred
        stock compensation                                 |  |  |  |                    |      
|Amortization
        of deferred stock compensation                 |  |  |  |                    |      
|Comprehensive
        loss:                                         |  |  |  |                    |       
|Foreign
        currency translation adjustment                     |  |  |  |                    |      
|Unrealized
        loss on investments                              |  |  |  |                    |      
|Net
        loss                                                    |  |  |  |                    |      
|Total
        comprehensive loss                                    |  |  |  |                    |       
|Balance
        at December 31, 2003                                |  |  |  |                    | 74,722

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

35

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E.PIPHANY, INC.  CONSOLIDATED STATEMENTS OF CASH
FLOWS






|                                                                            |  |  |  | Years Ended December 31, |         
|--------------------------------------------------------------------------- |  |  |  | ------------------------ | --------
|
|
|Cash flows from
operating activities:                                       |  |  |  |                          |         
|Net
loss                                                                    |  |  |  | $                        | (24,244 
|Adjustments to
reconcile net loss to net cash used in operating activities: |  |  |  |                          |         
|Depreciation                                                                |  |  |  |                          | 6,769   
|Provision for
doubtful accounts                                             |  |  |  |                          |        
|Amortization
of goodwill and purchased intangibles                          |  |  |  |                          | 5,069   
|Write-down of
goodwill and purchased intangibles                            |  |  |  |                          |        
|Stock-based
compensation                                                    |  |  |  |                          | 55      
|Non-cash
restructuring charge                                               |  |  |  |                          | 301     
|Minority
interest in net loss of consolidated subsidiary                    |  |  |  |                          |        
|Changes in
operating assets and liabilities                                 |  |  |  |                          |         
|Accounts
receivable                                                         |  |  |  |                          | (3,836  
|Prepaid
expenses and other assets                                           |  |  |  |                          | 3,270   
|Accounts
payable                                                            |  |  |  |                          | (1,050  
|Accrued
liabilities                                                         |  |  |  |                          | (1,038  
|Restructuring
costs                                                         |  |  |  |                          | (5,242  
|Deferred
revenue                                                            |  |  |  |                          | (1,369  
|Net cash used
in operating activities                                       |  |  |  |                          | (21,315 
|Cash flows from
investing activities:                                       |  |  |  |                          |         
|Purchases of
property and equipment                                         |  |  |  |                          | (1,920  
|Restricted
cash                                                             |  |  |  |                          | 1,175   
|Cash acquired
in acquisitions                                               |  |  |  |                          |        
|Loss on
disposal of fixed assets                                            |  |  |  |                          | 409     
|Acquisition
related costs and changes in accruals                           |  |  |  |                          |        
|Proceeds from
the sales of investments                                      |  |  |  |                          | 196,022 
|Purchases of
investments                                                    |  |  |  |                          | (199,000
|Net cash
provided by (used in) investing activities                         |  |  |  |                          | (3,314  
|Cash flows from
financing activities:                                       |  |  |  |                          |         
|Repayments of
notes payable                                                 |  |  |  |                          |        
|Principal
payments on capital lease obligations                             |  |  |  |                          | (156    
|Repayments on
stockholders notes receivable                                |  |  |  |                          | 556     
|Subsidiary
stock offering                                                   |  |  |  |                          |        
|Issuance of
common stock, net of repurchases                                |  |  |  |                          | 7,199   
|Net cash
provided by financing activities                                   |  |  |  |                          | 7,599   
|Effect of
foreign currency translation                                      |  |  |  |                          | (737    
|Net decrease
in cash and cash equivalents                                   |  |  |  |                          | (17,767 
|Cash and cash
equivalents at beginning of year                              |  |  |  |                          | 48,235  
|Cash and cash
equivalents at end of year                                    |  |  |  | $                        | 30,468  
|Supplemental
cash flow information:                                         |  |  |  |                          |         
|Cash paid for
interest                                                      |  |  |  | $                        | 94      
|Unrealized
gain (loss) on available for sale securities                     |  |  |  | $                        | (242    

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

36

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Organization and Operations



E.piphany, Inc. (E.piphany or the
Company), was incorporated in Delaware in November 1996. Epiphany develops, markets and licenses the E.piphany® E.6TM
suite, an integrated set of customer relationship management, or CRM, software products. These CRM products are used by large companies to better
manage their customer relationships by optimizing marketing, sales and customer service business interaction processes. Our products provide a wide
range of functions to support customer interactions, collect and analyze customer data, and create inbound and outbound marketing campaigns. A key
strength of the E.6 Suite is its integration of operational CRM with analytical CRM. Our operational CRM capabilities automate customer-related
business processes, such as customer service or sales processes, across a variety of communications and distribution channels. Our analytical CRM
capabilities analyze large volumes of customer data, providing insight into customers characteristics and preferences to deliver more effective
marketing campaigns and customer interactions. Companies deploy these capabilities independently or as blended applications that combine both
operational and analytical CRM to grow revenue, increase profitability, and to improve customer satisfaction.. E.piphanys worldwide headquarters
is in San Mateo, California. E.piphany has regional domestic offices in the United States, as well as international offices in Asia, Australia, Europe
and Latin America.


2. Summary of Significant Accounting Policies

Principles of Consolidation



The consolidated financial statements include the
accounts of Epiphany, Inc. and its subsidiaries. As of December 31, 2003, the Company holds an ownership percentage of 100% for all subsidiaries.
Intercompany accounts and transactions have been eliminated.


Use of Estimates in Preparation of Financial Statements



Our consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles (US GAAP). The preparation of these financial statements requires us
to make estimates and assumptions that affect reported assets and liabilities, disclosure of contingent assets and liabilities as of the date of the
financial statements, and reported expenses during the reporting period. Actual results in these particular areas could differ from those
estimates.


Reclassification



Certain amounts from prior years have been
reclassified to conform to the current year presentation.


Foreign Currency Translation



The functional currency of our foreign subsidiaries
is the local currency. The Company translates the assets and liabilities of non-U.S. functional currency subsidiaries into dollars at the current rates
of exchange in effect as of the balance sheet date. Revenues and expenses are translated using average exchange rates during each reporting period.
Gains and losses from translation adjustments are included in stockholders equity in the consolidated balance sheet caption Accumulated
other comprehensive income (loss). Currency transaction gains or losses, derived on monetary assets and liabilities stated in a currency other
than the functional currency, are recognized in current operations and have not been significant to the Companys operating results in any period.
The effect of foreign currency rate changes on cash and cash equivalents has not been significant in any period.


Impairment of Long-Lived Assets



The Company evaluates long-lived assets for
impairment on a periodic basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
such assets are considered


37

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)

to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of
the asset exceeds its fair market value.



The Company adopted Statement of Financial
Accounting Standard No. 141 Business Combinations (SFAS 141) and No. 142 Goodwill and Other Intangible Assets
(SFAS 142) as of January 1, 2002. As a result, acquired goodwill and other intangible assets with indefinite useful lives are no longer
amortized, but are subject to impairment tests on an annual basis, and on an interim basis in certain circumstances. SFAS 142 also required the
completion of a transitional impairment test, with any impairment treated as a cumulative effect of a change in accounting principle. The Company
completed the transitional impairment test upon adoption, which did not result in an impairment charge. In addition, the Company completed annual
impairment tests during the fourth quarter of 2003 and 2002, which did not result in an impairment charge.


Cash Equivalents, Short-Term Investments and Long-Term
Investments



The Company considers all highly liquid investments
with an original maturity of 90 days or less to be cash equivalents. The Company has classified its short-term and long-term investments as
available for sale. Short-term investments generally consist of highly liquid securities that the Company intends to hold for more than 90
days but less than 1 year. Long-term investments generally consist of securities that the Company intends to hold for more than one year. Such
investments are carried at fair value with unrealized gains and losses reported, net of tax, as other comprehensive income (loss) in stockholders
equity. Realized gains and losses and declines in value which are determined to be other-than-temporary on available-for-sale securities are included
in other income, net and are derived using the specific identification method for determining the cost of securities. From time to time, we are
required to obtain letters of credit that serve as collateral for our obligations to third parties under facility lease agreements. These letters of
credit are secured by cash and cash equivalents. See further discussion in Note 3, Financial Statement Details.


Accounts Receivable and Deferred Revenue



Accounts receivable consists of amounts due from
customers for which revenue has been recognized. Deferred revenue consists of amounts received from customers for which revenue has not been
recognized. Deferred license revenue is recognized upon delivery of our product, as services are rendered or as other requirements requiring deferral
are satisfied. Deferred maintenance revenue is recognized ratably over the term of the maintenance agreement, typically one year, and deferred professional
services revenue is recognized as services are rendered or as other requirements requiring deferral are satisfied. Deferred license revenues were
$4.5 million and $6.6 million as of December 31, 2003 and 2002, respectively. The remaining deferred revenue balance was comprised of deferred
services revenues.


Allowances for Doubtful Accounts



We evaluate the collectability of our accounts
receivable based on a combination of factors. When we believe a collectability issue exists with respect to a specific receivable, we record an
allowance to reduce that receivable to the amount that we believe to be collectable. For all other receivables, we record an allowance based on an
assessment of the aging of such receivables, our historical experience with bad debts and the general economic environment.


Property and Equipment



Property and equipment are stated at cost.
Depreciation is computed using the straight-line method based on estimated useful lives. The estimated useful lives for computer software and equipment
is three years, furniture and fixtures is five years and leasehold improvements range from the shorter of five years or applicable lease term.
Depreciation expense is included in operating expenses and cost of revenues based on how the assets are utilized.


38

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments, Concentration of Credit Risk and
Significant Customers



The carrying value of the Companys financial
instruments, including cash and cash equivalents, investments and accounts receivable approximates fair market value. Financial instruments that
subject the Company to concentrations of credit risk consist primarily of investments in debt securities and trade accounts receivable. Management
believes the financial risks associated with these financial instruments are not significant. The Company invests its cash and investments in
government sponsored enterprises, auction rate municipal securities, corporate debt rated A1/P1 or higher and money market
instruments.




The Companys customer base consists of
businesses in Asia, Australia, Europe, Latin America and North America. The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable. The Company maintains reserves for potential credit losses. Historically, such reserves have been
adequate to cover the actual losses incurred. No individual customer accounted for more than 10% of our total revenues for the years ended December 31,
2003, 2002 or 2001. One individual customer account receivable balance accounted for 13% of our total accounts receivable as of December 31, 2003. No
customer account receivable balance accounted for more than 10% of our total accounts receivable as of December 31, 2002.


