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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

                        COMMISSION FILE NUMBER 000-26881

                                E.PIPHANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      77-0443392
       (STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
       INCORPORATION OR ORGANIZATION)
     1900 SOUTH NORFOLK STREET, STE. 310                           94403
            SAN MATEO, CALIFORNIA                               (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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.  [X]

     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 [ ]

     The approximate aggregate market value of the registrant's Common Stock
held by nonaffiliates on February 28, 2001 was $926,344,000. 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 February 28, 2001 was
68,669,568.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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<CAPTION>
                                                            FORM 10-K REFERENCE
                                                            -------------------
<S>                                            <C>
(1) Proxy Statement for Stockholder Meeting                       Part III
    scheduled for May 31, 2000
</TABLE>

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                                     PART I

     The information in this Annual Report on Form 10-K that is not historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding our expectations,
beliefs, intentions or strategies regarding the future. Forward-looking
statements include statements regarding the extent and timing of future revenues
and expenses and customer demand, statements regarding the deployment of our
products, and statements regarding our reliance on third parties. All
forward-looking statements included in this document are based on information
available to us as of the date hereof, and we assume no obligation to update any
such forward-looking statement. Our actual results could differ materially from
those in such forward-looking statements. Factors that might cause or contribute
to such a discrepancy include, but are not limited to, those discussed under the
heading "Risk Factors" in Item 1 below and the risks discussed in our other
Securities Exchange Commission filings.

ITEM 1. BUSINESS

OVERVIEW

     E.piphany develops, markets and sells the E.piphany E.5 System, an
integrated suite of customer relationship management (CRM) software solutions.
These CRM solutions provide capabilities for the analysis of customer data, the
creation of inbound and outbound marketing campaigns, and the execution of sales
and service customer interactions. Companies can implement the E.piphany E.5
System to gain insight into their customers' characteristics and preferences,
and then take action on that insight to better and more profitably serve those
customers. To gain insight into their customers, companies use our analytic CRM
solutions, which collect customer data from existing software systems or other
E.piphany solutions, as well as third party data providers. To take action on
this insight, companies use our operational CRM solutions to more efficiently
interact with their customers across a variety of communication and distribution
channels.

     E.piphany was founded in November 1996. From E.piphany's founding through
the end of 1997, E.piphany primarily engaged in research activities, developing
products and building business infrastructure. E.piphany began shipping its
first software product and first generated revenues from software license fees,
implementation and consulting fees, and maintenance fees in early 1998. Although
E.piphany's revenues consistently increased from quarter to quarter from 1998
through 2000, E.piphany incurred significant costs to develop its technology and
products, to continue the recruitment of research and development personnel, to
build a direct sales force and a professional services organization, and to
expand its general and administrative infrastructure. E.piphany's total
headcount has increased from 279 employees at December 31, 1999 to 979 employees
at December 31, 2000.

RECENT EVENTS

     On February 20, 2001, E.piphany signed an Agreement and Plan of
Reorganization to acquire Moss Software, Inc. through a merger with a
wholly-owned subsidiary of E.piphany. Moss Software provides customer
relationship management products with solutions that resolve its customer sales
automation challenges and better manage their sales cycles. Under the terms of
the agreement, E.piphany will issue up to 1,641,791 shares of common stock. The
acquisition of Moss Software is subject to certain closing conditions, including
the approval of Moss Software's stockholders and other customary closing
conditions.

     On January 29, 2001, E.piphany acquired the intellectual property assets of
Radnet, Inc. Under the terms of the asset purchase agreement, E.piphany issued
238,032 shares of common stock in exchange for the assets. This transaction will
add to E.piphany's strategic intellectual property and complement its current
product development plan.

INDUSTRY BACKGROUND

     To remain competitive in today's dynamic business environment, many
companies are seeking to not only attract new customers, but also increase the
longevity and profitability of their customer relationships. To

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improve these customer relationships, we believe companies need to establish a
single view of each customer across all of the company's various departments,
distribution channels and points of customer interaction. We believe companies
that achieve this single customer view can then better understand their
customers and gain the loyalty of their most profitable customers by
personalizing products, services and related interactions based on each
customer's characteristics and preferences. Furthermore, when companies
understand individual customer preferences, they can market complementary
products, known as "cross-selling," or market higher-end products, known as
"up-selling."

     Achieving a single customer view and improving customer relationships is
difficult because most companies do not have an integrated software
infrastructure for automating sales and service interactions, collecting
customer data and analyzing that data to better understand and market to their
customers. Moreover, the process of managing relationships with customers has
changed as technology has evolved. The channels of communication between
corporations' employees, partners and customers have grown to include not only
traditional channels such as direct mail, the telephone, retail stores and
direct sales forces, but also newer channels that include Internet-based
communications. Examples of these Internet communications channels include
e-mail, web commerce sites, live text "chat" and customer web self-service
sites. The numerous software systems that independently automate these channels
of communication and applications that automate back office functions, such as
accounting and manufacturing, create tremendous amounts of customer data, such
as customer demographic information or historical purchasing information. This
data is often augmented by marketing data from third-party data providers.

     To gain a single customer view of each customer and improve customer
relationships, companies need to implement an integrated CRM infrastructure for
automating sales and service interactions, collecting customer data and
analyzing that data to better understand and market to their customers.

THE E.PIPHANY SOLUTION

     E.piphany develops, markets and sells the E.piphany E.5 System, an
integrated suite of CRM software solutions. These CRM solutions provide
capabilities for the collection and analysis of customer data, the creation of
inbound and outbound marketing campaigns, and the execution of sales and service
customer interactions. Companies can implement the E.piphany E.5 System to gain
insight into their customers' characteristics and preferences, and then take
action on that insight to better and more profitably serve those customers. To
gain insight into their customers, companies use our analytic CRM solutions,
which collect customer data from existing software systems or other E.piphany
solutions, as well as third party data providers. To take action on this
insight, companies use our operational CRM solutions to more efficiently
interact with their customers across a variety of communication and distribution
channels.

     Companies can use our software to establish, maintain and continually
improve customer relationships across both modern Internet-based channels and
traditional sales, marketing and service channels. Our E.piphany E.5 System
allows companies to profile customers' characteristics and preferences by
collecting and analyzing data from their existing software systems and third
party data providers. Business users within these companies can then act on this
information by using our E.piphany E.5 System to design and execute marketing
campaigns as well as personalize products, services and related interactions.
Finally, users can use the software to synchronize their inbound and outbound
interactions with customers and partners on the Web, at the call center and in
other sales, and service functions. We believe that our software is
differentiated by its combination of the following characteristics:

          Integration of analytic and operational CRM solutions. Our E.piphany
     E.5 System integrates analytic CRM technologies, which are used to gain
     insight into customer data, with operational CRM technologies, which make
     sales and service interactions more efficient. The integration of these
     traditionally disparate technologies allows companies to increase the value
     of every interaction with a customer. For example, a service agent using
     our operational CRM solutions to support a customer over the telephone will
     receive real-time cross-sell and up-sell recommendations for the customer
     through the integration of our analytic CRM technologies.

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          Designed to span all channels of customer interaction. Our E.piphany
     E.5 System is designed to improve customer relationships across all
     channels of customer interaction. For example, companies can use our
     operational CRM solutions to manage customer communications over the web,
     e-mail, telephone, fax, chat and wireless devices. Also, our analytic CRM
     solutions can extract data from, or integrate marketing campaigns into, our
     operational CRM solutions or other third party software solutions to
     improve interactions across all of these channels.

          Web-based design to promote ease of use and wide-scale deployment to
     business users. Our software offers an easy to use interface that is
     similar to those used on most Web sites. The interface is accessed by
     business users across a corporate network or the Internet using a Web
     browser, such as Microsoft Internet Explorer. The software is installed by
     the customer in a central location, either on the customer's own computer
     servers or on those of a third-party hosting service. This Web-based design
     does not require our software to be installed on each user's computer,
     which reduces the costs of deploying and maintaining software.

          Packaged software suite for faster and less expensive
     implementation. Our software solutions are integrated to combine all of the
     technologies required to collect and analyze customer data, manage
     marketing campaigns and conduct service and support interactions. As a
     result, companies do not need to combine multiple vendors' software tools
     into a single software solution and then customize this software solution
     to meet their needs. Individual software solutions can generally be
     implemented in 16 to 20 weeks, however some implementations could take
     longer.

E.PIPHANY STRATEGY

     We intend to be the leading provider of software that companies can use to
establish, maintain and continually improve customer relationships across both
Internet and traditional sales, marketing and distribution channels. Key
elements of our strategy include:

          Extend the breadth and depth of our product offerings. We intend to
     continue to invest in research and development to build new software to
     extend the range of problems that we solve. In particular, we intend to
     expand our current software offerings for marketing, sales and service and
     to develop new software that solves additional problems in partner
     management, operations, and field sales. We believe that maintaining and
     enhancing our products is important to our ability to expand our market
     share, retain existing customers and acquire new customers.

          Increase market penetration by expanding our sales and distribution
     capabilities. We intend to continue to increase the size of our direct
     sales force and service and support organizations. In addition to growing
     our own organization, we have developed contractual relationships with
     consultants, systems integrators and resellers that we believe will allow
     us to extend our sales presence. We intend to use these relationships to
     support sales and help us develop new E.piphany E.5 System software
     solutions.

          Increase our international penetration by expanding our global
     presences. In addition to growing our business domestically, we intend to
     continue to invest substantially in expanding our global presence. To
     achieve an expanded global presence, we intend to increase the size of our
     direct sales and service organization in Europe, South America and Asia. We
     also intend to build our international presence through relationships with
     distributors, consulting organizations and systems integrators that have a
     strong international presence, such as KPMG and Hewlett-Packard.

          Develop industry-specific software products. In the future, we plan to
     offer versions of our software designed specifically for industries such as
     financial services, high technology, Internet commerce, healthcare,
     telecommunications and manufacturing. We intend to use the industry
     expertise of our professional services organization and the consultants,
     system integrators and other companies with which we have relationships to
     help us extend our software to solve business problems specific to these
     industries.

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E.PIPHANY PRODUCTS

     The E.piphany E.5 System includes multiple CRM software solutions designed
to solve specific business problems in areas such as marketing, service and
sales. Our software solutions can be deployed simultaneously or in incremental
steps as our customers address new business problems.

     The E.piphany E.5 System software solutions are grouped into the following
product families:

     - Enterprise Insight,

     - Personalized Marketing, and

     - Intelligent Service.

ENTERPRISE INSIGHT

     Our Enterprise Insight software solutions allow any business user with a
Web browser to easily analyze customer, supplier and operational data from
across the enterprise and the Internet. To support this capability, we have
designed the E.piphany E.5 System to extract and manage data from a wide variety
of electronic data sources regardless of their format. The analytical
capabilities of our software solutions range from aggregating data from
disparate software systems to the application of complex statistical formulas to
that data, known as data mining. Once our software solutions have analyzed the
data, they present the resulting information in an easy-to-use format, such as
graphs and tables. Currently, our Enterprise Insight product family includes the
following software solutions:

<TABLE>
<S>                                 <C>
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  SOLUTION                          DESCRIPTION
--------------------------------------------------------------------------------------------
  Enterprise Insight for Sales      Enables users to uncover sales trends and patterns
  Reporting                         surrounding sales opportunity management and sales
                                    finance.
--------------------------------------------------------------------------------------------
  Enterprise Insight for Contact    Enables users to gain visibility and understanding of
  Centers                           their customer interactions across multiple
                                    communications channels, including the web, chat,
                                    e-mail, telephone, wireless and more.
--------------------------------------------------------------------------------------------
  Enterprise Insight for            Enables users to better understand their indirect sales
  Indirect Sales                    channel activity and channel partner effectiveness.
--------------------------------------------------------------------------------------------
  Enterprise Insight for B2B        Enables users to understand interactions between buyers,
  Marketplaces                      sellers and net market makers in B2B marketplaces.
--------------------------------------------------------------------------------------------
  Enterprise Insight for            Enables marketers to gain visibility and understanding
  Real-Time Personalization         of their personalization efforts across multiple
                                    communications channels including the web, e-mail,
                                    telephone, fax, chat and wireless.
--------------------------------------------------------------------------------------------
  Enterprise Insight for            Enables companies to analyze their online customer
  E-commerce                        interactions and better market to those customers.
--------------------------------------------------------------------------------------------
</TABLE>

  Personalized Marketing

     Our Personalized Marketing software solutions allow employees in a
company's marketing department to collaborate on planning and designing
marketing campaigns that target each customer based on his or her specific
characteristics and preferences. Once a campaign is designed, our software
solutions can execute the campaign through direct mail, personalized e-mail,
customized Web pages and other points of customer interaction. When campaigns
are executed, our Personalized Marketing software solutions analyze response

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data to refine and tune campaigns. Currently, our Personalized Marketing product
family includes the following software solutions:

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<S>                                 <C>
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  SOLUTION                          DESCRIPTION
--------------------------------------------------------------------------------------------
  Campaign Management               Allows marketers to plan, execute and analyze marketing
                                    campaigns across multiple communication channels to
                                    attract, retain, cross-sell, and up-sell customers.
--------------------------------------------------------------------------------------------
  Campaign Management for           A version of our Campaign Management application
  E-commerce                        designed specifically for integration with e-commerce
                                    applications so that companies can personalize each
                                    e-commerce interaction for their customers.
--------------------------------------------------------------------------------------------
  Real-Time Personalization         A real-time marketing engine that personalizes customer
                                    interactions across all communications channels based on
                                    up-to-the-second information drawn from web sites,
                                    contact centers, back office systems and other sources
                                    of customer information.
--------------------------------------------------------------------------------------------
</TABLE>

  Intelligent Service

     Our Intelligent Service software solutions help customer care
representatives and call center agents respond to customer requests, issues,
inquiries and opportunities, as well as enabling customers to help themselves
over the web. Our Intelligent Service software solutions are based on a
web-based architecture that provides an integrated view of all of a company's
communication channels, including the web, e-mail, telephone, fax, and chat. By
incorporating the technology of our Enterprise Insight and Personalized
Marketing software solutions, our Intelligent Service software solutions enable
customer contact representatives to have a single view of all of their
customers' data that has been collected from multiple sources, and make relevant
offers and service recommendations based on that information.

<TABLE>
<S>                                 <C>
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  SOLUTION                          DESCRIPTION
--------------------------------------------------------------------------------------------
  Service Center                    Allows customer support agents to respond to customer
                                    requests, issues, inquiries and opportunities across
                                    multi customer communications channels, including the
                                    web, e-mail, telephone, fax, chat and wireless.
--------------------------------------------------------------------------------------------
  Service Portal                    Allows customers to help themselves over the web by
                                    searching a knowledge base, reading responses to
                                    frequently asked questions or requesting a support call.
--------------------------------------------------------------------------------------------
</TABLE>

PROFESSIONAL SERVICES

     Our internal professional services organization plays an integral role in
implementing our software for our customers as well as supporting and training
our customers. We believe that providing a high level of customer service and
technical support is critical to the satisfaction of our customers. Our
professional services staff consisted of 353 employees as of December 31, 2000.
We believe that our consulting services enhance the quality of our software
solutions, accelerate the implementation of our solutions and share best
business practices with client project teams.

     We provide our customers with extensive maintenance services including
telephone support, Web-based support and updates to our products and
documentation.

     We offer extensive training programs to our customers and other companies
with which we have relationships to accelerate the implementation and adoption
of our solutions by the users within a company. Fees for our training services
are typically charged separately from our software license, maintenance and
consulting fees.

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     In addition to implementing our software and supporting our customers, our
professional services organization works closely with our internal research and
development organization to design new E.piphany E.5 System software solutions.
Experience gained by our professional services organization through repeated
implementation of our products is routinely conveyed to our research and
development staff. Our research and development staff then uses this experience
to design new features into new releases of its software.

E.PIPHANY E.5 SYSTEM TECHNOLOGY

     The E.piphany E.5 System includes numerous analytic and operational CRM
technologies. The major elements of the E.piphany E.5 System's core technologies
include:

          Web-based architecture. E.piphany's browser-based, web architecture
     allows information and application functionality to be broadly shared
     within and outside a company, with no need to install special desktop
     software.

          Modular architecture. The E.piphany E.5 System is comprised of
     numerous software modules that can be implemented independently or in a
     broad suite. For example, a company may choose to start with one or more
     Personalized Marketing applications and later add Web or call center
     applications from the Intelligent Service family of solutions. Another
     customer may start with Enterprise Analytics and then expand with E.piphany
     marketing, sales, and service applications. A common application
     infrastructure is used in every case, and the same benefits of scalability,
     flexibility, and ease of deployment apply.

          Metadata-driven architecture. E.piphany's integrated metadata defines
     the information that flows through the system, from source data systems to
     an application's web page interface. Through this metadata, additions or
     changes to an application are propagated automatically throughout the
     system to minimize the administrative burden.

          Packaged marketing, service, and sales applications. E.piphany
     applications combine metadata and process logic to deliver pre-packaged
     functionality that is easy to install and deploys rapidly throughout the
     enterprise.

          Offline and real-time analytics. E.piphany provides a broad range of
     analytics -- including analytical processing, data mining, collaborative
     filtering, and real-time likelihood estimation -- and integrates them
     tightly into operational marketing, service, and sales applications.

          Optimized, scalable management of data for both analysis and
     transactions. The E.piphany E.5 System automatically optimizes its
     management of data depending on the application. The various application
     components are designed to efficiently handle hundreds of millions of
     customer records, billions of facts, thousands of simultaneous users, and
     tens of millions of customer contacts each month.

          Advanced extraction, transformation, and load (ETL) technology. Our
     ETL capabilities enable system administrators to easily integrate data from
     disparate source systems using a visual interface to define links to source
     data systems and to schedule extraction jobs at any interval. To accelerate
     this process, E.piphany offers packaged and template extractors for many
     third party software systems commonly found in large companies.

          Open architecture allows the E.5 System to fit into existing software
     environments. The E.piphany E.5 system is built on industry standards such
     as Microsoft and Oracle databases and Microsoft and Netscape browsers and
     uses existing applications and data warehouses where applicable.

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
solutions. These relationships and alliances fall into the following four
categories:

     Consulting and implementation relationships. We have system integrator
relationships with Deloitte & Touche, KPMG, and PricewaterhouseCoopers to
implement our products and to assist us with sales lead

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generation. We have certified and trained consultants in these organizations for
the implementation and operation of our products.

     We rely, and expect to increasingly rely, on a number of third parties to
implement, support and recommend our products during the evaluation stage of a
customer's purchase process. If we are unable to maintain or increase the number
and quality of our relationships with providers that recommend and implement our
software on customers' computer systems, our business will be seriously harmed.
A number of our competitors have significantly more established relationships
with such providers and, as a result, these firms may be more likely to
recommend competitors' products and services rather than our products and
services. Furthermore, it is possible that our current implementation partners,
many of which have significantly greater financial, technical, marketing and
other resources than we have, could begin to market software products and
services that compete with our products and services.

     Platform relationships. To help ensure that our products are based on
industry standards and take advantage of current and emerging technologies, we
have formed relationships with vendors of software and hardware technology
platforms. We currently maintain platform relationships with Hewlett-Packard,
Microsoft, Oracle and Sun Microsystems. These companies voluntarily provide us
with early releases of new technology platforms, education related to those
platforms and limited access to their technical resources to facilitate adoption
of their technology. As a result, we are able to more easily integrate our
products with these vendors' platforms, and we can also anticipate required
changes to our products based on new versions of these vendors' platforms. We
believe that these relationships allow us to focus on our core competencies,
simplify the task of designing and developing our software and reduce the time
it takes us to make our software compatible with their software or hardware.

     Technology relationships. We have formed relationships with vendors of
complementary software products. These relationships consist of non-exclusive
contractual agreements to co-market each other's products and share technical
resources in order to better integrate each other's products. These agreements
also provide, in some instances, for the payment of referral fees to each other
for customer referrals. We currently have such agreements with Art Technology
Group, BroadVision, FirePond and Vignette, all of which are providers of
Internet infrastructure software.

     Reseller and applications service provider relationships. We have entered
into contractual reseller agreements with vendors under which we sell software
solutions to them for resale to their customers. We believe that these
relationships will extend our sales presence in new and existing markets. We
currently have reseller agreements with Acxiom, Harte-Hanks and Hewlett-Packard,
among others. Our application service provider relationships include Interelate
and Corio. Under these agreements, we sell our software solutions to these
companies at a discount from our list prices, provide marketing and training
support and must provide advance notice of price increases. These companies have
committed resources to training their employees, developing co-marketing
programs and incorporating our products into their CRM marketing strategies. We
provide sales materials, training and support services to these resellers on the
implementation of our software solutions. We also have a contractual
relationship with Interelate under which this company hosts our software
solutions as an Internet-based application service provider.

CUSTOMERS

     Our customers represent large global institutions from industries such as
high technology, financial services, communications, and internet commerce. For
the year ended December 31, 2000, no customer accounted for more than 10% of our
revenues. For the year ended December 31, 1999, Sallie Mae accounted for 11% of
our total revenues. For the year ended December 31, 1998, Autodesk, Charles
Schwab, Hewlett-Packard, KPMG and Macromedia, accounted for 30%, 17%, 16%, 11%
and 11%, respectively, of our total revenues.

RESEARCH AND DEVELOPMENT

     Our research and development organization is responsible for developing new
software products, product architecture, core technologies, product testing,
quality assurance and ensuring the compatibility of our

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products with hardware and software platforms. In addition, this organization
supports some pre-sale and customer support activities. Our research and
development organization is divided into teams consisting of development
engineers, product managers, quality assurance engineers and technical writers.
In addition, our professional services staff helps our research and development
organization identify potential new product features. Our research and
development organization consisted of 211 employees as of December 31, 2000.

     E.piphany's total expenses for research and development were $26.8 million,
$7.1 million and $3.8 million for the years ended December 31, 2000, 1999 and
1998. In addition, for fiscal year 2000, we recorded charges of $47.0 million
for acquired in-process research and development costs in connection with our
acquisitions of Octane and RightPoint. We expect that research and development
expenses will increase in absolute dollars and may increase as a percentage of
revenue in future periods.

SALES, MARKETING AND DISTRIBUTION

     To date, we have marketed our products primarily through our direct sales
force. However, we have expanded our sales channels through additional
relationships with systems integrators and value-added resellers. In selling our
products, we typically approach both business users and information technology
professionals with an integrated team from our sales and professional services
organizations. Initial sales activities typically include a demonstration of our
product capabilities followed by one or more detailed technical reviews. We also
seek to establish relationships and alliances with major industry vendors that
will add value to our products and expand our distribution opportunities. Our
sales and marketing organization consisted of 291 employees as of December 31,
2000.

     We use a variety of marketing programs to build market awareness of our
company, our brand name and our 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 in support of sales to prospective customers that
include brochures, data sheets, white papers, presentations and demonstrations.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     Our future success depends in part on legal protection of our technology.
To protect our technology, we rely on a combination of the following, among
others:

     - patent laws,

     - copyright laws,

     - trademark laws,

     - trade secret laws, and

     - employee and third-party nondisclosure agreements and confidentiality
       procedures.

     We hold one patent and have applied for seven other patents on our
technology in the United States, and we have made one international application.
We have also applied for trademarks. Our pending patent and trademark
applications may not be allowed. Even if they are allowed, they may not provide
us a competitive advantage. Competitors may successfully challenge the validity
and scope of our patents and trademarks.

     Our end-user licenses are designed to prohibit unauthorized use, copying
and disclosure of our software and technology. However, these provisions may be
unenforceable under the laws of some jurisdictions and foreign countries.
Unauthorized third parties may be able to copy some portions of our products or
reverse engineer or obtain and use information and technology that we regard as
proprietary. Third parties could also independently develop competing technology
or design around our technology. If we are unable to successfully detect
infringement and enforce our rights to our technology, we may lose competitive
position in the market. We cannot assure you that our means of protecting our
proprietary rights in the United States or abroad will be adequate or that
competing companies will not independently develop similar technology. In
addition, some

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of our licensed users may allow additional unauthorized users to use our
software, and if we do not detect such use we could lose potential license fees.

     From time to time, we may encounter disputes over rights and obligations
concerning intellectual property. We believe that our products do not infringe
the intellectual property rights of third parties. However, we cannot assure you
that we will prevail in all intellectual property disputes. We have not
conducted a search for existing patents and other intellectual property
registrations, and we cannot assure you that our products do not infringe upon
issued patents. In addition, because patent applications in the United States
are not publicly disclosed until the patent is issued, applications may have
been filed which would relate to our products.

     We indemnify some of our customers against claims that our products
infringe upon the intellectual property rights of others. We could incur
substantial costs in defending our company and our customers against
infringement claims. In the event of a claim of infringement, we or our
customers may be required to obtain one or more licenses from third parties. We
cannot assure you that such licenses could be obtained from third parties at a
reasonable cost, or at all. Defense of any lawsuit or failure to obtain any such
required license would have a material adverse effect on our business.

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. Our integrated software competes against
various vendors' software tools designed to accomplish specific elements of a
complete process, including extracting data, storing and managing data,
analyzing data, or managing marketing campaigns. Our competitors include
companies that sell:

     - data management and data analysis software tools such as Broadbase,
       Microstrategy and Oracle,

     - enterprise application software such as PeopleSoft, SAP and Siebel
       Systems,

     - marketing campaign management software tools such as Exchange
       Applications, Prime Response and Recognition Systems,

     - software that recommends products to customers in real time based on
       simple analytics such as Net Perceptions, and

     - web-based contact center software tools such as Kana Communications.

     Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing, or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements. Competition
could seriously harm our ability to sell additional software, maintenance
renewals, and services on terms favorable to us. Competitive pressures could
reduce our market share or require us to reduce the price of our products and
services, any of which could materially and adversely affect our business,
financial condition and operating results.

     We compete on the basis of certain factors, including:

     - product performance,

     - product features,

     - user scalability,

     - open architecture,

     - ease of use,

     - product reliability,

     - cost of ownership,

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<PAGE>   11

     - analytic capabilities,

     - time to market,

     - customer support, and

     - product pricing.

     We believe that we presently compete favorably with respect to each of
these factors. However, the markets for our products are still rapidly evolving,
and we may not be able to compete successfully against current and potential
competitors.

EMPLOYEES

     Based on the number of E.piphany employees as of December 31, 2000, we have
979 full-time employees. Of these employees, 211 are engaged in research and
development, 291 are engaged in sales and marketing, 353 are engaged in
professional services and 124 are engaged in finance and administration. Of
these employees, 856 were located in the United States and 123 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.