Warranties and Indemnification



The Company generally provides a warranty for its
software products and services to its customers and accounts for its warranties under the Financial Accounting Standards Boards
(FASB) Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5). The
Companys products are generally warranted to perform substantially as described in the associated product documentation for a period of one year.
The Companys services are generally warranted to be performed consistent with industry standards for a period of ninety days from delivery. In
the event there is a failure of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty
provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company
has not provided for a warranty accrual as of December 31, 2003 or December 31, 2002. To date, the Companys product warranty expense has not been
significant.




The Company generally agrees to indemnify its
customers against legal claims that the Companys software products infringe certain third-party intellectual property rights and accounts for its
indemnification obligations under SFAS No. 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim
and to either settle the claim at the Companys expense or pay damages that the customer is legally required to pay to the third-party claimant.
In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably
possible, to refund the cost of the software, as pro-rated over a five-year period. To date, the Company has not been required to make any payment
resulting from infringement claims asserted against our customers. As such, the Company has not provided for an infringement accrual as of December 31,
2003 or December 31, 2002 and has not deferred revenue recognition on license agreements which provide for a pro-rated refund over a five-year
period.




During the quarter ended September 30, 2003, the
Company sold all of the outstanding capital stock of its Japanese subsidiary, E.piphany Software, K.K. (E.piphany Japan), to Braxton Ltd.
for approximately $4.2 million in cash. The stock purchase agreement contained customary representations, warranties and covenants of the parties,
including covenants to indemnify each other in the event of a breach of warranty or representation. Claims under the indemnification covenants may be
submitted within 6 months, and others within two years, from the date of closing, for a maximum of $0.7 million, and only to the extent that losses
exceed 10% of the purchase price. The fair value of these indemnification provisions were not material to the Companys financial position,
results of operations or cash flows for the year ended December 31, 2003.


39

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)



The Company indemnifies its directors and officers
in their capacity as such. To date, the Company has not been required to make any payment resulting from these indemnification obligations.
Additionally, the fair value of these indemnification provisions was not material to the Companys financial position, results of operations or
cash flows for the year ended December 31, 2003.


Software Development Costs



Software development costs incurred prior to the
establishment of technological feasibility are included in research and development expenses. E.piphany defines establishment of technological
feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility
through the period of general market availability of the products are capitalized, if material, after consideration of various factors, including net
realizable value. To date, software development costs that are eligible for capitalization have not been material and have been
expensed.


Income Taxes



The Company uses the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences
between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets
are recognized for deductible temporary differences, along with net operating loss carryforwards and credit carryforwards, when it is more likely than
not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances must be
established. Deferred tax assets and liabilities are measured using applicable tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.


Revenue Recognition



E.piphany recognizes revenue under the following
policies, which are in accordance with the provisions of Statement of Position 97-2, Software Revenue Recognition as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions:




Licenses. Fees from licenses are recognized
as revenue upon contract execution, provided all delivery obligations have been met, fees are fixed or determinable and collection is probable. We
consider all arrangements with payment terms extending beyond six months not to be fixed or determinable, and revenue is recognized as payments become
due from the customer, assuming all other revenue recognition conditions are met. If collection is not considered probable, revenue is recognized when
the fee is collected. The Company uses the residual method to recognize revenue from a license arrangement with multiple elements when vendor specific
objective evidence of the fair value exists for all the undelivered elements in the arrangement, but does not exist for one of the delivered elements
in the arrangement. Vendor specific objective evidence for undelivered elements is based on normal pricing for those elements when sold separately.
Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as
revenue. If vendor specific objective evidence does not exist to allocate the total fee to all undelivered elements of the arrangement, revenue is
deferred until the earlier of the time at which (1) such evidence does exist for the undelivered elements, or (2) all elements are delivered. We
recognize license fees from resellers as revenue when the above criteria have been met and the reseller has sold the subject licenses through to the
end-user.




When licenses are sold together with consulting and
implementation services, license fees are recognized upon delivery, provided that (1) the criteria set forth in the above paragraph have been met, (2)
payment of the license fees is not dependent upon the performance of the consulting or implementation services, and (3) the services are not essential
to the functionality of the software. For arrangements that do not meet the above criteria, both the


40

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)

product license
revenues and professional services revenues are recognized under the percentage of
completion contract method in accordance with the  provisions of Statement of Position
81-1, Accounting for Performance of Construction Type and Certain Production Type
Contracts (SOP  81-1). To date, when the Company has been primarily
responsible for the implementation of the software, services have been considered
essential  to the functionality of the software products and therefore license and
services revenue have been recognized pursuant to SOP 81-1. The Company follows  the
percentage of completion method since reasonably dependable estimates of progress toward
completion of a contract can be made. We estimate the  percentage of completion on
contracts utilizing hours incurred to date as a percentage of the total estimated hours
to complete the project. Recognized  revenues and profit are subject to revisions as the
contract progresses to completion. Revisions in profit estimates are charged to income in
the  period in which the facts that give rise to the revision become known.



From time to time, our license and service
arrangements include acceptance provisions. When acceptance provisions exist, we apply judgment in assessing the significance of the provision. If we
determine that the likelihood of non-acceptance in these arrangements is remote, we recognize revenue once all of the criteria described above have
been met. If such a determination cannot be made, revenue is recognized upon the earlier of customer acceptance or expiration of the acceptance period,
provided that all of the criteria described above have been met.




Maintenance Services. Maintenance services
include technical support and unspecified software updates to customers. Revenue derived from maintenance services is recognized ratably over the
applicable maintenance term, typically one year, and is included in services revenue in the accompanying consolidated statements of
operations.




Professional, Implementation and Training
Services. E.piphany provides professional, implementation and training services to its customers. Revenue from such services is generally
recognized as the services are performed, except when such services are subject to acceptance provisions, as discussed above.




As of December 31, 2003 and 2002, $1.5 million and
$0.7 million, respectively, of accounts receivable were unbilled and recognized as revenue due to services performed in advance of
billings.


Advertising Costs



The Company expenses all advertising costs as they
are incurred, which totaled $1.7 million, $1.5 million, and $3.9 million during the years ended December 31, 2003, 2002 and 2001,
respectively.


Stock-Based Compensation



The Company accounts for stock issued to employees
in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and complies
with the disclosure provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation and SFAS No. 148 (SFAS
148), Accounting for Stock-Based Compensation  Transition and Disclosure. Under APB 25, compensation expense for fixed stock
options is based on the difference between the fair market value of the Companys stock and the exercise price of the option on the date of grant,
if any.


41

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)



The following table illustrates the effect on net
loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 using the Black-Scholes stock option
pricing model (in thousands except per share amounts):







|                                                                                                                                    |  |  |  | Years Ended December 31, |        
|----------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------ | -------
|
|Net loss, as
reported                                                                                                               |  |  |  | $                        | (24,244
|Add:
Stock-based employee compensation expense included in reported net loss, net of tax effects                                    |  |  |  |                          | 55     
|Deduct: Total
stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects |  |  |  |                          | (34,669
|Pro forma net
loss                                                                                                                  |  |  |  | $                        | (58,858
|Loss per
share:                                                                                                                     |  |  |  |                          |        
|Basic and
diluted  as reported                                                                                                     |  |  |  | $                        | (0.33  
|Basic and
diluted  pro forma                                                                                                       |  |  |  | $                        | (0.80  



The fair value of each option grant and the
option component of the employee purchase plan shares were estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:







|                                       |  |  |  | Years Ended December 31, |     
|-------------------------------------- |  |  |  | ------------------------ | ----
|
|Risk-free
interest rate                |  |  |  |                          | 3.04
|Expected life
of the option (in years) |  |  |  |                          | 4.5 
|Dividend
yield                         |  |  |  |                          |    
|Volatility                             |  |  |  |                          | 62  






|Employee Stock Purchase Plan           |  |  |  | 2003 |          | 2002 |  | 2001
|-------------------------------------- |  |  |  | ---- | -------- | ---- |  | ----
|Risk-free
interest rate                |  |  |  |      | 1.1%1.8 | %    |  |     
|Expected life
of the option (in years) |  |  |  |      | 0.52.0  |      |  |     
|Dividend
yield                         |  |  |  |      |         |      |  |     
|Volatility                             |  |  |  |      | 62-67%   |      |  |     

Restructuring Charges



The Company has recorded restructuring charges
consisting primarily of: (i) lease costs related to the abandonment of leased facilities; (ii) impairment charges for the reduction in fair value of
property and equipment resulting from the abandonment of leased facilities and the reduction of the Companys workforce; and (iii) severance and
related employee termination costs resulting from the reduction of the Companys workforce. The Company accounts for restructuring charges in
accordance with SEC Staff Accounting Bulletin No. 100 Restructuring and Impairment Charges (SAB 100) as well as the additional
guidance discussed below.




Prior to January 1, 2003, the Company accounted for
the costs associated with the reduction of the Companys workforce in accordance with EITF Issue No. 94-3 Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (EITF 94-3).
Accordingly, the Company recorded the liability related to employee termination costs when the following conditions had been met: (i) management with
the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will
receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the
termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their


42

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)

locations and
their job classifications; and (iv) the period of time to implement the plan does not
indicate changes to the plan are likely. The  termination costs recorded by the Company
are not associated with, nor do they benefit, continuing activities.



In July 2002, the staff of the FASB issued Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit and Disposal Activities (SFAS 146) which
revised the accounting treatment for the cost of exit and disposal activities under EITF 94-3. SFAS 146 requires companies to record exit or disposal
costs when they are incurred and can be measured at fair value. The recorded liability will subsequently be adjusted for changes in
estimated cash flows. Commitment to a plan to exit an activity or dispose of longlived assets will no longer be sufficient to record a one-time
charge for most anticipated costs. The provisions of SFAS 146 were effective for exit or disposal activities initiated after December 31, 2002.
Companies may not restate previously issued financial statements for the effect of the provisions of SFAS 146 and liabilities that a company previously
recorded under EITF Issue No. 94-3 were not affected.




The Company accounts for costs associated with the
abandonment of leased facilities in accordance with EITF Issue No. 88-10 Costs Associated with Lease Modification or Termination
(EITF 88-10). Accordingly, the Company records the costs associated with the abandonment of a lease facility when the leased property has
no substantive future use or benefit to the Company. Under EITF 88-10, the Company records the liability as the sum of the total remaining lease costs
and related exit costs, less probable sublease income.


Computation of Basic and Diluted Net Loss Per Share



Basic and diluted net loss per common share has been
computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase. The following
table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts).







|                                                                                      |  |  |  | Years Ended December 31, |        
|------------------------------------------------------------------------------------- |  |  |  | ------------------------ | -------
|
|Net
loss                                                                              |  |  |  | $                        | (24,244
|Basic and
diluted:                                                                    |  |  |  |                          |        
|Weighted
average shares of common stock outstanding                                   |  |  |  |                          | 73,523 
|Less:
Weighted average shares subject to repurchase                                   |  |  |  |                          | (24    
|Weighted
average shares used in computing basic and diluted net loss per common share |  |  |  |                          | 73,499 
|Basic and
diluted net loss per common share                                           |  |  |  | $                        | (0.33  

43

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)



The Company excludes potentially dilutive securities


from its
diluted net loss per share computation when their effect would be antidilutive to net
loss per share amounts. The following common stock  equivalents were excluded from the
net loss per share computation (in thousands):







|                                                                                                                                                                                                                         |  |  |  | Years Ended December 31, |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | ------------------------ | ------
|
|Options
excluded due to the exercise price exceeding the average fair market value of the Companys common stock during the period                                                                                       |  |  |  |                          | 7,816 
|Options
excluded for which the exercise price was less than the average fair market value of the Companys common stock during the period but were
excluded as inclusion would decrease the Companys net loss per share |  |  |  |                          | 4,384 
|Common shares
excluded resulting from common stock subject to repurchase                                                                                                                                                 |  |  |  |                          | 24    
|Total common
stock equivalents excluded from diluted net loss per common share                                                                                                                                           |  |  |  |                          | 12,224

Segment Reporting



The Company is organized and operates as one
business segment, which is responsible for the design, development, marketing and sale of software products and related services. The Company
distributes its products in the United States and in foreign countries through direct sales personnel and indirect channel partners.




The Company classifies revenues based on the country
in which the applicable sales contracts originate. The following table details revenues by country (in thousands):







|               |  |  |  | Years Ended December 31, |       
|-------------- |  |  |  | ------------------------ | ------
|
|Revenues:      |  |  |  |                          |       
|United
States  |  |  |  | $                        | 66,022
|United
Kingdom |  |  |  |                          | 9,457 
|Rest of
World  |  |  |  |                          | 20,653
|Total          |  |  |  | $                        | 96,132

Recent Accounting Pronouncements

Accounting for Revenue Arrangements with Multiple
Deliverables



In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). EITF No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF No.
00-21 were effective to revenue arrangements entered into after October 1, 2003. The adoption of EITF No. 00-21 will had no effect on the
Companys consolidated financial statements.


Revenue Recognition



In December 2003, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104). SAB 104 revises or rescinds
portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive
guidance


44

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2. Summary of Significant Accounting Policies (Continued)

Consolidation of Variable Interest Entities



In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was amended by FIN 46R issued
in December 2003. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities (VIEs) that either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial support, or (2) for which the equity investors lack an essential
characteristic of a controlling financial interest. This Interpretation applies immediately to VIEs created after January 31, 2003. It also applies in
the first fiscal year or interim period ending after March 15, 2004, to VIEs created before February 1, 2003 in which an enterprise holds a variable
interest. FIN 46 requires disclosure of VIEs in financial statements issued after January 31, 2003, if it is reasonably possible that as of the
transition date: (1) the company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the company will hold a
significant variable interest in, or have significant involvement with, an existing VIE. As of and for the year ended December 31, 2003, the Company
has not held an interest in any entity that requires disclosure or consolidation under FIN 46.


3. Financial Statement Details

Investments



Cash, cash equivalents, short-term investments, and
long-term investments consisted of the following as of December 31, 2003 and 2002 (in thousands):







|                           |  |  |  |   |         | Unrealized | 
|-------------------------- |  |  |  | - | ------- | ---------- | 
|
|December
31, 2003:         |  |  |  |   |         |            | 
|Cash and cash
equivalents: |  |  |  |   |         |            | 
|Cash                       |  |  |  | $ | 21,834  |            | 
|Money market
funds         |  |  |  |   | 5,623   |            | 
|Corporate
bonds            |  |  |  |   | 3,011   |            | 
|                           |  |  |  | $ | 30,468  |            | 
|Short-term
investments:    |  |  |  |   |         |            | 
|Auction rate
securities    |  |  |  | $ | 79,525  |            | 
|Commercial
paper           |  |  |  |   | 1,650   |            | 
|Corporate
bonds            |  |  |  |   | 18,363  |            | 
|Government
notes/bonds     |  |  |  |   | 27,339  |            | 
|                           |  |  |  | $ | 126,877 |            | 
|Long-term
investments:     |  |  |  |   |         |            | 
|Corporate
bonds            |  |  |  | $ | 25,374  |            | 
|Government
notes/bonds     |  |  |  |   | 79,640  |            | 
|                           |  |  |  | $ | 105,014 |            | 

45

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3. Financial Statement Details (Continued)

|                           |  |  |  |   |         | Unrealized | 
|-------------------------- |  |  |  | - | ------- | ---------- | 
|
|December
31, 2002:         |  |  |  |   |         |            | 
|Cash and cash
equivalents: |  |  |  |   |         |            | 
|Cash                       |  |  |  | $ | 18,184  |            | 
|Money market
funds         |  |  |  |   | 30,051  |            | 
|                           |  |  |  | $ | 48,235  |            | 
|Short-term
investments:    |  |  |  |   |         |            | 
|Auction rate
securities    |  |  |  | $ | 45,200  |            | 
|Corporate
bonds            |  |  |  |   | 38,900  |            | 
|Government
notes/bonds     |  |  |  |   | 30,311  |            | 
|                           |  |  |  | $ | 114,411 |            | 
|Long-term
investments:     |  |  |  |   |         |            | 
|Corporate
bonds            |  |  |  | $ | 17,326  |            | 
|Government
notes/bonds     |  |  |  |   | 97,176  |            | 
|                           |  |  |  | $ | 114,502 |            | 



Government notes/bonds consist primarily of
government sponsored enterprises and include, to a lesser extent, investments in taxable municipal bonds. Short-term investments of $127,112 and
$114,479 as of December 31, 2003 and 2002, respectively, mature in less than one year. Long-term investments of $105,171 and $115,068 as of December
31, 2003 and 2002, mature within two years.


Restricted Cash



Restricted cash consists of cash, cash equivalents
and investments which serve as collateral, under letters of credit, for the Companys obligations to third parties for lease payments.
Classification of restricted cash as short-term or long-term is determined based on the expiration of the underlying lease agreement.







|                            |  |  |  | December 31, |      
|--------------------------- |  |  |  | ------------ | -----
|
|Short-term
restricted cash: |  |  |  |              |      
|Letters of
credit           |  |  |  | $            | 726  
|Long-term
restricted cash:  |  |  |  |              |      
|Letters of
credit           |  |  |  |              | 7,160
|Bank
deposits               |  |  |  |              | 114  
|                            |  |  |  | $            | 7,274



See further discussion of restricted cash in Note 6,
Commitments and Contingencies.


46

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3. Financial Statement Details (Continued)

Property and Equipment



Property and equipment consists of the following (in
thousands):







|                                |  |  |  | December 31, |        
|------------------------------- |  |  |  | ------------ | -------
|
|Computer
software and equipment |  |  |  | $            | 18,265 
|Furniture and
fixtures          |  |  |  |              | 2,823  
|Leasehold
improvements          |  |  |  |              | 4,171  
|                                |  |  |  |              | 25,259 
|Less:
Accumulated depreciation  |  |  |  |              | (18,549
|                                |  |  |  | $            | 6,710  

Accrued Liabilities



Accrued compensation consists of the following (in
thousands):







|                             |  |  |  | December 31, |      
|---------------------------- |  |  |  | ------------ | -----
|
|Vacation                     |  |  |  | $            | 2,864
|Commissions and
bonus        |  |  |  |              | 3,844
|Employee Stock
Purchase Plan |  |  |  |              | 789  
|Other                        |  |  |  |              | 1,039
|                             |  |  |  | $            | 8,536



Other accrued liabilities consist of the following
(in thousands):







|                                      |  |  |  | December 31, |      
|------------------------------------- |  |  |  | ------------ | -----
|
|Professional
services                 |  |  |  | $            | 1,448
|Sales
tax                             |  |  |  |              | 2,548
|Marketing
expenses                    |  |  |  |              | 768  
|Royalties                             |  |  |  |              | 218  
|Third-party cost
of services revenues |  |  |  |              | 192  
|Other                                 |  |  |  |              | 2,907
|                                      |  |  |  | $            | 8,081

Accumulated Other Comprehensive Income (Loss)



The components of accumulated other comprehensive
income (loss), reflected in the Consolidated Statements of Stockholders Equity and Comprehensive Loss, net of related taxes, consisted of the
following (in thousands):







|                                      |  |  |  | December 31, |       
|------------------------------------- |  |  |  | ------------ | ------
|
|Unrealized gain
(loss) on investments |  |  |  | $            | 392   
|Cumulative
translation adjustment     |  |  |  |              | (1,075
|                                      |  |  |  | $            | (683  

47

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3. Financial Statement Details (Continued)

Other Income, net



Other income, net consists of the following (in
thousands):







|                 |  |  |  | Year ended December 31, |      
|---------------- |  |  |  | ----------------------- | -----
|
|Interest
income  |  |  |  | $                       | 4,558
|Other
income     |  |  |  |                         | 843  
|Interest
expense |  |  |  |                         | (94  
|Other
expense    |  |  |  |                         | (58  
|                 |  |  |  | $                       | 5,249



Other income of $843,000 represents fees received
pursuant to the termination of a partner agreement.


4. Acquisitions, Goodwill and Purchased Intangible Assets

Acquisitions



During the three years ended December 31, 2003, the
Company completed the following acquisitions:




The Acquisition of Certain Intellectual
Property Assets of Radnet. On January 29, 2001, E.piphany acquired certain intellectual property assets of Radnet, Inc. from a secured creditor
of Radnet. Under the terms of the asset purchase agreement, E.piphany issued 238,032 shares of common stock in exchange for the assets. The total
purchase price was approximately $10.3 million. This transaction added to E.piphanys strategic intellectual property and complemented its current
product development plan. The purchased intellectual property assets are being amortized on a straight-line basis over a useful life of three
years.




The Moss Acquisition. On April 12,
2001, E.piphany acquired Moss Software, Inc. in a merger transaction. Moss Software was a provider of customer relationship management products that
resolve sales automation challenges and improve the management of sales cycles. Under the terms of the merger agreement, stockholders of Moss Software
received approximately 0.0581 shares of E.piphany common stock for each share of Moss Software common stock held by them, which resulted in a total
issuance of approximately 1,370,296 shares. In addition, E.piphany assumed all outstanding options to purchase Moss Software common stock, as adjusted
to reflect the exchange ratio. E.piphany accounted for the acquisition under the purchase method of accounting and the results of Moss Softwares
operations subsequent to April 12, 2001 have been included in E.piphanys operating results. The total purchase price was approximately $40.6
million. In connection with the assumption of all outstanding options, the Company recorded deferred compensation of approximately $1.0 million. The
deferred compensation represents the difference between the fair value of the unvested options at the date of acquisition and the option exercise price
at the date of the option grant, and will be amortized over the vesting period.