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<PAGE>   12

                                  RISK FACTORS

     An investment in our common stock is very risky. You should carefully
consider the risks below, together with all of the other information included in
this Annual Report on Form 10-K before investing in E.piphany.

E.PIPHANY HAS A HISTORY OF LOSSES, EXPECTS LOSSES IN THE FUTURE AND MAY NOT EVER
BECOME PROFITABLE.

     We incurred net losses of $768.5 million for the year ended December 31,
2000, $22.4 million in the year ended December 31, 1999 and $10.3 million in the
year ended December 31, 1998. We had an accumulated deficit of $804.3 million as
of December 31, 2000, and $35.9 million as of December 31, 1999. We expect to
continue to incur losses before amortization charges for the foreseeable future.
In addition, in connection with the acquisitions of Octane, RightPoint, eClass,
and iLeverage, we are incurring significant accounting charges for the
amortization of intangible assets over the three years following these mergers.
These losses will be substantial, and we may not ever become profitable. In
addition, we expect to significantly increase our expenses in the near term,
especially research and development and sales and marketing expenses. Therefore,
our operating results will be harmed if our revenue does not keep pace with our
expected increase in expenses or is not sufficient for us to achieve
profitability. If we do achieve profitability in any period, it cannot be
certain that we will sustain or increase profitability on a quarterly or annual
basis.

OUR LIMITED OPERATING HISTORY AND THE LIMITED OPERATING HISTORY OF THE COMPANIES
WE ACQUIRED MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR BUSINESS
DIFFICULT.

     Our limited operating history and the limited operating history of the
companies that we acquired makes it difficult to forecast E.piphany's future
operating results. E.piphany was founded in November 1996 and began developing
products in 1997. Our revenue and income potential is unproven. We received our
first revenues from licensing our software and performing related services in
early 1998. Since neither we nor the companies we acquired have a long history
upon which to base forecasts of future operating results, any predictions about
our future revenues and expenses may not be as accurate as they would be if
E.piphany and the other companies we acquired had a longer business history.

OUR REVENUES MAY BE HARMED IF GENERAL ECONOMIC CONDITIONS CONTINUE TO WORSEN.

     Our revenues are dependent on the health of the economy and the growth of
our customers and potential future customers. If the economy remains stagnant,
our customers may continue to delay or reduce their spending on CRM software.
When economic conditions weaken, sales cycles for sales of software products
tend to lengthen and companies' information technology budgets tend to be
reduced. If that happens, our revenues could suffer and our stock price may
decline. Further, if the economic conditions in the United States worsen or if a
wider or global economic slowdown occurs, we may experience a material adverse
impact on our business, operating results, and financial condition.

VARIATIONS IN QUARTERLY OPERATING RESULTS DUE TO SUCH FACTORS AS CHANGES IN
DEMAND FOR OUR PRODUCTS AND CHANGES IN OUR MIX OF REVENUES MAY CAUSE OUR STOCK
PRICE TO DECLINE.

     We expect our quarterly operating results to fluctuate. We therefore
believe 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, expenses 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 are:

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

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

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<PAGE>   13

     - 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 orders or implementations, particularly
       large orders or implementations, from one quarter to the next,

     - changes in demand for our software or for enterprise software and real
       time marketing solutions generally,

     - announcements or introductions of new products by our competitors,

     - software defects and other product quality problems,

     - our ability to integrate acquisitions,

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

     - our ability to hire, train and retain sufficient engineering, consulting,
       training and sales staff.

THE LOSS OF KEY PERSONNEL, OR ANY 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, this inability could affect our ability to grow our business. Competition
for qualified personnel in high technology is intense, particularly in the
Silicon Valley region of Northern California where our principal offices are
located. 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 are 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 options are no longer priced below market value may
choose not to remain employed by us. In that case, our ability to attract or
retain employees will be adversely affected.

IF CUSTOMERS DO NOT CONTRACT DIRECTLY WITH CONSULTING ORGANIZATIONS TO IMPLEMENT
AND SUPPORT OUR PRODUCTS, OUR REVENUES, PROFITABILITY AND MARGINS MAY BE HARMED.

     Our principal focus is providing software solutions rather than services.
As a result, we encourage our customers to purchase consulting, implementation,
maintenance and training services directly from 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 solutions and allow us to focus on
software development and licensing. If consulting organizations are unwilling or
unable to provide a sufficient level and quality of service 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.

     Further, to the extent that consulting organizations do not provide
consulting, implementation, maintenance and training services directly to our
customers, we need to provide these services to our customers. We provide these
services to our customers either directly through our internal professional
services organization or indirectly through subcontractors we hire to perform
the services on our behalf. Because our margins on service revenues are less
than our margins on license revenues, our overall margins decline when we
provide

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<PAGE>   14

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.

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,
implementation, maintenance and training services and obtain them from our
internal professional services, customer support and training organizations,
which employed a staff of 353 as of December 31, 2000, or from outside
consulting organizations. When we provide these services, we generally recognize
revenue from the licensing of our software products as the implementation
services are performed. If our internal professional services organization does
not effectively implement and support our products or if we are unable to expand
our internal professional services organization as needed to meet our customers'
needs, our ability to sell software, and accordingly our revenues, will be
harmed. If we are unable to expand our internal professional services
organization to keep pace with sales, we will be required to increase our use of
subcontractors to help meet our implementation and service obligations, which
will result in lower gross margins. In addition, we may be unable to negotiate
agreements with subcontractors to provide a sufficient level and quality of
services. If we fail to retain sufficient subcontractors, our ability to sell
software for which these services are required will be harmed and our revenues
will suffer.

OUR SERVICE REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR PRODUCT
REVENUES, AND AN INCREASE IN SERVICE REVENUES RELATIVE TO LICENSE REVENUES COULD
HARM OUR GROSS MARGINS.

     Our service revenues, which includes fees for consulting, implementation,
maintenance and training, were 42% of our revenues for the year ended December
31, 2000, 47% of our revenues for the year ended December 31, 1999 and 34% of
our revenues for the year ended December 31, 1998. Our service revenues have
substantially lower gross margins than license revenues. Our cost of service
revenues for the year ended December 31, 2000, 1999 and 1998 was 101%, 102% and
120%, respectively, of our service revenues. An increase in the percentage of
total revenues represented by services revenues could adversely affect our
overall gross margins.

     Service revenues as a percentage of total revenues and cost of service
revenues as a percentage of total revenues have varied significantly from
quarter to quarter due to our relatively early stage of development. The
relative amount of service revenues as compared to license revenues has varied
based on the volume of software solution orders compared to the volume of
additional user orders. In addition, the amount and profitability of services
can depend in large part on:

     - the software solution which has been licensed,

     - the complexity of the customers' information technology environment,

     - the resources directed by customers to their implementation projects,

     - the number of users licensed, and

     - the extent to which outside consulting organizations provide services
       directly to customers.

NEW PRODUCT INTRODUCTIONS AND PRICING STRATEGIES BY OUR COMPETITORS COULD
ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS 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 on our products and services, any of which
could harm our business. We compete principally with vendors of:

     - data management and data analysis software tools such as Broadbase,
       Microstrategy and Oracle,

     - enterprise application software such as PeopleSoft, SAP and Siebel
       Systems,

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<PAGE>   15

     - marketing campaign management software tools such as Exchange
       Applications, Prime Response and Recognition Systems,

     - software that recommends products to customers in real time based on
       simple analytics such as Net Perceptions, and

     - web-based contact center software tools such as Kana Communications.

     Many of these companies have significantly greater financial, technical,
marketing, service and other resources than we do. Many of these companies also
have a larger installed base of users, have been in business longer or have
greater name recognition than we do. In addition, some large companies may
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 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. For example, our
competitors' software products may incorporate other capabilities, such as
recording accounting transactions, customer orders or inventory management data.
A software product that performs these functions, as well as some of the
functions of our software solutions, may be appealing to some customers because
it would reduce the number of different types of software necessary to
effectively run their business. Further, our competitors may be able to respond
more quickly than we can to changes in customer requirements.

     In addition, our products must integrate with software solutions provided
by a number of our existing or potential competitors. These competitors could
alter their products so that our products no longer integrate well with them, or
they could deny or delay access by us to advance software releases that allow us
to timely adapt our products to integrate with their products.

     Our competitors have made and may also continue to make strategic
acquisitions or establish cooperative relationships among themselves or with
other software vendors. This may increase the ability of their products to
address the need for software solutions such as ours, which provide both the
ability to collect data from multiple sources and analyze that data to profile
customer characteristics and preferences. Our competitors may also establish or
strengthen cooperative relationships with our current or future distributors or
other parties with whom we have relationships, thereby limiting our ability to
sell through these channels, reducing promotion of our products and limiting the
number of consultants available to implement our software.

OUR REVENUES MIGHT BE HARMED BY RESISTANCE TO ADOPTION OF E.PIPHANY'S SOFTWARE
BY INFORMATION TECHNOLOGY DEPARTMENTS.

     Some businesses may have already made a substantial investment in other
third party or internally developed software designed to integrate data from
disparate sources and analyze this data or manage marketing campaigns. These
companies may be reluctant to abandon these investments in favor of our
software. In addition, information technology departments of potential customers
may resist purchasing our software solutions for a variety of other reasons,
particularly the potential displacement of their historical role in creating and
running software and concerns that packaged software products are not
sufficiently customizable for their enterprises. If the market for our products
does not grow for any of these reasons, our revenues will be harmed.

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<PAGE>   16

IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, OUR REVENUES WILL BE REDUCED.

     If the market for software that enables companies to establish, manage,
maintain and continually improve customer relationships by collecting and
analyzing data to design and manage marketing campaigns and customize products
and services and providing timely, consistent, multichannel customer interaction
does not grow as quickly or become as large as we anticipate, our revenues will
be reduced. Our market is still emerging, and our success depends 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,
       or

     - use alternative methods to solve the same business problems.

     In addition, because our products can be used in connection with Internet
commerce and we are currently developing additional Internet commerce solutions,
if the Internet commerce market does not grow as quickly as we anticipate, we
may experience sales which are lower than our expectations.

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
E.piphany E.5 System 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 do not, we may not achieve market
acceptance and we may be unable to attract new customers. E.piphany may also
lose existing customers, to whom we seek to sell additional software solutions
and professional services.

     To achieve increased market acceptance of our products, we must, among
other things, continue to:

     - improve and introduce new software solutions for reporting and analysis,
       distributed database marketing and e-commerce,

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

     - enhance our software's ease of administration,

     - design software for vertical markets,

     - make available international versions of our software,

     - improve our software's ability to extract data from existing software
       systems, and

     - adapt to rapidly changing computer operating system and database
       standards and Internet technology.

     We may not be successful in developing and marketing these or other new or
improved products. If we are not successful, we may lose sales to competitors.
In addition, we have entered into customer contracts, which contain specific
performance goals relating to new product releases or enhancements, and if we
are not able to meet these goals, we may be required to, among other things,
return fees, pay damages and offer discounts.

IF OUR PRODUCTS DO NOT STAY COMPATIBLE WITH CURRENTLY POPULAR SOFTWARE PROGRAMS,
WE MAY LOSE SALES AND REVENUES.

     The E.piphany E.5 System 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.

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<PAGE>   17

     In order to operate the E.piphany E.5 System, the system must be installed
on both a computer server running the Microsoft Windows NT or Windows 2000
computer operating systems and a computer server running database software from
Microsoft or Oracle. We are currently in various stages of porting our software
to operate on additional operating systems and databases, including UNIX, IBM
DB2 and other third party application servers such as BEA System's Web Logic
product. If we fail to successfully complete these modifications in a timely
manner, we may lose sales and revenues. In addition, users access the E.piphany
E.5 System 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, the E.piphany E.5 System collects and analyzes data to
profile customers' characteristics and preferences. This data may be stored in a
variety of our customers' existing software systems, 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 collect data from new
versions of these products, we may lose potential customers. If we lose
customers, our revenues and profitability may be harmed.

OUR PRODUCTS HAVE LONG SALES CYCLES WHICH MAKES IT DIFFICULT TO PLAN EXPENSES
AND FORECAST RESULTS.

     It takes us between three and six months to complete the majority of our
sales and it can take us up to one year or longer. It is therefore difficult to
predict the quarter in which a particular sale will occur and to plan
expenditures accordingly. The period between initial contact with a potential
customer and their 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 customers require competitive evaluation and internal
       approval before purchasing our products,

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

     - many of our 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. If our sales cycle unexpectedly
lengthens in general or for one or more large orders, it would adversely affect
the timing of our revenues. If we were to experience a delay of several weeks on
a large order, it could harm our ability to meet our forecasts for a given
quarter.

IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND 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 Deloitte & Touche, KPMG and
PricewaterhouseCoopers; resellers, including Acxiom, Hewlett-Packard and
Harte-Hanks; and application service providers that provide access to our
software to their customers over the Internet, including Interrelate. 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. However,

                                        16
<PAGE>   18

our contracts do not require these third parties to devote resources to
promoting, selling and supporting our products. Therefore we have little control
over 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.

IF WE FAIL TO EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE WILL NOT BE ABLE
TO INCREASE REVENUES.

     In order to grow our business, we need to increase market awareness and
sales of our products and services. To achieve this goal, we need to increase
both our direct and indirect sales channels. If we fail to do so, this failure
could harm our ability to increase revenues. We currently receive substantially
all of our revenues from direct sales, but we intend to increase sales through
indirect sales channels in the future. We also need to expand our direct sales
force by hiring additional salespersons and sales management.