The following table details the net assets acquired
in each of the Companys purchase transactions for the three-year period ended December 31, 2003 (in thousands):







|Entity |  |  |  | Consideration |        | Goodwill and Purchased Intangibles, including IPRD |  | Other Net Assets (Liabilities)
|------ |  |  |  | ------------- | ------ | -------------------------------------------------- |  | ------------------------------
|Radnet |  |  |  | $             | 10,325 |                                                    |  | $                             
|Moss   |  |  |  |               | 40,628 |                                                    |  |                               

Acquisitions Prior to 2001



During 2000 the Company entered business
combinations with RightPoint Software, Inc., iLeverage Corporation, eClass Direct, Inc. and Octane Software, Inc. Each of these merger transactions
were accounted for


48

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4. Acquisitions, Goodwill and Purchased Intangible Assets
(Continued)

Goodwill and Purchased Intangibles



Prior to the adoption of SFAS 142, the Company
periodically assessed the impairment of long-lived assets, including identifiable intangibles in accordance with the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company also periodically assessed the
impairment of enterprise level goodwill in accordance with the provisions of Accounting Principles Board Opinion No. 17, Intangible Assets
(APB 17). As part of its review of its third quarter of 2001 financial results, the Company performed an impairment assessment of
identifiable intangible assets and goodwill in connection with all of its acquisitions due to the existence of impairment indicators. The impairment
indicators included, among others, the significant decline in the Companys stock price, the net book value of assets, which significantly
exceeded the Companys market capitalization, and the overall decline in industry growth rates, which had negatively impacted the Companys
revenues and forecasted revenue growth rates, precipitating the Companys reduction in workforce and overall restructuring in the quarter ended
September 30, 2001. The impairment assessment was performed with the assistance of a third-party valuation firm to determine whether an impairment
existed. As a result, the Company recorded a $1.7 billion impairment charge to reduce goodwill and other intangible assets associated with all of its
acquisitions to reflect their estimated fair market value. Fair market value was determined based on discounted future cash flows from the acquired
entities that had separately identifiable cash flows. Prior to recording the impairment charge, the Companys quarterly amortization expense was
approximately $274.1 million compared to amortization expense of approximately $17.0 million in the quarter following the impairment
charge.




The following table summarizes the impairment charge
taken during 2001 to reduce the goodwill and purchased intangible assets related to each of the following acquired companies (in
thousands):







|           |  |  |  | Beginning Balance |           | Accumulated Amortization |  | Impairment Charge |            | Balance as of December 31, 2001
|---------- |  |  |  | ----------------- | --------- | ------------------------ |  | ----------------- | ---------- | -------------------------------
|RightPoint |  |  |  | $                 | 479,642   |                          |  | $                 | (283,842   | )                              
|iLeverage  |  |  |  |                   | 29,143    |                          |  |                   | (13,762    | )                              
|eClass     |  |  |  |                   | 48,347    |                          |  |                   | (21,882    | )                              
|Octane     |  |  |  |                   | 2,679,413 |                          |  |                   | (1,201,154 | )                              
|Radnet     |  |  |  |                   | 10,325    |                          |  |                   | (2,399     | )                              
|Moss       |  |  |  |                   | 45,548    |                          |  |                   | (10,080    | )                              
|           |  |  |  | $                 | 3,292,418 |                          |  | $                 | (1,533,119 | )                              



Subsequent to the adoption of SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators
arise. The Company adopted SFAS 142 as of January 1, 2002 and completed the transitional impairment test during the first quarter of 2002 which did not
result in an impairment charge. The Company has also completed annual impairment tests as of December 31, 2003 and 2002 which have not resulted in
impairment charges. Goodwill and intangible assets with indefinite lives are shown as goodwill on the face of the balance sheet.


49

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4. Acquisitions, Goodwill and Purchased Intangible Assets
(Continued)



The changes in the net carrying amount of goodwill
are as follows (in thousands):







|                                                           |  |  |  | Year ended December 31, |       
|---------------------------------------------------------- |  |  |  | ----------------------- | ------
|
|Beginning
balance                                          |  |  |  | $                       | 81,499
|Adjustment of
estimated liabilities related to acquisition |  |  |  |                         |      
|Ending
balance                                             |  |  |  | $                       | 81,499



The following table summarized the effects on net
loss and net loss per share data if the Company had followed the amortization provision of SFAS 142 for the year ended December 31, 2001 (in thousands,
except per share amounts):







|                                                           |  |  |  | Year Ended December 31, 2003
|---------------------------------------------------------- |  |  |  | ----------------------------
|Net
loss                                                   |  |  |  | $                           
|Amortization
of goodwill and assembled workforce           |  |  |  |                             
|Adjusted net
loss                                          |  |  |  | $                           
|Basic and
diluted net loss per share                       |  |  |  | $                           
|Amortization
of goodwill and assembled workforce per share |  |  |  |                             
|Adjusted
basic and diluted net loss per share              |  |  |  | $                           



Subsequent to the adoption of SFAS 142, identifiable
intangible assets with definite lives will continue to be amortized over their useful lives and are reviewed for impairment in accordance with SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets when impairment indicators exist. These assets are shown as purchased
intangibles on the face of the balance sheet, and are as follows (in thousands):







|                            |  |  |  | December 31, 2003 |        | December 31, 2002 | 
|--------------------------- |  |  |  | ----------------- | ------ | ----------------- | 
|
|Purchased
technology        |  |  |  | $                 | 17,652 |                   | 
|Customer
list               |  |  |  |                   | 1,332  |                   | 
|Total
purchased intangibles |  |  |  | $                 | 18,984 |                   | 






|(1) |  | Gross carrying amount is presented net of the impairment charge
discussed above and accumulated amortization as of the date of the impairment charge.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



E.piphany amortizes purchased intangible assets over
a period of 3 years. The Company will continue to amortize purchased intangible assets of $0.7 million on a straight-line basis over their remaining
useful lives which will result in the full amortization of these assets by March 31, 2004. The amortization of purchased technology is recorded in cost
of revenues and was $4.8 million, $9.7 million and $32.7 million in the years ended December 31, 2003, 2002 and 2001, respectively. The amortization of
customer list assets is recorded in operating expenses and was $0.3 million, $0.9 million and $4.0 million in the years ended December 31, 2003, 2002
and 2001, respectively.


50

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5. Restructuring



In the quarter ended September 30, 2001, the Company
began restructuring worldwide operations to reduce costs and improve efficiencies in response to a slower economic environment. Since that time,
operations have been streamlined, sales models have changed in certain geographies and facilities have been abandoned to align the Companys cost
structure to current market conditions. In accordance with SAB 100, specified activities are deemed the commencement of a separate restructuring plan
in the quarter in which those activities could be specifically identified. The first plan was initiated in the quarter ended September 30, 2001
(Plan 1). The second plan, initiated during the quarter ended June 30, 2002, consisted of actions which were primarily supplemental to Plan
1 (Plan 2) and a third plan was initiated during the quarter ended March 31, 2003 (Plan 3). Charges for these plans were based
on assumptions and related estimates that were appropriate for the economic environment that existed at the time these charges were recorded. However,
due to the continued deterioration of the commercial real estate market, primarily in the U.S. and the United Kingdom, we have made subsequent
adjustments to the initial restructuring charges recorded under Plan 1 and Plan 2.




The following table summarizes the restructuring
accrual for the years ended December 31, 2003 and 2002 (in thousands):







|                                            |  |  |  | Severance and Related Charges |        | Impairment of Property and Equipment |  | Lease Costs |        | Other Restructuring Activities |  | Total
|------------------------------------------- |  |  |  | ----------------------------- | ------ | ------------------------------------ |  | ----------- | ------ | ------------------------------ |  | -----
|Accrued
balance at December 31, 2001        |  |  |  | $                             | 58     |                                      |  | $           |       |                                |  | $    
|Charges
accrued during 2002  Plan 1        |  |  |  |                               | 1,070  |                                      |  |             | 157    |                                |  |      
|Charges
accrued during 2002  Plan 2        |  |  |  |                               | 1,542  |                                      |  |             | 2,290  |                                |  |      
|Adjustments
to previous estimates  Plan 1  |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Adjustments
to previous estimates  Plan 2  |  |  |  |                               | 131    |                                      |  |             | 791    |                                |  |      
|Cash payments
 Plan 1                      |  |  |  |                               | (914   | )                                    |  |             |       |                                |  |      
|Cash payments
 Plan 2                      |  |  |  |                               | (1,647 | )                                    |  |             |       |                                |  |      
|Non-cash
activity  Plan 1                  |  |  |  |                               | (214   | )                                    |  |             | (157   | )                              |  |      
|Non-cash
activity  Plan 2                  |  |  |  |                               |       |                                      |  |             | (3,081 | )                              |  |      
|Accrued
balance at December 31, 2002        |  |  |  | $                             | 26     |                                      |  | $           |       |                                |  | $    
|Charges
accrued during 2003  Plan 3        |  |  |  |                               | 620    |                                      |  |             | 301    |                                |  |      
|Adjustments
to previous estimates  Plan 1  |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Adjustments
to previous estimates  Plan 2  |  |  |  |                               | (13    | )                                    |  |             |       |                                |  |      
|Adjustments
to previous estimates  Plan 3  |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Cash payments
 Plan 1                      |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Cash payments
 Plan 2                      |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Cash payments
 Plan 3                      |  |  |  |                               | (633   | )                                    |  |             |       |                                |  |      
|Non-cash
activity  Plan 3                  |  |  |  |                               |       |                                      |  |             | (301   | )                              |  |      
|Accrued
balance at December 31, 2003        |  |  |  | $                             |       |                                      |  | $           |       |                                |  | $    
|Less: current
portion                       |  |  |  |                               |       |                                      |  |             |       |                                |  |      
|Restructuring
costs, net of current portion |  |  |  | $                             |       |                                      |  | $           |       |                                |  | $    



Severance and related charges primarily result from
involuntary termination benefits and related payroll taxes. The impairment of property and equipment primarily relates to leasehold improvements and
other property and equipment impaired as a result of the abandonment of leased facilities and the reduction of the Companys workforce. Lease
costs reflect remaining operating lease obligations and brokerage fees stated at actual costs reduced by estimated sublease income. The Company
calculates the estimated costs of abandoning these leased facilities, including estimated sublease costs and income, with the assistance of market
information trend analyses provided by commercial real estate brokerage firms retained by the Company.