     We intend to derive revenues from indirect sales channels by selling our
software through value added resellers. These resellers offer our software
products to their customers together with consulting and implementation services
or integrate our software solutions with other software.

     We expect as part of our strategy to increase international sales through
the use of direct and indirect sales channels. We will be even more dependent on
indirect sales channels in the future due to our international strategy. We also
plan to expand our international direct sales force and therefore must hire
additional sales personnel outside the United States. Our ability to develop and
maintain these channels will significantly affect our ability to penetrate
international markets.

WE HAVE GROWN VERY QUICKLY AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
GENERATE NEW REVENUES AND ACHIEVE PROFITABILITY WOULD BE HARMED.

     We have grown significantly since our inception and will need to grow
quickly in the future. Any failure to manage this growth could impede our
ability to increase revenues and achieve profitability. We have increased our
number of employees from 21 at December 31, 1997 to 979 as of December 31, 2000.
Our future expansion could be expensive and strain our management and other
resources. In order to manage growth effectively, we must:

     - hire, train and integrate new personnel,

     - integrate people and technologies from acquired companies,

     - continue to augment our financial and accounting systems,

     - manage our sales operations, which are in several locations, and

     - expand our facilities.

     If we do manage our growth effectively, our business could suffer.

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 properly evaluate and execute
acquisitions and investments, they may seriously harm our business and
prospects. To successfully complete an acquisition, 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,

     - integrate and retain personnel,

     - combine potentially different corporate cultures,

                                        17
<PAGE>   19

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

     - maintain focused on our day-to-day operations.

     Further, the financial consequences of our acquisitions and investments may
include potentially dilutive issuances of equity securities, one-time
write-offs, amortization expenses related to goodwill and other intangible
assets and the incidence 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 others 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 some of our technology.

     We have been contacted by a company which has asked us to evaluate the need
for a license of several patents that the company holds directed to data
extraction technology. This company has filed litigation alleging infringement
of its patents against several of our competitors. We cannot assure you that the
holder of the patents will not file litigation against us or that we would
prevail in the case of such litigation. In addition, the patent holder has
informed us that it has applications pending in numerous foreign countries. The
patent holder may also have applications on file in the United States covering
related subject matter which are confidential until the patent or patents, if
any, is issued.

     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. 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.

     However, 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 against 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 patent, copyright, trademark 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 harmed.

     Our pending patent and trademark registration applications may not be
allowed or competitors may successfully challenge the validity or scope of these
registrations. In addition, our patents may not provide 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.

     In addition, one of the ways in which we charge for our software is based
on the number of users at a particular site that will be permitted to use the
software. Organizations that have a site license for a fixed number of users for
our products could allow unauthorized use of our software by unlicensed users.

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<PAGE>   20

Unauthorized use is difficult to detect and, to the extent that our software is
used without authorization, we may lose potential license fees.

PRIVACY AND SECURITY CONCERNS, PARTICULARLY RELATED TO THE USE OF OUR SOFTWARE
ON THE INTERNET, 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. Our 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, due to privacy concerns, some Internet commentators, consumer
advocates, and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. In addition, Internet users can, if they choose, configure their
web browsers to limit the collection of user data for customer profiling. Should
many Internet users choose to limit the use of customer profiling technologies,
or if major countries or regions adopt legislation or other restrictions on the
use of customer profiling data, our software would be less useful to customers,
and our sales and profits could decrease.

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 began shipping our first products in early 1998. Our products are
complex and may contain currently unknown errors, defects or failures,
particularly since they are new and recently released. In the past we have
discovered software errors in some of 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 and correct 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 which
require us to spend additional consulting or support resources to resolve these
problems.

     In addition, our customers generally store their data across computer
networks, which are often connected to the Internet. Our software operates
across our customers' computer networks and can, at the customer's option, be
accessed through an Internet connection. Our software contains technology
designed to prevent theft or loss of data. Nevertheless, customers may encounter
security issues with their existing databases installed across networks,
particularly the Internet, or with our software. A security breach involving our
software, or a widely publicized security breach involving the Internet
generally, could harm our sales. A security breach involving our software could
also expose us to claims for damages.

     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 product 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 product

                                        19
<PAGE>   21

liability claims to date, we may encounter these claims in the future. Product
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 damage awards.

     Our product 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, they may elect to use other training, consulting
and product integration firms rather than contract for our services. If
customers are dissatisfied with our services, we may lose revenues.

WE INTEND TO EXPAND OUR INTERNATIONAL SALES EFFORTS BUT WE DO NOT HAVE
SUBSTANTIAL EXPERIENCE IN INTERNATIONAL MARKETS.

     We intend to expand our international sales efforts in the future. We have
limited experience in marketing, selling and supporting our products and
services abroad. If we are unable to grow our international operations
successfully and in a timely manner, our business and operating results could be
seriously harmed. In addition, doing business internationally involves greater
expense and many additional risks, particularly:

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

     - differing intellectual property rights,

     - differing labor regulations,

     - unexpected changes in regulatory requirements,

     - changes in a specific country's or region's political or economic
       conditions,

     - greater difficulty in establishing, staffing and managing foreign
       operations, and

     - fluctuating exchange rates.

     We have expanded our international operations during 2000, which has
required a significant amount of attention from our management and substantial
financial resources. We have begun efforts at international expansion in Europe
and Asia and, as of December 31, 2000, had 123 employees located in Australia,
Canada, France, Germany, Japan, Switzerland, The Netherlands and the United
Kingdom. We are also exploring other regions for future expansion.

IF DATABASE ACCESS BECOMES STANDARDIZED, DEMAND FOR OUR PRODUCTS WILL BE
REDUCED.

     Our products are useful for integrating data from a variety of disparate
data sources. Adoption of uniform, industry-wide standards across various
database and analytic software programs could minimize the importance of the
data integration capabilities of our products. This, in turn, could adversely
affect the competitiveness and market acceptance of our products. Also, a single
competitor in the market for database and analytic software programs or Internet
relationship management may become dominant, even if there is no formal
industry-wide standard. If large numbers of our customers adopt a single
standard, this would similarly reduce demand for our product. If E.piphany loses
customers because of the adoption of standards, we may have lower revenues and
profitability.

SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE MAY AFFECT OUR QUARTERLY REVENUES.

     The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenue growth. We believe that these
fluctuations are caused in part by customer buying patterns, which are
influenced by year-end budgetary pressures and by sales force commission
structures. As our revenues grow, we may experience seasonal fluctuations in our
revenues.

                                        20
<PAGE>   22

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 which 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 our board of directors or act by written consent without a meeting. In
addition, our board of directors have staggered terms, which makes it difficult
to remove them all at once. The acquirer would also be required to provide
advance notice of its proposal to remove directors at an annual meeting. The
acquirer also will not be able to cumulate votes at a meeting, which will
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 which
would significantly dilute the 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 antitakeover measures, you could lose
the opportunity to sell your shares at a favorable price.

ITEM 2. PROPERTIES

     We currently lease approximately 87,000 square feet of office space for our
headquarters in one building in San Mateo, California. We also lease
approximately 118,000 square feet of additional office space in three additional
buildings in San Mateo, California. We also lease sales and support offices near
Atlanta, Boston, Calgary, Charlotte, Chicago, Dallas, Detroit, Los Angeles,
Miami, Minneapolis, New York, Phoenix, Pittsburgh, St. Louis, Stamford,
Connecticut and Toronto. We also lease sales and support offices outside of
North America including locations in Australia, France, Germany, Japan,
Switzerland, The Netherlands, and the United Kingdom. We believe that our
facilities are adequate for our current needs. We may need to locate additional
space to meet our needs in the future.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     A special meeting of stockholders was held on December 6, 2000 and the
following matter was considered and voted upon:

     To approve the amendment and restatement of the Company's Certificate of
Incorporation for the purpose of increasing the number of authorized shares of
common stock, $0.0001 par value, of the Company from 100,000,000 to 500,000,000
shares and increasing the number of authorized shares of preferred stock,
$0.0001 par value, of the Company from 5,000,000 to 25,000,000 shares.

<TABLE>
<S>                      <C>                <C>                    <C>
Common Stock:            FOR: 34,263,562    AGAINST: 10,667,559    ABSTAIN: 222,079
</TABLE>

                                        21
<PAGE>   23

                                    PART II

ITEM 5. MARKET FOR REGISTRANTS'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:

<TABLE>
<CAPTION>
                                                             HIGH       LOW
                                                            -------    ------
<S>                                                         <C>        <C>
Third Quarter 1999........................................  $ 34.92    $25.33
Fourth Quarter 1999.......................................  $183.33    $29.67
First Quarter 2000........................................  $216.58    $83.33
Second Quarter 2000.......................................  $ 89.83    $28.67
Third Quarter 2000........................................  $ 98.13    $50.33
Fourth Quarter 2000.......................................  $ 68.25    $34.38
</TABLE>

     The last reported sale price for our common stock on the Nasdaq Stock
Market's National Market was $12.75 per share on March 27, 2001. As of February
28, 2001, we estimate that there were approximately 990 holders of record of our
common stock. This does not include the number of persons whose stock is 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.

USE OF PROCEEDS

     The proceeds from our initial public offering in September 1999 were
initially invested in short-term investments and have subsequently all been
applied to working capital and general corporate purposes as contemplated in our
prospectus for our initial public offering.

     On January 20, 2000, we completed a public offering of 5,550,000 shares of
common stock. We sold 2,990,796 shares of our common stock and the selling
stockholders sold 2,559,204 shares of our common stock. In addition, on February
15, 2000 the underwriters exercised their option to purchase 627,750 shares, of
which 156,513 were from us and 471,237 were from selling stockholders, to cover
over-allotments of shares. We expect to use the net proceeds from the offering
of $356 million for working capital and general corporate purposes. We may also
use a portion of the net proceeds to acquire complementary products,
technologies or businesses.

                                        22
<PAGE>   24

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
the financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which are included elsewhere in this
report.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                        -----------------------------------------
                                                         1997       1998       1999       2000
                                                        -------   --------   --------   ---------
                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Total revenues......................................  $    --   $  3,377   $ 19,182   $ 127,281
  Cost of revenues....................................       --      1,400      9,349      55,305
  Gross profit........................................       --      1,977      9,833      71,976
  Stock-based compensation............................        1        799      2,929       3,514
  Loss from operations................................   (3,220)   (10,613)   (23,473)   (791,624)
  Net loss............................................   (3,149)   (10,330)   (22,390)   (768,478)
  Basic and diluted net loss per share................  $ (1.93)  $  (3.00)  $  (1.46)  $  (13.71)
  Shares used in computing basic and diluted net loss
     per share........................................    1,631      3,449     15,371      56,038
  Pro forma basic and diluted net loss per share
     (unaudited)......................................            $  (0.71)  $  (0.82)  $  (13.71)
  Shares used in computing pro forma basic and diluted
     net loss per share (unaudited)...................              14,541     27,302      56,038
</TABLE>

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                      ----------------------------------------
                                                      1997     1998       1999         2000
                                                      ----    -------    -------    ----------
                                                                   (IN THOUSANDS)
<S>                                                   <C>     <C>        <C>        <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and short-term
     investments....................................  $369    $13,595    $81,010    $  396,973
  Working capital...................................   131     12,601     78,351       373,452
  Total assets......................................   801     16,364     93,586     2,995,074
  Long-term obligations, net of current portion.....    --        333      7,824           618
  Total stockholders' equity........................   468     13,440     74,642     2,938,191
</TABLE>

     The statement of operations data for the year ended December 31, 1997 is
presented for the period from inception in November 1996 to December 31, 1997.
Operating expenses totaled $12,000 for the period from inception in November
1996 to December 31, 1996.

     See Note 2 of Notes to E.piphany's Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing per
share data.

                                        23
<PAGE>   25

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 discussion contains forward-looking statements that involve
risks and uncertainties. Forward-looking statements include statements regarding
the extent and timing of future revenues and expenses and customer demand,
statements regarding the deployment of our products, and statements regarding
our reliance on third parties. All forward-looking statements included in this
document are based on information available to us as of the date hereof, and we
assume no obligation to update any such forward-looking statement. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including but not limited to, those
discussed in "Risk Factors" in Item 1 above and elsewhere in this Annual Report
on Form 10-K.

OVERVIEW

     We develop, market and sell the E.piphany E.5 System, an integrated suite
of CRM software solutions. These CRM solutions provide capabilities for the
analysis of customer data, the creation of inbound and outbound marketing
campaigns, and the execution of sales and service customer interactions.
Companies can implement the E.piphany E.5 System to gain insight into their
customers' characteristics and preferences, and then take action on that insight
to better and more profitably serve those customers. To gain insight into their
customers, companies use our analytic CRM solutions, which collect customer data
from existing software systems or other E.piphany solutions, as well as third
party data providers. To take action on this insight, companies use our
operational CRM solutions to more efficiently interact with their customers
across a variety of communication and distribution channels.

     We were founded in November 1996. From our founding through the end of
1997, we primarily engaged in research activities, developing products and
building business infrastructure. We began shipping our first software product
and first generated revenues from software license fees, implementation and
consulting fees and maintenance fees in early 1998. Although our revenues
consistently increased from quarter to quarter during 1998, 1999 and 2000, we
incurred significant costs to develop our technology and products, to continue
the recruitment of research and development personnel, to build a direct sales
force and a professional services organization, and to expand our general and
administrative infrastructure. Our total headcount has increased from 279
employees at December 31, 1999 to 979 employees at December 31, 2000.

SECONDARY OFFERING AND ACQUISITIONS

     On January 20, 2000, we completed a public offering of 5,550,000 shares of
common stock. We sold 2,990,796 shares of our common stock and the selling
stockholders sold 2,559,204 shares of our common stock. In addition, on February
15, 2000 the underwriters exercised their option to purchase 627,750 shares, of
which 156,513 were from us and 471,237 were from selling stockholders, to cover
over-allotments of shares. We expect to use the net proceeds from the offering
of $356 million for working capital and general corporate purposes. We may also
use a portion of the net proceeds to acquire complementary products,
technologies or businesses.

     On January 4, 2000, E.piphany acquired RightPoint Software, Inc., a
provider of real time marketing software solutions that enable companies to
optimize and present marketing offers, promotions, and communications while a
customer is interacting with a web site, call center agent or other point of
customer interaction. In connection with this transaction, E.piphany acquired
all of the outstanding shares of capital stock of RightPoint in exchange for
4,614,992 shares of E.piphany's common stock. In addition, options and warrants
of RightPoint were converted into options and warrants to purchase approximately
795,000 shares of E.piphany's common stock. E.piphany accounted for the
acquisition under the purchase method of accounting and the results of
RightPoint's operations subsequent to January 4, 2000 have been included in
E.piphany's operating results for the year ended December 31, 2000. Please see
Note 9 in the Notes to Consolidated Financial Statements for more detailed
information.

                                        24
<PAGE>   26

     On May 1, 2000, E.piphany acquired iLeverage Corporation, a start-up
company that develops marketing solutions for digital marketplaces. In
connection with this transaction, E.piphany acquired all of the outstanding
shares of capital stock of iLeverage in exchange for 177,146 shares of
E.piphany's common stock. In addition, options of iLeverage were converted into
options to purchase approximately 95,231 shares of E.piphany's common stock.
E.piphany accounted for the acquisition under the purchase method of accounting
and the results of iLeverage's operations subsequent to May 1, 2000 have been
included in E.piphany's operating results for the year ended December 31, 2000.
Please see Note 9 in the Notes to Consolidated Financial Statements for more
detailed information.

     On May 31, 2000, E.piphany acquired Octane Software, Inc., a provider of
next-generation multi-channel customer interaction applications and
infrastructure software for sales, service and support. In connection with this
transaction, E.piphany acquired all of the outstanding shares of capital stock
of Octane in exchange for 17,353,426 shares of E.piphany's common stock. In
addition, options and warrants of Octane were converted into options and
warrants to purchase approximately 1,836,839 shares of E.piphany's common stock.
E.piphany accounted for the acquisition under the purchase method of accounting
and the results of Octane's operations subsequent to May 31, 2000 have been
included in E.piphany's operating results for the year ended December 31, 2000.
Please see Note 9 in the Notes to Consolidated Financial Statements for more
detailed information.

     On May 31, 2000, E.piphany acquired eClass Direct, Inc., an application
service provider of permission-based e-mail marketing services. In connection
with this transaction, E.piphany acquired all of the outstanding shares of
capital stock of eClass in exchange for 1,084,031 shares of E.piphany's common
stock. In addition, options of eClass were converted into options to purchase
approximately 69,575 shares of E.piphany's common stock. E.piphany accounted for
the acquisition under the purchase method of accounting and the results of
eClass' operations subsequent to May 31, 2000 have been included in E.piphany's
operating results for the year ended December 31, 2000. Please see Note 9 in the
Notes to Consolidated Financial Statements for more detailed information.

STOCK SPLIT

     On October 17, 2000 the Board of Directors authorized a three-for-two stock
split of the Company's common stock, in the form of a stock dividend, which was
paid on November 13, 2000. The financial information included in this report has
been restated to give effect to the stock split.

SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY

     E.piphany generates revenues principally from licensing its software
products directly to customers and providing related professional services
including implementation, consulting, support and training. Through December 31,
2000, substantially all of E.piphany's revenues have been derived from sales
through E.piphany's direct sales force. E.piphany's license agreements generally
provide that customers pay a software license fee to use one or more software
solutions in perpetuity (a perpetual license) for a specified number of users.
The amount of the license fee varies based on which software solution is
purchased, the number of software solutions purchased and the number of users
licensed. Customers can subsequently pay additional license fees to allow
additional users to use previously purchased software solutions or to purchase
additional software solutions. Each software solution included in the E.piphany
E.5 System contains the same core technology, allowing for easy integration of
additional software solutions as they are purchased from E.piphany. Customers
that purchase software solutions receive the software on compact disc or via
Internet delivery.

     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 which
fulfills their needs. Customers can purchase these services directly from
E.piphany through E.piphany's internal professional services organization on
either a fixed fee or a time and expense basis or they can purchase these
services directly from third party consulting organizations, such as KPMG and
PricewaterhouseCoopers. E.piphany has also historically supplemented the
capacity of its internal professional

                                        25
<PAGE>   27

services organization by subcontracting some of these services to these third
party consulting organizations. E.piphany intends to increasingly encourage
customers to purchase services directly from these consulting organizations.
E.piphany believes that this would increase the number of consultants who can
provide consulting and implementation services related to E.piphany's software
products and that it would increase E.piphany's overall gross margins by
increasing E.piphany's percentage of license revenue, which has substantially
higher gross margins than services revenue, as a percentage of total revenue.
E.piphany also believes that it will encourage these consulting organizations to
generate sales leads within their customer base.

     Fees from licenses are recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or determinable,
collection is probable, and vendor specific objective evidence exists to
allocate the total fee between all delivered and undelivered elements of the
arrangement. If vendor specific objective evidence does not exist to allocate
the total fee to all delivered and undelivered elements of the arrangement,
revenue is deferred until the earlier of a) such evidence does exist for the
undelivered elements, or b) all elements are delivered. Fees from license
agreements which include the right to receive unspecified future products are
recognized over the term of the arrangement or, if not specified, the estimated
economic life of the product.

     When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the above
criteria have been met, (2) payment of the license fees is not dependent upon
the performance of the consulting services, and (3) the services do not include
significant alterations to the features and functionality of the software. To
date, services have been essential to the functionality of the software products
for substantially all license agreements entered into which included
implementation services. For these arrangements and other arrangements which
don't meet the above criteria, both the product license revenues and services
revenues are recognized in accordance with the provisions of Statement of
Position ("SOP") 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." When reliable estimates are available for
the costs and efforts necessary to complete the implementation services, the
Company accounts for the arrangements under the percentage of completion
contract method pursuant to SOP 81-1. When such estimates are not available, the
completed contract method is utilized.

     We provide for sales returns based on historical rates of return which, to
date, have not been material.

     Maintenance agreements generally call for us to provide technical support
and software updates to customers. Revenue on technical support and software
update rights is recognized ratably over the term of the maintenance agreement
and is included in services revenue in the accompanying consolidated statements
of operations.

     We provide consulting, implementation and training services to our
customers. Revenue from such services, when not sold in conjunction with product
licenses, is generally recognized as the services are performed.

COST OF REVENUES AND OPERATING EXPENSES

     Our cost of license revenues primarily consist of license fees due to third
parties for integrated technology. Our cost of services revenues include
salaries and related expenses for our implementation, consulting support and
training organizations, costs of subcontracting to consulting organizations to
provide consulting services to customers and an allocation of facilities,
communications and depreciation expenses. 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 their headcount. These allocated
charges include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment.

     Software development costs incurred prior to the establishment of
technological feasibility are included in research and development costs as
incurred. Since license revenues from our software solutions are not

                                        26
<PAGE>   28

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.

RESULTS OF OPERATIONS

     The following table sets forth statement of operations data for the three
years ended December 31, 2000 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998        1999        2000
                                                            --------    --------    ---------
<S>                                                         <C>         <C>         <C>
Revenues:
  Product license.........................................  $  2,216    $ 10,161    $  73,493
  Services................................................     1,161       9,021       53,788
                                                            --------    --------    ---------
                                                               3,377      19,182      127,281
                                                            --------    --------    ---------
Cost of revenues:
  Product license.........................................         4         158        1,209
  Services................................................     1,396       9,191       54,096
                                                            --------    --------    ---------
                                                               1,400       9,349       55,305
                                                            --------    --------    ---------
     Gross profit.........................................     1,977       9,833       71,976
                                                            --------    --------    ---------
Operating expenses:
  Research and development................................     3,769       7,074       26,792
  Sales and marketing.....................................     6,519      18,727       67,678
  General and administrative..............................     1,503       4,576       21,510
  In-process research and development charge..............        --          --       47,000
  Amortization of goodwill and purchased intangibles......        --          --      697,106
  Stock-based compensation................................       799       2,929        3,514
                                                            --------    --------    ---------
          Total operating expenses........................    12,590      33,306      863,600
                                                            --------    --------    ---------
  Loss from operations....................................   (10,613)    (23,473)    (791,624)
                                                            --------    --------    ---------
Other income (expense):
  Interest income.........................................       333       1,722       23,684
  Interest expense........................................       (48)       (639)        (538)
  Other...................................................        (2)         --           --
                                                            --------    --------    ---------
          Total other income..............................       283       1,083       23,146
                                                            --------    --------    ---------
     Net loss.............................................  $(10,330)   $(22,390)   $(768,478)
                                                            ========    ========    =========
Basic and diluted net loss per share......................  $  (3.00)   $  (1.46)   $  (13.71)
                                                            ========    ========    =========
Shares used in computing basic and diluted net loss per
  share...................................................     3,449      15,371       56,038
                                                            ========    ========    =========
Pro forma basic and diluted net loss per share
  (unaudited).............................................  $  (0.71)   $  (0.82)   $  (13.71)
                                                            ========    ========    =========
Shares used in computing pro forma basic and diluted net
  loss per share (unaudited)..............................    14,541      27,302       56,038
                                                            ========    ========    =========
</TABLE>

YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUES

     Total revenues increased to $127.3 million for the year ended December 31,
2000, from $19.2 million for the year ended December 31, 1999. This rapid growth
in revenues reflected our relatively early stage of development in 1999, and we
do not expect revenues to increase at the same rate in the future.

     Product license revenues increased to $73.5 million, or 58% of total
revenue, for the year ended December 31, 2000 from $10.2 million, or 53% of
total revenue, for the year ended December 31, 1999. The increase in dollar
amount of product license revenues was due to both an increase in the number of
licenses

                                        27
<PAGE>   29

sold and the average size of the licenses, and resulted primarily from the
growth of our direct sales force and the introduction and shipment of new
products.

     Services revenues increased to $53.8 million, or 42% of total revenues, for
the year ended December 31, 2000 from $9.0 million, or 47% of revenues, for the
year ended December 31, 1999. The increase in dollar amount of service revenues
was primarily attributable to increased implementation and consulting services
performed in connection with increased license sales and to maintenance
contracts sold to our new customers.

     The relative amount of services revenues as compared to license revenues
has varied based on the extent to which consulting organizations provide
services directly to customers, the solution which has been licensed, the
complexity of the customers' information technology environment, the resources
directed by customers to their implementation projects and the number of users
licensed. Services revenues have substantially lower margins relative to product
license revenues. This is especially true when we are required to subcontract
with consulting organizations to supplement our internal professional services
organization. It generally costs us more to subcontract with consulting
organizations to provide these services than to provide these services ourself.
To offset the effect that providing services ourself or through subcontractors
has on our gross margins, we intend to further encourage customers to contract
directly with consulting organizations for implementation and consulting
services. Encouraging direct contracts between our customers and consulting
organizations may also increase the overall amount of services available to
customers and generate sales leads. We do not receive any services revenues when
customers contract directly with consulting organizations for implementation and
consulting services. To the extent that services revenues become a greater
percentage of our total revenues and services margins do not increase, our
overall gross margins will decline.

COST OF REVENUES

     Total cost of revenues increased to $55.3 million for the year ended
December 31, 2000 from $9.3 million for the year ended December 31, 1999. Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements and have not been significant to
date. Cost of services revenues consists primarily of the costs of consulting
and customer service and support. Cost of services revenues increased to $54.1
million, or 101% of services revenues, for the year ended December 31, 2000 from
$9.2 million, or 102% of services revenues, for the year ended December 31,
1999. The increase in cost of services revenues in absolute dollars resulted
primarily from the hiring of additional employees and the subcontracting of
consulting services to consulting organizations to support increased customer
demand for consulting services. Cost of services revenues has exceeded services
revenues due to the rapid growth of our services organization and our investment
in experienced management in anticipation of future revenue growth. Cost of
services revenues may continue to exceed services revenues in future periods as
we continue to grow our services capacity, if services revenues decrease in
future periods, or a combination of both circumstances exist.

OPERATING EXPENSES

  Research and Development

     Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses increased to $26.8 million for the year ended December 31,
2000 from $7.1 million for the year ended December 31, 1999. The increase in
absolute dollars was primarily due to an increase in the number of employees
engaged in research and development from our internal growth and acquisitions.
Research and development expenses as a percentage of total revenues decreased
from 37% for the year ended December 31, 1999 to 21% for the year ended December
31, 2000. We believe that investments in product development are essential to
our future success and expect that the absolute dollar amount of research and
development expenses will increase in future periods.