51

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5. Restructuring (Continued)

Year Ended December 31, 2001



During 2001, the Company recorded a charge of $43.0
million, of which $32.4 million reflects the initial restructuring charge for Plan 1 and $10.6 million related to changes in estimated lease
costs.




Under Plan 1, in 2001, the Company reduced the total
number of employees by 116. Of these, 55 were engaged in professional services activities, 43 were engaged in sales and marketing activities, and 18
were engaged in general and administrative activities. The reduction included employees located in all geographies. Excess facilities were eliminated
and lease costs were recorded related to the abandonment of leased facilities in or near Atlanta, Boston, Chicago, New York and San
Mateo.




The change in estimated lease costs of $10.6 million
reflected changes in estimates related to facilities in or near Boston, Chicago and New York. These changes resulted from the reduction of estimated
sublease income due to the loss of sublease tenants and the continued deterioration of real estate markets in these areas.


Year Ended December 31, 2002



During 2002, the Company recorded a charge of $16.1
million, of which $1.4 million related to additional restructuring charges taken when the related liabilities could be reasonably estimated for Plan 1,
$8.5 million was the initial restructuring charge for Plan 2 and $6.2 million related to changes in estimated lease costs:




Under Plan 1, in 2002, the Company reduced the
number of employees by 19. Of these, 13 were engaged in sales and marketing activities, four were engaged in professional services activities and two
were engaged in general and administrative activities. The reduction consisted primarily of sales employees located in Asia, Australia and the United
States. Included in severance and related charges is a non-cash charge of $0.2 million for the acceleration of vesting of certain stock options in
connection with terminated employees.




The Company initiated Plan 2 under which it reduced
the number of employees by 91. Of these, 40 were engaged in sales and marketing activities, 21 were engaged in professional services activities, 20
were engaged in general and administrative activities and 10 were engaged in research and development activities. The reduction consisted of employees
across all geographies. Lease costs were recorded related to the abandonment of leased facilities in the United States, Australia and the United
Kingdom.




In addition, adjustments to previously recorded
restructuring estimates were recorded totaling $6.2 million primarily to reflect changes in estimated lease costs related to the offices in or near
Boston, New York, Chicago and the United Kingdom which resulted from continued deterioration of real estate markets in those
locations.


Year Ended December 31, 2003



During 2003, the Company recorded a restructuring
charge of $3.9 million, of which $1.3 million related to restructuring charges for Plan 3 and $2.6 million related to changes in estimated lease
costs.




The Company initiated Plan 3 to reduce direct sales
and marketing costs in Japan, Australia and Latin America by transitioning these markets to an indirect sales model. This plan was completed during
2003 and resulted in the sale of the Companys subsidiary located in Japan, the abandonment of leased facilities in Australia and a reduction in
the number of employees by 18. Of the total employee reduction, most had been engaged in sales and marketing activities. The sale of the Companys
subsidiary located in Japan was completed in July 2003 when the Company sold all of the outstanding capital stock of E.piphany Software, K.K.
(E.piphany Japan) to Braxton Ltd. for approximately $4.2 million in cash. At the time of the sale, the subsidiary had $4.4 million in net
assets resulting in a charge to other restructuring activities of approximately $0.2 million. Other expenses associated with the sale of the entity for
$0.1 million resulted in total charges classified as Other Restructuring Activities of $0.3 million. Due to the continuing obligations and
future cash flows expected under the distribution agreement, the sale of the subsidiary is not considered to be a discontinued operation in accordance
with SFAS No. 144 (SFAS 144), Accounting for the Impairment of Disposal of Long-Lived Assets.


52

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5. Restructuring (Continued)



Adjustments to lease cost estimates of $2.6 million
were recorded primarily to reflect changes in estimates associated with facilities in New York, Boston and the United Kingdom.




The accrued liability of $27.7 million at December
31, 2003 is net of $31.2 million of estimated sublease income. Of this total sublease income, $12.7 million represents future sublease income due under
non-cancelable subleases and $18.5 million represents our estimates of future sublease income on excess facilities we expect to sublease in the future.
Our ability to generate this amount of sublease income, as well as our ability to terminate certain lease obligations at the amounts we have estimated,
is highly dependent upon the existing economic conditions, particularly lease market conditions in certain geographies, at the time we negotiate the
lease termination and sublease arrangements with third parties. While the amount we have accrued is our best estimate, these estimates are subject to
change and may require routine adjustment as conditions change through the implementation period. If macroeconomic conditions, particularly as they
pertain to the commercial real estate market, continue to worsen, we may be required to increase our estimated cost to exit certain facilities. The
current estimates accrued for abandoned leases, net of anticipated sublease proceeds, will be paid over their respective lease terms through fiscal
2017.


6. Commitments and Contingencies

Lease Commitments



E.piphany leases certain facilities under operating
lease agreements, which expire at various dates through 2017. In addition, we receive sublease income from non-cancelable subleases of excess
facilities. Future minimum lease payments due and receivable under these leases as of December 31, 2003 were as follows (in
thousands):







|Year Ending December 31, |  |  |  | Lease Payments Due |        | Sublease Payments Receivable |  | Total, Net
|------------------------ |  |  |  | ------------------ | ------ | ---------------------------- |  | ----------
|2004                     |  |  |  | $                  | 11,581 |                              |  | $         
|2005                     |  |  |  |                    | 9,061  |                              |  |           
|2006                     |  |  |  |                    | 6,333  |                              |  |           
|2007                     |  |  |  |                    | 6,348  |                              |  |           
|2008                     |  |  |  |                    | 6,441  |                              |  |           
|2009 and
thereafter      |  |  |  |                    | 22,171 |                              |  |           
|                         |  |  |  | $                  | 61,935 |                              |  | $         



The net amounts shown above include operating lease
commitments due under leases for abandoned facilities of $33.6 million which are accrued as restructuring costs as of December 31,
2003.




Rent expense, excluding amounts charged to
restructuring, was approximately $4.6 million, $6.4 million and $10.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. For
the year ended December 31, 2003, all sublease income received had been included in the Companys restructuring accrual and did not reduce rent
expense. For the years ended December 31, 2002 and 2001, the Company received sublease income, excluding amounts included in restructuring charges,
which reduced its rent expense by $0.7 million and $0.4, respectively.


Legal Proceedings



As of the date hereof, there is no material
litigation pending against us other than as disclosed in the paragraph below. From time to time, the Company may become a party to litigation and
subject to claims incident to the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty,
the Company believes that the final outcome of such matters will not have a material adverse effect on our business, results of operations or financial
condition.




The Company, two of its current officers, one of its
former officers and three underwriters in its initial public offering (IPO) were named as defendants in a consolidated shareholder lawsuit
in the United States District Court


53

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

6. Commitments and Contingencies (Continued)

for the
Southern District of New York, In re E.piphany, Inc. Initial Public Offering
Securities Litigation, 01-CV-6158. This is one of a number  of actions coordinated
for pretrial purposes as In re Initial Public Offering Securities Litigation, 21
MC 92. Plaintiffs in the coordinated  proceeding have brought claims under the federal
securities laws against numerous underwriters, companies, and individuals, alleging
generally that  defendant underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than 300 companies during  the
period from late 1998 through 2000. Specifically, among other things, the plaintiffs
allege that the prospectus pursuant to which shares of Company  common stock were sold in
the Companys IPO contained certain false and misleading statements regarding the
practices of the Companys  underwriters with respect to their allocation of shares
of common stock in the Companys IPO to their customers and their receipt of
commissions  from those customers related to such allocations, and that such statements
and omissions caused the Companys post-IPO stock price to be  artificially
inflated. The consolidated amended complaint in the Companys case seeks unspecified
damages on behalf of a purported class of  purchasers of the Companys common stock
between September 21, 1999 and December 6, 2000. The court has appointed a lead plaintiff
for the  consolidated action. The underwriter and issuer defendants have filed motions to
dismiss. These motions were denied as to all the underwriter  defendants and the majority
of issuer defendants including the Company. The individual defendants have been dismissed
from the action without prejudice  pursuant to a tolling agreement. A proposal has been
made for the settlement and release of claims against the issuer defendants, including
the  Company. The settlement is subject to a number of conditions, including approval of
the proposed settling parties and the court. The Company has  elected to participate in
the settlement. If the settlement does not occur, and litigation against the Company
continues, the Company believes it has  meritorious defenses and intends to defend the
case vigorously.



On February 28, 2003, a related case, captioned Liu
v. Credit Suisse First Boston, et al., Case No. 03-20459, was filed in the United States District Court for the Southern District of Florida. Among the
166 parties named as defendants were Credit Suisse First Boston and its personnel, issuers that completed IPOs underwritten by Credit Suisse First
Boston, and certain directors and officers of these issuers, including E.piphany and two of its current officers. The complaint alleged that the
defendants violated federal and state laws by, among other things, publishing false and misleading information regarding the issuers projected
financial performance and revenue potential and by incorrectly pricing issuers IPOs. The Liu plaintiff was not alleged to have bought or sold
E.piphany stock. By court order dated July 16, 2003, the E.piphany defendants were dismissed from the litigation.




Several governmental entities have initiated
investigations related to the IPO allocation practices of Credit Suisse First Boston and other investment banks, and their personnel. In connection
with some of these proceedings, E.piphany and several other public companies have been asked to provide information relevant to these proceedings. In
response, the Company has provided information and is otherwise cooperating with these entities. Based on discussions with these entities, the Company
does not believe that it, or any of its directors and officers, is the subject of any of these investigations.


Letters of Credit



E.piphany has entered into several letters of credit
with a bank which serve as collateral for the Companys obligations to third parties for lease payments. These are secured by cash and cash
equivalents and are included in restricted cash on the face of the balance sheet. Classification of restricted cash as short-term or long-term is
determined based on the termination date of the underlying lease agreement irrespective of expiration date on letter of credit, as the Company is
contractually required to maintain letters of credit during the lease term.


54

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

6. Commitments and Contingencies (Continued)



The table below lists the Companys outstanding
letters of credit as of December 31, 2003 (in thousands):


|Date Effective |  |  |  | Lease Termination Date |            | Amount Secured
|-------------- |  |  |  | ---------------------- | ---------- | --------------
|1/5/2001       |  |  |  |                        | 3/31/2004  |               
|1/5/2001       |  |  |  |                        | 9/30/2004  |               
|1/5/2001       |  |  |  |                        | 10/31/2004 |               
|9/17/2001      |  |  |  |                        | 10/31/2004 |               
|1/5/2001       |  |  |  |                        | 10/31/2005 |               
|1/5/2001       |  |  |  |                        | 2/28/2006  |               
|11/3/2000      |  |  |  |                        | 3/31/2011  |               
|2/7/2001       |  |  |  |                        | 4/30/2011  |               
|5/17/2002      |  |  |  |                        | 4/30/2011  |               
|2/8/2001       |  |  |  |                        | 6/30/2013  |               
|               |  |  |  |                        |            |               

7. Common Stock



In July 1998, E.piphanys former chief
executive officer, Roger Siboni, purchased 2,400,000 shares of common stock under a restricted stock purchase agreement in exchange for a promissory
note. Pursuant to the stock purchase agreement, E.piphany had a right to repurchase the common stock at the original purchase price upon the occurrence
of certain events. The repurchase right expired during 2002.