  Sales and Marketing

     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. Sales and

                                        28
<PAGE>   30

marketing expenses increased to $67.7 million for the year ended December 31,
2000 from $18.7 million for the year ended December 31, 1999. Sales and
marketing expenses as a percentage of total revenues decreased from 98% for the
year ended December 31, 1999 to 53% for the year ended December 31, 2000. The
increase in sales and marketing expenses in absolute dollars was primarily
attributable to an increase in the number of sales and marketing employees from
internal growth and acquisitions. We expect that the absolute dollar amount of
sales and marketing expenses will continue to increase due to the planned growth
of our sales force, including the establishment of sales offices in additional
domestic and international locations including Europe and Asia, and due to
expected additional increases in advertising and marketing programs and other
promotional activities.

  General and Administrative

     General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $21.5 million for the year
ended December 31, 2000 from $4.6 million for the year ended December 31, 1999.
The increase in general and administrative expenses in absolute dollars was
primarily attributable to an increase in the number of executive, finance and
administrative employees from our internal growth and acquisitions necessary to
support our expanding operations. General and administrative expenses as a
percentage of total revenues decreased from 24% for the year ended December 31,
1999 to 17% for the year ended December 31, 2000. We expect general and
administrative expenses to increase in absolute dollars in future periods.

  In-Process Research and Development Charge

     In connection with the Octane acquisition, we recorded a charge of $25.0
million in the quarter ended June 30, 2000. In connection with the RightPoint
acquisition, we recorded a charge of $22.0 million in the quarter ended March
31, 2000. Please see Note 9 in the Notes to Consolidated Financial Statements
for more detailed information.

  The RightPoint Acquisition

     In connection with the RightPoint acquisition, E.piphany expensed $22.0
million of acquired in-process research and development which, in the opinion of
management, had not reached technological feasibility and had no alternative
future use.

     E.piphany allocated values to in-process research and development based on
an assessment of the research and development projects. The value assigned to
these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of
RightPoint's next-generation technologies.

     The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
RightPoint and its competitors.

     The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental RightPoint
technologies met their design specifications including functional, technical,
and economic performance requirements.

     RightPoint's primary in-process R&D projects involved the development of
additional features and functionality to make the RealTime product suite a
complete e-marketing solution rather than a component technology. The estimated
revenues for the in-process projects were expected to peak within four years of
introduction and then decline as other new products and technologies are
expected to enter the market.

                                        29
<PAGE>   31

     Operating expenses were estimated based on historical results and
management's estimates regarding anticipated profit margin improvements. Due to
purchasing power increases and general economics of scale, estimated operating
expenses as a percentage of revenues were expected to decrease after the
acquisition.

     The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, a discount rate of 25 percent was appropriate for the
in-process R&D, and a discount rate of 20 percent was appropriate for the
existing products and technology. These discount rates were commensurate with
RightPoint's stage of development and the uncertainties in the economic
estimates described above.

     The estimates used by E.piphany in valuing in-process research and
development were based upon assumptions E.piphany believes to be reasonable but
which are inherently uncertain and unpredictable. E.piphany's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the projected results. Any such variance may result in a material adverse
effect on the financial condition and results of operations of E.piphany.

  The Octane Acquisition

     In connection with the acquisition of the Octane Software, Inc., the
Company allocated $25.0 million of the purchase price to in-process research and
development projects. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to the incomplete research and development
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.

     At the acquisition date, Octane was conducting design, development,
engineering and testing activities associated with the completion of subsequent
releases of the Octane 2000 application solution. The projects under development
at the valuation date represent next-generation technologies that are expected
to address emerging market demands for a new mix of complex e-business
objectives. The technologies under development were approximately 50 percent
complete based on engineering man-month data and technological progress.

     In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. The resulting net cash flows from such projects
are based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.

     Aggregate revenues for the developmental Octane products were estimated to
grow based on forecast sales for the five years following introduction, assuming
the successful completion and market acceptance of the major R&D programs. The
estimated revenues for the in-process projects were expected to peak within five
years of acquisition and then decline sharply as other new products and
technologies are expected to enter the market.

     The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 25 percent was considered
appropriate for the in-process R&D. These discount rates were commensurate with
the Octane's stage of development and the uncertainties in the economic
estimates described above.

                                        30
<PAGE>   32

     If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.

  Amortization of Goodwill and Other Intangible Assets

     Our acquisitions of Octane, eClass, iLeverage, and RightPoint were
accounted for under the purchase method of accounting. Accordingly, we recorded
goodwill and other intangible assets representing the excess of the purchase
price paid over the fair value of net assets acquired. The aggregate
amortization of goodwill and these other intangible assets was $697 million in
fiscal 2000. There were no acquisitions in fiscal 1999 or 1998.

     We anticipate that future amortization of goodwill and other intangibles
associated with fiscal 2000 acquisitions will continue to be amortized on a
straight-line basis over their expected useful lives of three years, and will
amount to approximately $1.1 billion in 2001, $1.1 billion in 2002, and $382.0
million in 2003. It is likely we may continue to expand our business through
acquisitions and internal development. Any additional acquisitions or impairment
of goodwill and other purchased intangibles could result in additional merger
and acquisition related costs. From time to time we reevaluate the cost of our
goodwill and other intangible assets. If we determine that the cost, net of
accumulated amortization, exceeds the net realizable value of the assets, an
acceleration of the amortization of these assets may be necessary.

  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. We have recorded aggregate deferred compensation of $5.8
million related to stock-based compensation to employees. 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.
28. Total stock-based compensation was $3.5 million for the year ended December
31, 2000. We expect amortization of approximately $680,000, $304,000, and
$25,000 in the years ended December 31, 2001, 2002, and the first half of 2003,
respectively. See Note 6 to E.piphany's Notes to Consolidated Financial
Statements for further discussion regarding the accounting treatment for
stock-based compensation.

INTEREST INCOME, NET

     Interest income, net of interest expense increased to $23.1 million for the
year ended December 31, 2000 from $1.1 million for the year ended December 31,
1999. The increase in interest income, net of interest expense was due to
increased cash balances as a result of the completion of our follow-on public
offering in January 2000.

PROVISION FOR INCOME TAXES

     From inception through December 31, 2000, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of December 31, 2000, we had $151.2 million of federal and state net
operating loss carryforwards to offset future taxable income. The federal net
operating loss carryforwards begin to expire on varying dates beginning in 2012
through 2020 and the state operating loss carryforwards begin to expire in 2004.
Certain future changes in the share ownership of E.piphany, as defined in the
Tax Reform Act of 1986 and similar state provisions, may restrict the
utilization of carryforwards. Given our limited operating history, our losses
incurred to date and the difficulty in accurately forecasting our future
results, management does not believe that the realization of the related
deferred income tax asset meets the criteria required by generally accepted
accounting principles. Therefore, we have recorded a 100% valuation allowance
against the deferred income tax asset. See Note 7 of Notes to E.piphany's
Consolidated Financial Statements for the components of the deferred income tax
asset.

                                        31
<PAGE>   33

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES

     Total revenues increased to $19.2 million for the year ended December 31,
1999, from $3.4 million for the year ended December 31, 1998. This rapid growth
in revenues reflected our relatively early stage of development, and we do not
expect revenues to increase at the same rate in the future. For the year ended
December 31, 1999, Sallie Mae accounted for 11% of E.piphany's total revenues,
and for the year ended December 31, 1998, Autodesk, Charles Schwab,
Hewlett-Packard, KPMG, and Macromedia accounted for 30%, 17%, 16%, 11%, and 11%
of total revenues, respectively.

     Product license revenues increased to $10.2 million, or 53% of total
revenue, for the year ended December 31, 1999 from $2.2 million, or 66% of total
revenue, for the year ended December 31, 1998. The increase in dollar amount of
product license revenues was due to both an increase in the number of licenses
sold and the average size of the licenses, and resulted primarily from the
growth of our direct sales force and the introduction and shipment of new
products.

     Services revenues increased to $9.0 million, or 47% of total revenues, for
the year ended December 31, 1999 from $1.2 million, or 34% of revenues, for the
year ended December 31, 1998. The increase in dollar amount of service revenues
was primarily attributable to increased implementation and consulting services
performed in connection with increased license sales and to maintenance
contracts sold to our new customers.

COST OF REVENUES

     Total cost of revenues increased to $9.3 million for the year ended
December 31, 1999 from $1.4 million for the year ended December 31, 1998. Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements and have not been significant to
date. Cost of services revenues consists primarily of the costs of consulting
and customer service and support. Cost of services revenues increased to $9.2
million, or 102% of services revenues, for the year ended December 31, 1999 from
$1.4 million, or 120% of services revenues, for the year ended December 31,
1998. The increase in cost of services revenues in absolute dollars resulted
primarily from the hiring of additional employees and the subcontracting of
consulting services to consulting organizations to support increased customer
demand for consulting services. Cost of services revenues has exceeded services
revenues due to the rapid growth of our services organization from 11 employees
at December 31, 1998 to 72 employees at December 31, 1999 and our investment in
experienced management in anticipation of future revenue growth.

OPERATING EXPENSES

  Research and Development

     Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses increased to $7.1 million for the year ended December 31,
1999 from $3.8 million for the year ended December 31, 1998. The increase in
absolute dollars was primarily due to an increase in the number of employees
engaged in research and development from 23 employees as of December 31, 1998 to
76 employees as of December 31, 1999. Research and development expenses as a
percentage of total revenues decreased from 112% for the year ended December 31,
1998 to 37% for the year ended December 31, 1999. Research and development
expenses as a percentage of total revenues decreased primarily due to growth in
our revenues.

  Sales and Marketing

     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. Sales and marketing expenses
increased to $18.7 million for the year ended December 31, 1999 from $6.5
million for the year ended December 31, 1998. Sales and marketing expenses as a
percentage of total revenues decreased from 193% for the year ended December 31,
1998 to 98% for the year ended December 31, 1999. The increase in sales and
marketing expenses in absolute dollars was primarily attributable to an increase
in the number of

                                        32
<PAGE>   34

direct sales, pre-sales support and marketing employees from 30 as of December
31, 1998 to 99 as of December 31, 1999.

  General and Administrative

     General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $4.6 million for the year ended
December 31, 1999 from $1.5 million for the year ended December 31, 1998. The
increase in general and administrative expenses in absolute dollars was
primarily attributable to an increase in the number of executive, finance and
administrative employees from 5 as of December 31, 1998 to 32 as of December 31,
1999.

  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. We have recorded aggregate deferred compensation of $5.8
million related to stock-based compensation to employees. 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.
28. Total stock-based compensation was $0.8 million and $2.9 million for the
years ended December 31, 1998 and 1999, respectively. See Note 6 to E.piphany's
Notes to Consolidated Financial Statements for further discussion regarding the
accounting treatment for stock-based compensation.

INTEREST INCOME, NET

     Interest income, net of interest expense, for the year ended December 31,
1999 increased by $0.8 million compared to the same period in the prior year.
The increase was primarily attributable to interest income resulting from higher
average cash balances during the more recent period.

PROVISION FOR INCOME TAXES

     From inception through December 31, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of December 31, 1999, we had $47.2 million of federal and state net
operating loss carryforwards to offset future taxable income. The federal net
operating loss carryforwards begin to expire on varying dates beginning in 2012
through 2019 and the state operating loss carryforwards begin to expire in 2004.
Given our limited operating history, our losses incurred to date and the
difficulty in accurately forecasting our future results, management does not
believe that the realization of the related deferred income tax asset meets the
criteria required by generally accepted accounting principles. Therefore, we
have recorded a 100% valuation allowance against the deferred income tax asset.
See Note 7 of Notes to E.piphany's Consolidated Financial Statements for the
components of the deferred income tax asset.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operating activities totaled $17.8 million and $19.0
million for the years ended December 31, 1999 and 2000, respectively. Cash used
in operating activities for each period resulted primarily from net losses in
those periods, and to a lesser extent, increases in accounts receivable. These
uses of cash were partially offset by increases in deferred revenue and accrued
liabilities.

     Net cash used in investing activities totaled $25.9 million and $74.2
million for the years ended December 31, 1999 and 2000, respectively. The
increase resulted from the purchase of investments during 2000, the direct costs
of our acquisitions and the purchase of property and equipment, partially offset
by cash acquired in acquisitions.

                                        33
<PAGE>   35

     Net cash provided by financing activities totaled $88.2 million and $355.1
million for the years ended December 31, 1999 and 2000, respectively. The
increase was due to the receipt of proceeds from our secondary offering
completed during the first quarter of 2000.

     We had a $3.0 million term loan under a senior credit facility that was
repayable ratably over a 36 month period beginning March 1, 2000. The term loan
had a variable interest at the bank's prime rate plus 0.5%, currently 9.0%. This
loan was paid in full during January 2000.

     In addition, we had a subordinated debt facility with Comdisco, Inc. under
which we were entitled to borrow up to $10.0 million, of which $5.0 million was
outstanding as of December 31, 1999. This loan was paid in full during January
2000 and expired in February 2000. As of December 31, 2000 there is nothing
outstanding under the debt facility. We also had a $2.0 million equipment lease
line with Comdisco. Under the equipment lease line, we were entitled to lease
equipment with payment terms extending over 42 months. The ability to lease new
equipment expired on May 31, 2000. The remaining balance on the lease was
$436,000 as of December 31, 2000 and bears interest at 8.0%.