As of December 31, 2003, E.piphany had reserved the
following shares of authorized but un-issued common stock:







|Stock options
outstanding under the 1997 stock option plan                      |  |  |  |  | 1,440,827  | 
|------------------------------------------------------------------------------- |  |  |  |  | ---------- | 
|Stock options
outstanding under the 1999 stock option plan                      |  |  |  |  | 8,600,369  | 
|Stock options
outstanding under the 2000 nonstatutory stock option plan         |  |  |  |  | 1,000,590  | 
|Stock options
outstanding under plans assumed through acquisition               |  |  |  |  | 320,722    | 
|Stock options
available for grant under the 1999 stock option plan              |  |  |  |  | 6,200,127  | 
|Stock options
available for grant under the 2000 nonstatutory stock option plan |  |  |  |  | 1,155,123  | 
|Stock
reserved for issuance under the 1999 employee stock purchase plan         |  |  |  |  | 6,501,467  | 
|Warrants
assumed through acquisition                                            |  |  |  |  | 5,366      | 
|Total shares
reserved                                                           |  |  |  |  | 25,224,591 | 

Warrants



As of December 31, 2003, the Company had warrants
outstanding to purchase 5,366 shares of common stock. Of these, warrants to purchase 911 shares have an exercise price of $1.29 and expire on January
26, 2005 and warrants to purchase 4,455 shares have an exercise price of $15.71 and expire on July 25, 2005.


Stock-Based Compensation



Stock-based compensation consists of amortization of
deferred compensation in connection with stock option grants and sales of stock to employees at exercise or sales prices below the deemed fair market
value of our common stock and compensation related to equity instruments issued to non-employees for services rendered. As of December 31, 2003,
deferred compensation was fully amortized.




During the years ended December 31, 2003, 2002 and
2001, E.piphany recorded stock-based compensation related to equity instruments issued to non-employees of $0, $53,000 and $50,000, respectively.
Stock-based


55

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7. Common Stock (Continued)

compensation
related to stock options to purchase common stock that are issued to non-employees is
determined based upon the fair value in accordance  with the provisions of SFAS No. 123
and EITF 96-18, Accounting for Equity Instruments that are Issued to Other
Employees for Acquiring, or in  Conjunction with Selling Goods or Services.

1999 Employee Stock Purchase Plan



On June 30, 1999, the Board of Directors approved
the adoption of E.piphanys 1999 Employee Stock Purchase Plan (the Purchase Plan). A total of 10,199,455 shares of common stock have
been reserved for issuance under the Purchase Plan as of December 31, 2003. The Purchase Plan permits eligible employees to purchase shares of common
stock through payroll deductions at 85% of the fair market value of the common stock, as defined in the Purchase Plan. As of December 31, 2003,
3,697,988 shares had been purchased and 6,501,467 shares are available for future issuance under the Purchase Plan.


Stock Option Exchange Program



On April 2, 2001, the Company announced a voluntary
stock option exchange program for its employees. Under the program, employees were given the opportunity to elect to cancel outstanding stock options
held by them in exchange for an equal number of new options to be granted at a future date at the then current fair market value. These elections
needed to be made by May 1, 2001 and were required to include all options granted during the prior six-month period. A total of 614 employees elected
to participate in the exchange program. Those 614 employees tendered a total of 5,849,237 options to purchase the Companys common stock in return
for its promise to grant new options on the grant date of November 5, 2001. A total of 4,687,353 options were granted at the fair market value of $6.44
per share on November 5, 2001 to those employees who had been continuously employed by the Company from the date they tendered their original options
through November 5, 2001. The exercise price of these stock options was equal to the fair market value on the date of grant. Therefore, no compensation
charge was recorded as a result of these stock options. The exchange program was not made available to the Companys executive officers,
directors, consultants, former employees or any of its employees who were residents of The Netherlands, Switzerland, Spain or Brazil or who were
employed by subsidiaries located in those countries.


Stock Options



In 1997, E.piphany adopted the 1997 Stock Plan (the
1997 Plan) under which incentive stock options and nonstatutory stock options were granted to employees and consultants of E.piphany. The
exercise price for incentive stock options is at least 100% of the fair market value on the date of grant for employees owning less than 10% of the
voting power of all classes of stock and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting
power of all classes of stock. For nonstatutory stock options, the exercise price is at least 110% of the fair market value on the date of grant for
employees owning more than 10% of voting power of all classes of stock and at least 85% for employees owning less than 10% of the voting power of all
classes of stock. Options generally expire in 10 years. Options are immediately exercisable, but shares so purchased vest over periods determined by
the Board of Directors, generally four years. Upon termination of employment, unvested shares may be repurchased by E.piphany for the original purchase
price. The Board of Directors determined that no further options would be granted under the 1997 Plan after the initial public offering. In addition to
the shares authorized for the 1999 Plan, the 1997 Plan options authorized but not granted as of the IPO date were made available for grant under the
1999 Plan. Accordingly, no shares are available for grant under the 1997 Plan as of December 31, 2003.




On June 30, 1999, the Board of Directors approved
the adoption of E.piphanys 1999 Stock Plan (the 1999 Plan). Under the 1999 Plan, incentive stock options and nonstatutory stock
options may be granted to employees and consultants of E.piphany. The exercise price for incentive stock options is at least 100% of the fair market
value on the date of grant for employees owning less than 10% of the voting power of all classes of stock and at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of


56

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7. Common Stock (Continued)



On October 18, 2000, the Board of Directors approved
the adoption of E.piphanys 2000 Nonstatutory Stock Option Plan (the Nonstatutory Plan). Under the Nonstatutory Plan, nonstatutory
stock options may be granted to employees and consultants of E.piphany, executive officers and directors, however, may not receive stock options under
the Nonstatutory Plan. The exercise price for nonstatutory stock options is at least 110% of the fair market value on the date of grant for employees
owning more than 10% of voting power of all classes of stock and at least 85% for employees owning less than 10% of the voting power of all classes of
stock. Options generally expire in 10 years. Options are exercisable pursuant to a vesting schedule determined by the Board of Directors. A total of
2,250,000 shares of common stock have been reserved for issuance, 1,000,590 options are outstanding and 94,287 options have been exercised under the
Nonstatutory Plan. As of December 31, 2003, 1,155,123 shares were available for grant.




The following table summarizes the stock option plan
activity under the stock option plans (in thousands, except per share amounts):







|                                        |  |  |  | Year Ended December 31, 2003 |        | Year Ended December 31, 2002 |  | Year Ended December 31, 2001 |     
|--------------------------------------- |  |  |  | ---------------------------- | ------ | ---------------------------- |  | ---------------------------- | ----
|
|Outstanding
at beginning of period      |  |  |  |                              | 13,003 |                              |  | $                            | 8.75
|Granted                                 |  |  |  |                              | 2,968  |                              |  | $                            | 4.73
|Exercised                               |  |  |  |                              | (755   | )                            |  | $                            | 4.36
|Canceled                                |  |  |  |                              | (3,854 | )                            |  | $                            | 8.95
|Outstanding
at end of period            |  |  |  |                              | 11,362 |                              |  | $                            | 7.92
|Vested and
exercisable at end of period |  |  |  |                              | 6,739  |                              |  | $                            | 9.61
|Weighted
average fair value per share   |  |  |  | $                            | 7.92   |                              |  |                              |     

57

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7. Common Stock (Continued)






|                      |  |  |  | Options Outstanding |            | Options Vested and Exercisable | 
|--------------------- |  |  |  | ------------------- | ---------- | ------------------------------ | 
|
|$    0.20  $    1.80 |  |  |  |                     | 436,708    |                                | 
|$    1.97  $    3.50 |  |  |  |                     | 1,205,025  |                                | 
|$    3.52  $    4.27 |  |  |  |                     | 827,537    |                                | 
|$    4.28  $    4.44 |  |  |  |                     | 2,065,400  |                                | 
|$    4.45  $    5.26 |  |  |  |                     | 568,354    |                                | 
|$    5.28  $    6.44 |  |  |  |                     | 2,587,293  |                                | 
|$    6.50  $    7.33 |  |  |  |                     | 1,162,247  |                                | 
|$    7.49  $    9.90 |  |  |  |                     | 1,370,841  |                                | 
|$    9.91  $121.29   |  |  |  |                     | 1,138,353  |                                | 
|$121.30  $162.33     |  |  |  |                     | 750        |                                | 
|$    0.20  $162.33   |  |  |  |                     | 11,362,508 |                                | 

8. Income Taxes



E.piphany accounts for income taxes pursuant to SFAS
No. 109, Accounting for Income Taxes. The components of provision for taxes are as follows (in thousands):







|         |  |  |  | December 31, |    
|-------- |  |  |  | ------------ | ---
|
|Federal: |  |  |  | $            |   
|Current  |  |  |  |              |   
|Deferred |  |  |  |              |   
|         |  |  |  |              |   
|State:   |  |  |  |              |   
|Current  |  |  |  |              |   
|Deferred |  |  |  |              |   
|         |  |  |  |              |   
|Foreign: |  |  |  |              |   
|Current  |  |  |  |              | 526
|Deferred |  |  |  |              |   
|         |  |  |  |              | 526
|Total    |  |  |  | $            | 526



Provision for taxes consists of withholding taxes
due on payments from certain foreign customers.


58

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8. Income Taxes (Continued)



The components of net deferred tax assets are as
follows (in thousands):







|                                           |  |  |  | December 31, |         
|------------------------------------------ |  |  |  | ------------ | --------
|
|Net operating
loss carryforwards           |  |  |  | $            | 111,197 
|Restructuring
charge                       |  |  |  |              | 7,834   
|Accruals and
reserves                      |  |  |  |              | 2,135   
|Plant and
equipment depreciation           |  |  |  |              | 761     
|Startup and
organization costs             |  |  |  |              | 132     
|Research and
development credits           |  |  |  |              | 7,371   
|Capitalized
research and development costs |  |  |  |              | 5,229   
|Total deferred
tax assets                  |  |  |  |              | 134,659 
|Valuation
allowance                        |  |  |  |              | (134,659
|Net deferred tax
assets                    |  |  |  | $            |        



From inception through December 31, 2003, we
incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. Due to uncertainties regarding realization
of the assets based on the limited operating history of E.piphany, the lack of annual profitability to date, and the uncertainty of future
profitability, E.piphany has recorded a valuation allowance equal to the total deferred tax assets of $134.7 million, and, therefore, has no net
deferred tax assets.