     As of December 31, 2000, our principal sources of liquidity included $319.6
million of cash and cash equivalents and $77.3 million in short-term
investments. We anticipate a substantial increase in our capital expenditures
consistent with anticipated growth in operations, infrastructure and personnel,
including the acquisitions and the addition of employees as a result of the
acquisitions completed during 2000. We believe that our current cash and cash
equivalents and short-term investments 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 sell additional equity or debt securities or
secure an additional 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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As amended, this statement is
effective for fiscal years beginning after June 15, 2000. E.piphany will apply
the new rules prospectively to transactions beginning in the first quarter of
2001. Based on certain circumstances, E.piphany believes the application of the
new rules will not have a material impact on its financial position or results
of operations.

     In March 2000, the FASB issued Financial Standards Board Interpretation
("FIN") No. 44, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25." FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues (a) the definition of
"employee" for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occurred after either December
15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying the interpretation have been recognized on a prospective
basis from July 1, 2000. E.piphany adopted FIN No. 44 in July 2000. The adoption
did not have a material effect on its financial position or results of
operations.

                                        34
<PAGE>   36

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange 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.
However, we do have foreign-based operations where transactions are denominated
in foreign currencies and are subject to market risk with respect to
fluctuations in the relative value of currencies. Currently, we have operations
throughout Asia, Asia Pacific, Canada, Europe, Middle East and Latin America and
conduct transactions in the local currency of each location. To date, the impact
of fluctuations in the relative value of other currencies has not been material.

  Interest Rate Risk

     As of December 31, 2000, we had cash and cash equivalents of $319.6 million
which consist of cash and highly liquid short-term investments. Declines of
interest rates over time will 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 0.5% would cause a corresponding decrease in our
annual interest income by approximately $1.6 million. As of December 31, 2000,
we did not have any short-term or long-term debt outstanding.

     From time to time we reevaluate our accounting for all of our investments
and we may recognize a loss in our income statement if we determine that the
investment is permanently impaired. We held $7.5 million in commercial paper in
a California public utility as of December 31, 2000. The investment had a
maturity date of February 15, 2001 and was not paid by the public utility. We
believe that the investment is not permanently impaired based on our evaluation
and therefore have not recognized a loss.

                                        35
<PAGE>   37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                E.PIPHANY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Report of Independent Public Accountants....................   37
Consolidated Balance Sheets.................................   38
Consolidated Statements of Operations.......................   39
Consolidated Statements of Stockholders' Equity and
  Comprehensive Loss........................................   40
Consolidated Statements of Cash Flows.......................   42
Notes to Consolidated Financial Statements..................   43
</TABLE>

                                        36
<PAGE>   38

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To E.piphany, Inc.:

     We have audited the accompanying consolidated balance sheets of E.piphany,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 2000,
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, 2000. 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, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                          ARTHUR ANDERSEN LLP

San Jose, California
January 22, 2001

                                        37
<PAGE>   39

                                E.PIPHANY, INC.

                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1999         2000
                                                              --------    ----------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $ 58,084    $  319,634
  Short-term investments....................................    22,926        77,339
  Accounts receivable, net of allowance for doubtful
     accounts of $300 and $4,750, respectively..............     5,502        27,592
  Prepaid expenses and other current assets.................     2,959         5,152
                                                              --------    ----------
          Total current assets..............................    89,471       429,717
Property and equipment, net.................................     3,932        21,789
Goodwill and purchased intangibles, net.....................        --     2,541,245
Other assets................................................       183         2,323
                                                              --------    ----------
                                                              $ 93,586    $2,995,074
                                                              ========    ==========
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capital lease obligations..............  $    237    $      658
  Current portion of notes payable..........................       894            --
  Accounts payable..........................................       650         2,191
  Accrued merger costs......................................        --           528
  Accrued compensation......................................     3,525        12,715
  Accrued other.............................................     2,171        16,761
  Deferred revenue..........................................     3,643        23,412
                                                              --------    ----------
          Total current liabilities.........................    11,120        56,265
  Capital lease obligations, net of current portion.........       399           618
  Notes payable, net of current portion.....................     7,425            --
                                                              --------    ----------
          Total liabilities.................................    18,944        56,883
                                                              --------    ----------
Commitments (Note 4)
Stockholders' equity:
  Convertible preferred stock, $0.0001 par value;
     Authorized -- 25,000 shares as of December 31, 2000
     Outstanding -- no shares as of December 31, 1999 and
     2000, respectively.....................................        --            --
  Common stock, $0.0001 par value;
     Authorized -- 500,000 shares as of December 31, 2000
     Outstanding -- 40,575 and 68,444 shares as of December
     31, 1999 and 2000, respectively........................         5             6
  Additional paid-in capital................................   113,636     3,746,759
  Warrants..................................................       143            --
  Note receivable...........................................      (640)       (2,668)
  Accumulated other comprehensive loss......................       (31)         (550)
  Deferred compensation.....................................    (2,602)       (1,009)
  Accumulated deficit.......................................   (35,869)     (804,347)
                                                              --------    ----------
          Total stockholders' equity........................    74,642     2,938,191
                                                              --------    ----------
                                                              $ 93,586    $2,995,074
                                                              ========    ==========
</TABLE>

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

                                        38
<PAGE>   40

                                E.PIPHANY, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998        1999        2000
                                                            --------    --------    ---------
<S>                                                         <C>         <C>         <C>
Revenues:
  Product license.........................................  $  2,216    $ 10,161    $  73,493
  Services................................................     1,161       9,021       53,788
                                                            --------    --------    ---------
                                                               3,377      19,182      127,281
                                                            --------    --------    ---------
Cost of revenues:
  Product license.........................................         4         158        1,209
  Services................................................     1,396       9,191       54,096
                                                            --------    --------    ---------
                                                               1,400       9,349       55,305
                                                            --------    --------    ---------
     Gross profit.........................................     1,977       9,833       71,976
                                                            --------    --------    ---------
Operating expenses:
  Research and development................................     3,769       7,074       26,792
  Sales and marketing.....................................     6,519      18,727       67,678
  General and administrative..............................     1,503       4,576       21,510
  In-process research and development charge..............        --          --       47,000
  Amortization of goodwill and purchased intangibles......        --          --      697,106
  Stock-based compensation................................       799       2,929        3,514
                                                            --------    --------    ---------
          Total operating expenses........................    12,590      33,306      863,600
                                                            --------    --------    ---------
     Loss from operations.................................   (10,613)    (23,473)    (791,624)
                                                            --------    --------    ---------
Other income (expense):
  Interest income.........................................       333       1,722       23,684
  Interest expense........................................       (48)       (639)        (538)
  Other...................................................        (2)         --           --
                                                            --------    --------    ---------
          Total other income..............................       283       1,083       23,146
                                                            --------    --------    ---------
     Net loss.............................................  $(10,330)   $(22,390)   $(768,478)
                                                            ========    ========    =========
Basic and diluted net loss per share......................  $  (3.00)   $  (1.46)   $  (13.71)
                                                            ========    ========    =========
Shares used in computing basic and diluted net loss per
  share...................................................     3,449      15,371       56,038
                                                            ========    ========    =========
Pro forma basic and diluted net loss per share
  (unaudited).............................................  $  (0.71)   $  (0.82)   $  (13.71)
                                                            ========    ========    =========
Shares used in computing pro forma basic and diluted net
  loss per share (unaudited)..............................    14,541      27,302       56,038
                                                            ========    ========    =========
</TABLE>

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

                                        39
<PAGE>   41

                                E.PIPHANY, INC.

     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                       CONVERTIBLE          COMMON                                              ACCUMULATED
                                     PREFERRED STOCK         STOCK        ADDITIONAL                               OTHER
                                     ----------------   ---------------    PAID-IN                   NOTE      COMPREHENSIVE
                                     SHARES    AMOUNT   SHARES   AMOUNT    CAPITAL     WARRANTS   RECEIVABLE       LOSS
                                     -------   ------   ------   ------   ----------   --------   ----------   -------------
<S>                                  <C>       <C>      <C>      <C>      <C>          <C>        <C>          <C>
Balance, December 31, 1997.........    4,842    $  1     8,429    $  1    $    3,615    $  --      $    --         $  --
  Issuance of Series B preferred
    stock, net.....................    4,844       1        --      --         8,019       --           --            --
  Sale of common stock to Series B
    investors......................       --      --       375      --            62       --           --            --
  Issuance of common stock to
    officer........................       --      --     2,400      --           640       --         (640)           --
  Issuance of common stock in
    exchange for services..........       --      --        90      --            36       --           --            --
  Issuance of Series C preferred
    stock, net.....................    6,240       1        --      --        13,992       --           --            --
  Exercise of common stock
    options........................       --      --     2,310       1           488       --           --            --
  Repurchase of stock..............       --      --      (234)     --           (70)      --           --            --
  Issuance of Series C preferred
    stock in exchange for
    services.......................        9      --        --      --            20       --           --            --
  Stock-based compensation.........       --      --        --      --            11       --           --            --
  Deferred stock compensation......       --      --        --      --         3,217       --           --            --
  Amortization of deferred stock
    compensation...................       --      --        --      --            --       --           --            --
  Comprehensive loss:
    Net loss.......................       --      --        --      --            --       --           --            --
                                     -------    ----    ------    ----    ----------    -----      -------         -----
        Total comprehensive loss...
Balance, December 31, 1998.........   15,935       3    13,370       2        30,030       --         (640)           --
  Exercise of common stock
    options........................       --      --     2,283      --         2,579       --           --            --
  Issuance of stock options in
    exchange for services..........       --      --        --      --           388       --           --            --
  Issuance of Series D preferred
    stock, net.....................    1,405      --        --      --         5,970       --           --            --
  Issuance of warrants.............       --      --        --      --            --      532           --            --
  Repurchase of stock..............       --      --      (258)     --           (10)      --           --            --
  Issuance of stock related to
    leases and debt financing......       --      --         9      --           100       --           --            --
  Issuance of common stock in
    initial public offering, net...       --      --     7,159      --        69,598       --           --            --
  Conversion of preferred stock....  (17,340)     (3)   17,340       3            --       --           --            --
  Exercise of warrants.............       --      --       672      --         2,315     (389)          --            --

<CAPTION>

                                                                      TOTAL
                                       DEFERRED     ACCUMULATED   STOCKHOLDERS'   COMPREHENSIVE
                                     COMPENSATION     DEFICIT        EQUITY           LOSS
                                     ------------   -----------   -------------   -------------
<S>                                  <C>            <C>           <C>             <C>
Balance, December 31, 1997.........    $    --       $  (3,149)    $      468
  Issuance of Series B preferred
    stock, net.....................         --              --          8,020
  Sale of common stock to Series B
    investors......................         --              --             62
  Issuance of common stock to
    officer........................         --              --             --
  Issuance of common stock in
    exchange for services..........         --              --             36
  Issuance of Series C preferred
    stock, net.....................         --              --         13,993
  Exercise of common stock
    options........................         --              --            489
  Repurchase of stock..............         --              --            (70)
  Issuance of Series C preferred
    stock in exchange for
    services.......................         --              --             20
  Stock-based compensation.........         --              --             11
  Deferred stock compensation......     (3,217)             --             --
  Amortization of deferred stock
    compensation...................        741              --            741
  Comprehensive loss:
    Net loss.......................         --         (10,330)       (10,330)      $ (10,330)
                                       -------       ---------     ----------       ---------
        Total comprehensive loss...                                                 $ (10,330)
                                                                                    =========
Balance, December 31, 1998.........     (2,476)        (13,479)        13,440
  Exercise of common stock
    options........................         --              --          2,579
  Issuance of stock options in
    exchange for services..........         --              --            388
  Issuance of Series D preferred
    stock, net.....................         --              --          5,970
  Issuance of warrants.............         --              --            532
  Repurchase of stock..............         --              --            (10)
  Issuance of stock related to
    leases and debt financing......         --              --            100
  Issuance of common stock in
    initial public offering, net...         --              --         69,598
  Conversion of preferred stock....         --              --             --
  Exercise of warrants.............         --              --          1,926
</TABLE>

                                        40
<PAGE>   42

                                E.PIPHANY, INC.