Included in the deferred tax assets of $134.7
million is $111.2 million, which is equal to the tax-effected amount of net operating loss carryforwards. As of December 31, 2003, E.piphany had net
operating loss carryforwards of approximately $278.0 million and $95.2 million for federal and state tax purposes, respectively. The federal net
operating loss and other credit carryforwards begin expiring, if not utilized, on various dates beginning in 2010. The state net operating loss and
other carryforwards will expire, if not utilized, on various dates through 2013. In addition, E.piphany has net operating losses in certain foreign
jurisdictions of approximately $32.3 million, which expire in various years. Approximately $18.2 million of the deferred tax asset relates to employee
stock option deductions and, accordingly, will be credited directly to stockholders equity when realized and will not be available to reduce the
provision for income taxes in future years.




The deferred tax assets of $134.7 million at
December 31, 2003 include approximately $26.4 million related to the acquisitions of RightPoint, Octane, eClass, iLeverage and Moss (including the tax
effected amounts of net operating losses of $66.7 million and $38.8 million, federal and state respectively) which when realized, will be used to
reduce the amount of any remaining goodwill that was originally recorded at the date of the acquisitions.




Under current tax law, net operating loss and credit
carryforwards available to offset future income in any given year may be limited upon the occurrence of certain events, including significant changes
in ownership interests.




The provision for income taxes differs from the
expected tax benefit amount computed by applying the statutory federal income rate of 34% to loss before taxes as follows:







|                                                                |  |  |  | Year Ended December 31, |      
|--------------------------------------------------------------- |  |  |  | ----------------------- | -----
|
|Federal
statutory rate                                          |  |  |  |                         | (34.0
|State taxes,
net of federal benefit                             |  |  |  |                         | (6.0 
|Amortization
of stock compensation                              |  |  |  |                         | 0.1  
|Foreign
taxes                                                   |  |  |  |                         | 2.2  
|Amortization
of goodwill, in-process R&D, and other intangibles |  |  |  |                         | 7.3  
|Net operating
loss not benefited and other                      |  |  |  |                         | 32.6 
|                                                                |  |  |  |                         | 2.2  

59

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E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8. Income Taxes (Continued)



The Companys pretax loss from operations for
the years ended December 31, 2003, 2002 and 2001 consisted of the following components (in thousands):







|                  |  |  |  | Year Ended December 31, |        
|----------------- |  |  |  | ----------------------- | -------
|
|Domestic          |  |  |  | $                       | (20,538
|Foreign           |  |  |  |                         | (3,180 
|Total pretax
loss |  |  |  | $                       | (23,718

9. Related Party Transactions



In connection with the employment of our former
chief executive officer, Roger Siboni, in 1998, we agreed to extend to Mr. Siboni credit in the form of two personal loans, all of which were repaid in
full as of September 30, 2003.




First, in July 1998, the Company loaned $640,000 to
Mr. Siboni, in order to purchase 2,400,000 shares of common stock at $0.26 2/3 per share. This loan was due on July 1, 2008 and accrued interest at
5.88% per annum. As of December 31, 2002, the outstanding principal balance of this loan was $377,000 and accrued interest was $6,000. This loan was
secured by 1,245,661 shares of E.piphany common stock. As of September 30, 2003, this loan was repaid in full.




Second, Mr. Siboni was offered a loan of $250,000
per year for a period beginning August 1, 1998 and ending July 31, 2000, drawable on a monthly basis. This loan accrued interest at 5.6% per annum. As
of December 31, 2002, the loan had been repaid in full.




Third, Mr. Siboni was extended a loan in the
aggregate sum of $173,000 for the payment of taxes arising from bonus payments made to him during the years 1999 and 2000. This loan accrued interest
at 5.6% per annum. As of December 31, 2002, the outstanding balance including accrued interest was $43,000. Subsequent to December 31, 2002, this loan
was repaid in full.




Mr. Siboni is currently a member of the board of
directors of two of E.piphanys customers. Total revenues to E.piphany from these customers were $0.2 million, $0.2 million and $0.4 million for
the years ended December 31, 2003, 2002, and 2001, respectively. E.piphany had accounts receivable balances from these customers totaling $0.1 million
and $0.1 as of December 31, 2003 and 2002, respectively.




In addition, four of our customers have board
members or executive officers that are also on our board of directors. Total revenues to E.piphany from these customers were $2.1 million, $1.0 million
and $3.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. We had accounts receivable balances from these customers totaling
less than $0.1 million and $0.3 million as of December 31, 2003 and 2002, respectively.


10. 401(k) Plan



In January 1999, E.piphany adopted a 401(k) plan
(the 401(k)). Participation in the 401(k) is available to all employees. Employees are eligible to participate in the 401(k) at any time
beginning with their first day of employment. Each participant may elect to contribute an amount up to 50% of his or her annual base salary plus
commission and bonus, but not to exceed the statutory limit as prescribed by the Internal Revenue Code. The Company may make discretionary
contributions to the 401(k). To date, no contributions have been made by the Company.


60

---

E.PIPHANY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

11. Valuation and Qualifying Accounts



The following table presents annual information
related to the allowance for doubtful accounts for the three years ended December 31, 2003 (in thousands):







|     |  |  |  | Balance at Beginning of Period |       | Charged to Expenses |  | Charged to Allowance for Doubtful Accounts |       | Balance at End of Period
|---- |  |  |  | ------------------------------ | ----- | ------------------- |  | ------------------------------------------ | ----- | ------------------------
|
|2003 |  |  |  | $                              | 2,508 |                     |  | $                                          |      |                         
|2002 |  |  |  |                                | 4,332 |                     |  |                                            | 403   |                         
|2001 |  |  |  |                                | 4,750 |                     |  |                                            | 2,700 |                         

12. Selected Quarterly Financial Data (Unaudited)



The following table presents selected quarterly
information for 2003 and 2002 (in thousands, except share data):







|                                              |  |  |  | First Quarter |         | Second Quarter |  | Third Quarter |         | Fourth Quarter
|--------------------------------------------- |  |  |  | ------------- | ------- | -------------- |  | ------------- | ------- | --------------
|2003:                                         |  |  |  |               |         |                |  |               |         |               
|Revenues                                      |  |  |  | $             | 22,511  |                |  | $             | 22,158  |               
|Gross
profit                                  |  |  |  |               | 12,867  |                |  |               | 12,822  |               
|Net income
(loss)                             |  |  |  |               | (10,901 | )              |  |               | (9,408  | )             
|Basic and
diluted net income (loss) per share |  |  |  | $             | (0.15   | )              |  | $             | (0.13   | )             
|2002:                                         |  |  |  |               |         |                |  |               |         |               
|Revenues                                      |  |  |  | $             | 22,146  |                |  | $             | 19,398  |               
|Gross
profit                                  |  |  |  |               | 11,304  |                |  |               | 8,620   |               
|Net
loss                                      |  |  |  |               | (17,016 | )              |  |               | (26,290 | )             
|Basic and
diluted net loss per share          |  |  |  | $             | (0.24   | )              |  | $             | (0.37   | )             

61

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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure



On May 14, 2002, we dismissed our independent
accountants, Arthur Andersen LLP, or AA, and engaged the services of Ernst &Young LLP, or EY, as our new independent accountants for the current
fiscal year ending December 31, 2002. The Audit Committee of our Board of Directors (the Board) recommended, and the Board approved, the
dismissal of AA and the appointment of EY.




The audit reports of AA on our consolidated
financial statements as of and for the fiscal years ended December 31, 2000 and 2001 did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting principles. During the two fiscal years ended December 31, 2001, and the
subsequent interim periods through May 14, 2002, we did not consult with EY regarding any of the matters or events set forth in Item 304(a)(2)(i) and
(ii) of Regulation S-K.




During the two fiscal years ended December 31, 2001,
and the subsequent interim periods through May 14, 2002, there were no disagreements between us and AA on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to AAs satisfaction, would have
caused AA to make reference to the subject matter of the disagreement in connection with its reports; and there were no reportable events described
under Item 304(a)(1)(v) of Regulation S-K.




We provided AA with a copy of the foregoing
disclosures and requested that AA furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with
the foregoing statements. A copy of AAs letter, dated May 15, 2002, was filed as Exhibit 16.1 to our current report on Form 8-K filed with the
SEC on May 16, 2002.


Item 9A. Controls and Procedures



Under the supervision and with the participation of
our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as of December 31, 2003 (the Evaluation Date). Based on this evaluation, our principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be
included in our Securities and Exchange Commission (SEC) reports is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms related to E.piphany, including our consolidated subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.




In addition, there were no significant changes in
our internal controls over financial reporting or in other factors subsequent to the Evaluation Date that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting. We have not identified any significant deficiencies or material weaknesses
in our internal controls, and, therefore, there were no corrective actions taken.


PART III

Item 10. Directors and Executive Officers of the
Registrant



The information concerning our directors required by
this Item is incorporated by reference to the information under the heading Proposal No. 1  Election of Directors in our proxy
statement.




The information concerning our executive officers
required by this Item is incorporated by reference to the information under the heading Other Information  Executive Officers in our
proxy statement.




On April 16, 2003, we adopted a code of business
conduct and ethics that applies to all directors, officers and employees. We have posted our code of business conduct and ethics on our website at
www.epiphany.com. The information concerning our code of business conduct and ethics required by this item is incorporated by reference to the
information under the heading Corporate Governance in our proxy statement. We intend to disclose any amendment to, or wavers of, the provisions of the
code of business conduct and ethics that apply specifically to our Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar funtions by posting such information on our
website.


62

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Item 11. Executive Compensation



The information required by this Item is
incorporated by reference to information under the heading Executive Compensation, Option Grants in Last Fiscal Year, and
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values in our proxy statement.


|Item 12. |  | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
|-------- |  | ----------------------------------------------------------------------------------------------



The information required by this Item is
incorporated by reference to the information under the heading Security Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plans in our proxy statement.


Item 13. Certain Relationships and Related Transactions



The information required by this Item is
incorporated by reference to the information under the headings Compensation Committee Interlocks and Insider Participation and
Certain Relationships and Related Transactions in our proxy statement.


Item 14. Principal Accountant Fees and Services



The information required by this Item is
incorporated by reference to the information under the heading Fees Paid to Ernst & Young LLP in our proxy statement.


63

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PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K

|(a) |  | (1) Financial Statements.
|--- |  | -------------------------

Our consolidated financial statements as set forth under Item 8 hereto are filed as
part of this annual report on Form 10-K.

|(a) |  | (2) Financial Statement Schedules.
|--- |  | ----------------------------------

See Item 15 (d) below.

|(a) |  | (3) Exhibits.
|--- |  | -------------

|Number     |  |  |  | Exhibit Title                                                                                                                                                            
|---------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1
(1)    |  |  |  | Restated Certificate of Incorporation of the Registrant.                                                                                                                 
|3.2
(2)    |  |  |  | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                         
|3.3
(3)    |  |  |  | Amended and Restated Bylaws of the Registrant.                                                                                                                           
|10.1(1)    |  |  |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers.                                                                         
|10.2
(4)   |  |  |  | 1999 Stock Plan and form of agreements thereunder, as amended on September 28, 2001.                                                                                     
|10.3
(3)   |  |  |  | 1999 Employee Stock Purchase Plan and form of agreements thereunder, as amended on October 15, 2002.                                                                     
|10.4
(1)   |  |  |  | 1997 Stock Plan and form of agreements thereunder.                                                                                                                       
|10.5
(1)   |  |  |  | Fourth Amended and Restated Investors Rights Agreement dated June 16, 1999.                                                                                             
|10.6
(1)   |  |  |  | Restricted Stock Purchase Agreement, Promissory Note, Stock Pledge Agreement and Joint Escrow Instructions dated July 1, 1998 between Roger S.
Siboni and the Registrant.
|10.7
(1)   |  |  |  | Promissory Note dated August 15, 1998 between Roger S. Siboni and the Registrant.                                                                                        
|10.8
(5)   |  |  |  | RightPoint Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan.                                                                                        
|10.9
(6)   |  |  |  | 2000 Nonstatutory Stock Option Plan and form of agreements thereunder.                                                                                                   
|10.10
(7)  |  |  |  | Octane Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.                                                                                           
|10.11
(7)  |  |  |  | Octane Software, Inc. Nonstatutory Stock Option Plan and form of agreement thereunder.                                                                                   
|10.12
(7)  |  |  |  | Octane Software, Inc. 2000 Pennsylvania Plan and form of agreements thereunder.                                                                                          
|10.13
(8)  |  |  |  | iLeverage Corporation (formerly Mayasoft Corporation) 1997 Stock Plan and form of agreements thereunder.                                                                 
|10.14
(9)  |  |  |  | eClass Direct, Inc. 1998 Stock Plan and form of agreements thereunder.                                                                                                   
|10.15
(10) |  |  |  | Moss Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.                                                                                             
|10.16
(10) |  |  |  | Moss Software, Inc. 2001 Stock Option Plan and form of agreement thereunder.                                                                                             
|10.17
(4)  |  |  |  | Change of Control Severance Agreement dated January 25, 2002 between Roger S. Siboni and the Registrant                                                                  
|10.18
(4)  |  |  |  | Severance Agreement dated February 15, 2002 between Karen Richardson and the Registrant                                                                                  
|10.19
(4)  |  |  |  | Form Change of Control Agreement dated February 15, 2002 between the Registrant and each of Phillip Fernandez and Kevin
Yeaman.                                          
|10.20
(2)  |  |  |  | Notice of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the Registrant and Karen Richardson.                                              
|10.21
(2)  |  |  |  | Notice of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the Registrant and Roger Siboni.                                                  

64

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|Number |  |  |  | Exhibit Title                                                                                                                                                        
|------ |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|23.1   |  |  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                  
|23.2   |  |  |  | Statement Regarding Consent of Arthur Andersen LLP.                                                                                                                  
|24.1   |  |  |  | Power of Attorney (see page 66).                                                                                                                                     
|31.1   |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|31.2   |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|32.1   |  |  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.






|(1) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-1 (Registration No. 333-82799) declared effective by the Securities and Exchange Commission on September 21, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2003 (Registration No. 000-27183) filed with the Securities and Exchange Commission on March 27,
2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002 (Registration No. 000-27183) filed with the Securities and Exchange Commission on November
13, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2001 (Registration No. 000-27183) filed with the Securities Exchange Commission on March 6,
2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-94317) filed with the Securities and Exchange Commission on January 20, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-48460) declared effective by the Securities and Exchange Commission On October 23, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by Reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-38828) filed with the Securities and Exchange Commission on June 8, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-38834) filed with the Securities and Exchange Commission on June 8, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-39440) filed with the Securities and Exchange Commission on June 16, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-59602) filed with the Securities and Exchange Commission on April 16, 2001.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Reports on Form 8-K.
|--- |  | --------------------

Reports on Form 8-K were made on October 20, 2003 and December 15, 2003.

|(c) |  | Exhibits.
|--- |  | ---------

See Item 15(a)(3) above.

|(d) |  | Financial Statement Schedules.
|--- |  | ------------------------------

Schedules have been omitted because they are not required or are not
applicable.

65

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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, State of California, on the 8th day of March 2004.




E.PIPHANY, INC.




By: /s/  KAREN A. RICHARDSON




Karen A. RichardsonChief Executive
Officer




KNOW ALL PERSONS BY THESE PRESENT, that
each person whose signature appears below constitutes and appoints Karen A. Richardson and Kevin J. Yeaman, his or her attorney-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.




Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.







|Signature                                     |  |  |  | Title                                                                |  | Date         
|--------------------------------------------- |  |  |  | -------------------------------------------------------------------- |  | -------------
|/s/ KAREN
A. RICHARDSON Karen A. Richardson   |  |  |  | Chief Executive
Officer (Principal Executive Officer)                |  | March 8,
2004
|/s/ KEVIN
J. YEAMAN Kevin J. Yeaman           |  |  |  | Chief Financial
Officer (Principal Financial and Accounting Officer) |  | March 8,
2004
|/s/ FRED
ANDERSON Fred Anderson               |  |  |  | Director                                                             |  | March 8,
2004
|/s/ MOHAN
GYANI Mohan Gyani                   |  |  |  | Director                                                             |  | March 8,
2004
|/s/ ROBERT
L. JOSS Robert L. Joss             |  |  |  | Director                                                             |  | March 8,
2004
|/s/ PAUL M.
HAZEN Paul M. Hazen               |  |  |  | Director                                                             |  | March 8,
2004
|/s/ DOUGLAS
J. MACKENZIE Douglas J. Mackenzie |  |  |  | Director                                                             |  | March 8,
2004
|/s/ ROGER
R. SIBONI Roger R. Siboni           |  |  |  | Director                                                             |  | March 8,
2004

66

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EXHIBIT INDEX






|Number     |  |  |  | Exhibit Title                                                                                                                                                            
|---------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1
(1)    |  |  |  | Restated Certificate of Incorporation of the Registrant.                                                                                                                 
|3.2
(2)    |  |  |  | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                         
|3.3
(3)    |  |  |  | Amended and Restated Bylaws of the Registrant.                                                                                                                           
|10.1
(1)   |  |  |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers.                                                                         
|10.2
(4)   |  |  |  | 1999 Stock Plan and form of agreements thereunder, as amended on September 28, 2001.                                                                                     
|10.3
(3)   |  |  |  | 1999 Employee Stock Purchase Plan and form of agreements thereunder, as amended on October 15, 2002.                                                                     
|10.4
(1)   |  |  |  | 1997 Stock Plan and form of agreements thereunder.                                                                                                                       
|10.5
(1)   |  |  |  | Fourth Amended and Restated Investors Rights Agreement dated June 16, 1999.                                                                                             
|10.6
(1)   |  |  |  | Restricted Stock Purchase Agreement, Promissory Note, Stock Pledge Agreement and Joint Escrow Instructions dated July 1, 1998 between Roger S.
Siboni and the Registrant.
|10.7
(1)   |  |  |  | Promissory Note dated August 15, 1998 between Roger S. Siboni and the Registrant.                                                                                        
|10.8
(5)   |  |  |  | RightPoint Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan.                                                                                        
|10.9
(6)   |  |  |  | 2000 Nonstatutory Stock Option Plan and form of agreements thereunder.                                                                                                   
|10.10
(7)  |  |  |  | Octane Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.                                                                                           
|10.11
(7)  |  |  |  | Octane Software, Inc. Nonstatutory Stock Option Plan and form of agreement thereunder.                                                                                   
|10.12
(7)  |  |  |  | Octane Software, Inc. 2000 Pennsylvania Plan and form of agreements thereunder.                                                                                          
|10.13
(8)  |  |  |  | iLeverage Corporation (formerly Mayasoft Corporation) 1997 Stock Plan and form of agreements thereunder.                                                                 
|10.14
(9)  |  |  |  | eClass Direct, Inc. 1998 Stock Plan and form of agreements thereunder.                                                                                                   
|10.15
(10) |  |  |  | Moss Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.                                                                                             
|10.16
(10) |  |  |  | Moss Software, Inc. 2001 Stock Option Plan and form of agreement thereunder.                                                                                             
|10.17
(4)  |  |  |  | Change of Control Severance Agreement dated January 25, 2002 between Roger S. Siboni and the Registrant                                                                  
|10.18
(4)  |  |  |  | Severance Agreement dated February 15, 2002 between Karen Richardson and the Registrant                                                                                  
|10.19
(4)  |  |  |  | Form Change of Control Agreement dated February 15, 2002 between the Registrant and each of Phillip Fernandez and Kevin
Yeaman.                                          
|10.20
(2)  |  |  |  | Notice of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the Registrant and Karen Richardson.                                              
|10.21
(2)  |  |  |  | Notice of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the Registrant and Roger Siboni.                                                  
|23.1       |  |  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                      
|23.2       |  |  |  | Statement Regarding Consent of Arthur Andersen LLP.                                                                                                                      
|24.1       |  |  |  | Power of Attorney (see page 66).                                                                                                                                         
|31.1       |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                      
|31.2       |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                      
|32.1       |  |  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.    

67

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|(1) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-1 (Registration No. 333-82799) declared effective by the Securities and Exchange Commission on September 21, 1999.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2003 (Registration No. 000-27183) filed with the Securities and Exchange Commission on March 27,
2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002 (Registration No. 000-27183) filed with the Securities and Exchange Commission on November
13, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2001 (Registration No. 000-27183) filed with the Securities Exchange Commission on March 6,
2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-94317) filed with the Securities and Exchange Commission on January 20, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-48460) declared effective by the Securities and Exchange Commission On October 23, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by Reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-38828) filed with the Securities and Exchange Commission on June 8, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-38834) filed with the Securities and Exchange Commission on June 8, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-39440) filed with the Securities and Exchange Commission on June 16, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration No. 333-59602) filed with the Securities and Exchange Commission on April 16, 2001.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

68

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