     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                                  (CONTINUED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                       CONVERTIBLE          COMMON                                              ACCUMULATED
                                     PREFERRED STOCK         STOCK        ADDITIONAL                               OTHER
                                     ----------------   ---------------    PAID-IN                   NOTE      COMPREHENSIVE
                                     SHARES    AMOUNT   SHARES   AMOUNT    CAPITAL     WARRANTS   RECEIVABLE       LOSS
                                     -------   ------   ------   ------   ----------   --------   ----------   -------------
<S>                                  <C>       <C>      <C>      <C>      <C>          <C>        <C>          <C>
  Acceleration of common stock
    option vesting.................       --      --        --      --            47       --           --            --
  Deferred stock compensation......       --      --        --      --         2,619       --           --            --
  Amortization of deferred stock
    compensation...................       --      --        --      --            --       --           --            --
  Comprehensive loss:
    Unrealized loss on
      investments..................       --      --        --      --            --       --           --           (31)
    Net loss.......................       --      --        --      --            --       --           --            --
                                     -------    ----    ------    ----    ----------    -----      -------         -----
        Total comprehensive loss...
Balance, December 31, 1999.........       --      --    40,575       5       113,636      143         (640)          (31)
  Exercise of common stock
    options........................       --      --     1,174      --         3,415       --       (2,364)           --
  Issuance of common stock under
    employee stock purchase plan...       --      --       433      --         4,711       --           --            --
  Issuance of stock in connection
    with acquisitions..............       --      --    23,230       1     3,267,498       --           --            --
  Repurchase of stock..............       --      --      (258)     --          (279)      --           --            --
  Issuance of common stock in
    public offering, net...........       --      --     3,147      --       356,109       --           --            --
  Payments received on notes
    receivable.....................       --      --        --      --            --       --          336            --
  Exercise of warrants.............       --      --       143      --           184     (143)          --            --
  Short swing profits remitted by
    insider........................       --      --        --      --           193       --           --            --
  Acceleration of common stock
    option vesting.................       --      --        --      --           776       --           --            --
  Deferred stock compensation......       --      --        --      --           516       --           --            --
  Amortization of deferred stock
    compensation...................       --      --        --      --            --       --           --            --
  Comprehensive loss:
    Foreign currency translation
      adjustment...................       --      --        --      --            --       --           --          (449)
    Unrealized loss on
      investments..................       --      --        --      --            --       --           --           (70)
    Net loss.......................       --      --        --      --            --       --           --            --
                                     -------    ----    ------    ----    ----------    -----      -------         -----
        Total comprehensive loss...
Balance, December 31, 2000.........       --    $ --    68,444    $  6    $3,746,759    $  --      $(2,668)        $(550)
                                     =======    ====    ======    ====    ==========    =====      =======         =====

<CAPTION>

                                                                      TOTAL
                                       DEFERRED     ACCUMULATED   STOCKHOLDERS'   COMPREHENSIVE
                                     COMPENSATION     DEFICIT        EQUITY           LOSS
                                     ------------   -----------   -------------   -------------
<S>                                  <C>            <C>           <C>             <C>
  Acceleration of common stock
    option vesting.................         --              --             47
  Deferred stock compensation......     (2,619)             --             --
  Amortization of deferred stock
    compensation...................      2,493              --          2,493
  Comprehensive loss:
    Unrealized loss on
      investments..................         --              --            (31)      $     (31)
    Net loss.......................         --         (22,390)       (22,390)        (22,390)
                                       -------       ---------     ----------       ---------
        Total comprehensive loss...                                                 $ (22,421)
                                                                                    =========
Balance, December 31, 1999.........     (2,602)        (35,869)        74,642
  Exercise of common stock
    options........................         --              --          1,051
  Issuance of common stock under
    employee stock purchase plan...         --              --          4,711
  Issuance of stock in connection
    with acquisitions..............         --              --      3,267,499
  Repurchase of stock..............         --              --           (279)
  Issuance of common stock in
    public offering, net...........         --              --        356,109
  Payments received on notes
    receivable.....................         --              --            336
  Exercise of warrants.............         --              --             41
  Short swing profits remitted by
    insider........................         --              --            193
  Acceleration of common stock
    option vesting.................         --              --            776
  Deferred stock compensation......        105              --            621
  Amortization of deferred stock
    compensation...................      1,488              --          1,488
  Comprehensive loss:
    Foreign currency translation
      adjustment...................         --              --           (449)      $    (449)
    Unrealized loss on
      investments..................         --              --            (70)            (70)
    Net loss.......................         --        (768,478)      (768,478)       (768,478)
                                       -------       ---------     ----------       ---------
        Total comprehensive loss...                                                 $(768,997)
                                                                                    =========
Balance, December 31, 2000.........    $(1,009)      $(804,347)    $2,938,191
                                       =======       =========     ==========
</TABLE>

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

                                        41
<PAGE>   43

                                E.PIPHANY, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998        1999        2000
                                                            --------    --------    ---------
<S>                                                         <C>         <C>         <C>
Cash flows from operating activities:
Net loss..................................................  $(10,330)   $(22,390)   $(768,478)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation.........................................       269         908        2,894
     Allowance for doubtful accounts......................        30         270        4,450
     Amortization of goodwill and purchased intangibles...        --          --      697,106
     In-process research and development charge...........        --          --       47,000
     Noncash compensation expense.........................       799       2,929        3,514
     Noncash interest expense.............................        --          86           --
     Changes in operating assets and liabilities, net of
       effect of acquisitions:
       Accounts receivable................................    (1,257)     (4,529)     (22,575)
       Prepaid expenses and other assets..................      (275)     (2,628)      (2,733)
       Accounts payable...................................       898        (365)         674
       Accrued liabilities................................       888       4,668        1,572
       Deferred revenue...................................       305       3,262       17,611
                                                            --------    --------    ---------
          Net cash used in operating activities...........    (8,673)    (17,789)     (18,965)
                                                            --------    --------    ---------
Cash flows from investing activities:
  Purchases of property and equipment.....................    (1,104)     (2,952)     (15,503)
  Cash acquired in acquisitions...........................        --          --       24,282
  Direct costs of purchase transactions...................        --          --      (28,471)
  Proceeds from the sales of investments..................        --          --       42,509
  Purchases of investments................................        --     (22,957)     (96,992)
                                                            --------    --------    ---------
          Net cash used in investing activities...........    (1,104)    (25,909)     (74,175)
                                                            --------    --------    ---------
Cash flows from financing activities:
  Borrowings on line of credit............................       500       8,000           --
  Repayments on line of credit............................        --        (181)      (8,319)
  Principal payments on capital lease obligations.........        --         (81)        (587)
  Proceeds from public offerings of common stock, net.....        --      69,598      356,109
  Repayments on notes receivable..........................        --          --          336
  Proceeds from exercise of warrant.......................        --       2,250           41
  Net proceeds from issuance of convertible preferred
     stock................................................    22,033       5,970           --
  Issuance of common stock................................       470       2,631        7,559
                                                            --------    --------    ---------
          Net cash provided by financing activities.......    23,003      88,187      355,139
                                                            --------    --------    ---------
Effect of foreign exchange rates on cash and cash
  equivalents.............................................        --          --         (449)
                                                            --------    --------    ---------
Net increase in cash and cash equivalents.................    13,226      44,489      261,550
Cash and cash equivalents at beginning of year............       369      13,595       58,084
                                                            --------    --------    ---------
Cash and cash equivalents at end of year..................  $ 13,595    $ 58,084    $ 319,634
                                                            ========    ========    =========
Supplemental cash flow information:
  Cash paid for interest..................................  $     48    $    487    $     478
                                                            ========    ========    =========
Non-cash transactions:
  Loan to officer to purchase stock.......................  $    640    $     --    $      --
                                                            ========    ========    =========
  Equipment acquired under capital lease..................  $     --    $    716    $      --
                                                            ========    ========    =========
</TABLE>

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

                                        42
<PAGE>   44

                                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. E.piphany provides web-based analytic and operational
CRM products to unify inbound and outbound marketing, sales and service customer
interactions. E.piphany enables a single, enterprise-wide view of each customer
to help global businesses better understand and proactively serve customers in
real time. Although E.piphany began actively selling its products in 1998 and no
longer considers itself to be in the development stage, it has not operated
profitably to date and there are no assurances that it will operate profitably
in the future. E.piphany's worldwide headquarters is in San Mateo, California
and E.piphany has regional operations and offices throughout the U.S., Europe
and Asia Pacific.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation

     During the year ended December 31, 2000, E.piphany established subsidiaries
primarily to extend its direct sales force into international locations. The
consolidated financial statements included the accounts of E.piphany, Inc. and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

  Foreign Currency Translation

     The functional currency of our foreign subsidiaries is the local currency.
The Company translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the current rates of exchange
in effect during each period. Revenues and expenses are translated using rates
that approximate those in effect during the period. Gains and losses from
translation adjustments are included in stockholders' equity in the consolidated
balance sheet caption "Accumulated other comprehensive 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.

  Use of Estimates in Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.

  Impairment of Long-Lived Assets and Identifiable Intangible Assets

     The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. 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.

  Statements of Cash Flows

     For purposes of the statements of cash flows, E.piphany considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of amounts on deposit at a
commercial bank and investments in commercial paper and other securities.

                                        43
<PAGE>   45
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Short-term Investments

     The Company classifies all of its short-term investments as
available-for-sale securities. Such short-term investments consist primarily of
United States government and federal agency securities, corporate commercial
paper and corporate bonds which are stated at market value, with unrealized
gains and losses on such securities reflected, net of tax, as other
comprehensive income in stockholders' equity. Realized gains and losses on
short-term investments are included in earning and are derived using the
specific identification method for determining the cost of securities. It is the
Company's intent to maintain a liquid portfolio to take advantage of investment
opportunities; therefore, all securities are considered to be available-for-sale
and are classified as current assets.

  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 cash and cash equivalents, investments and
trade accounts receivable. Management believes the financial risks associated
with these financial instruments are minimal. The Company maintains its cash and
cash equivalents and investments with high quality financial institutions. The
Company's customer base consists of businesses in the United States, Australia,
Canada, France, Germany, Japan and the United Kingdom. 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 losses have been within management's
expectations.

     Sales to significant customers as a percentage of total revenues were as
follows:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                              1998    1999    2000
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Customer A..................................................  30%      --     --
Customer B..................................................  17%      --     --
Customer C..................................................  16%      --     --
Customer D..................................................  11%      --     --
Customer E..................................................  11%      --     --
Customer F..................................................   --      11%    --
</TABLE>

     In September 1998, the President and Chief Executive Officer of E.piphany
was elected to the board of directors of Customer D. E.piphany recognized
$357,000, $273,000 and $45,000 in revenue from this customer in 1998, 1999 and
2000, respectively, and had $146,000, $118,000 and $0 in accounts receivable due
from Customer D at December 31, 1998, 1999 and 2000, respectively. The majority
of the agreements relating to this revenue were entered into before the chief
executive officer was employed by E.piphany or elected to Customer D's board of
directors.

     The President and Chief Executive Officer of E.piphany is currently or has
been a member of the board of directors of five additional customers. E.piphany
recognized a total of $296,000 and $1,349,000 in revenue from these customers in
1999 and 2000, respectively, and had a total of $280,000 and $0 in accounts
receivable at December 31, 1999 and 2000, respectively from these customers. An
outside director of E.piphany is also a member of the board of directors of
three of these customers.

     An outside director of E.piphany is currently or has been a member of the
board of directors of two additional customers. E.piphany recognized $233,000,
$704,000 and $93,000 in revenue from these customers

                                        44
<PAGE>   46
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

in 1998, 1999 and 2000, and had a total of $57,000, $112,000 and $6,000 in
accounts receivable as of December 31, 1998, 1999 and 2000, respectively. The
first agreement with one of these customers was entered into before the outside
director was elected to E.piphany's board of directors.

  Investments

     Cash equivalents consist of securities with remaining maturities of 90 days
or less at the date of purchase. Cash, cash equivalents and short-term
investments consisted of the following as of December 31, 1999 and 2000 (in
thousands):

<TABLE>
<CAPTION>
                                                                       UNREALIZED
                                                                      ------------
                                                            COST      LOSS    GAIN    MARKET
                                                           -------    ----    ----    -------
<S>                                                        <C>        <C>     <C>     <C>
DECEMBER 31, 1999:
Cash and cash equivalents:
  Cash...................................................  $   110    $ --    $ --    $   110
  Certificates of deposit................................       --      --      --         --
  Money market funds.....................................    9,006      --      --      9,006
  Commercial paper.......................................    5,972      --      --      5,972
  Short-term municipal notes/bonds.......................   42,996      --      --     42,996
  Government notes/bonds.................................       --      --      --         --
                                                           -------    ----    ----    -------
                                                           $58,084    $ --    $ --    $58,084
                                                           =======    ====    ====    =======
Short-term investments:
  Certificates of deposit................................  $    --    $ --    $ --    $    --
  Commercial paper.......................................   19,997     (31)     --     19,966
  Corporate bonds........................................    2,960      --      --      2,960
  Government notes/bonds.................................       --      --      --         --
                                                           -------    ----    ----    -------
                                                           $22,957    $(31)   $ --    $22,926
                                                           =======    ====    ====    =======
</TABLE>

<TABLE>
<CAPTION>
                                                                       UNREALIZED
                                                                      -------------
                                                             COST     LOSS    GAIN      MARKET
                                                           --------   -----   -----    --------
<S>                                                        <C>        <C>     <C>      <C>
DECEMBER 31, 2000:
Cash and cash equivalents:
  Cash...................................................  $  8,426   $  --   $  --    $  8,426
  Certificates of deposit................................       570      --      --         570
  Money market funds.....................................    79,472      --      --      79,472
  Commercial paper.......................................    26,274      --      --      26,274
  Short-term municipal notes/bonds.......................   182,986      --      --     182,986
  Government notes/bonds.................................    21,906      --      --      21,906
                                                           --------   -----   -----    --------
                                                           $319,634   $  --   $  --    $319,634
                                                           ========   =====   =====    ========
Short-term investments:
  Certificates of deposit................................  $  1,191   $  --   $  --    $  1,191
  Commercial paper.......................................    38,493    (101)     --      38,392
  Corporate bonds........................................    23,118      --      --      23,118
  Government notes/bonds.................................    14,638      --      --      14,638
                                                           --------   -----   -----    --------
                                                           $ 77,440   $(101)  $  --    $ 77,339
                                                           ========   =====   =====    ========
</TABLE>

                                        45
<PAGE>   47
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Property and Equipment

     Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
five years. Depreciation expense is included in operating expenses and cost of
revenues.

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

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                            1999       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Computer software and equipment..........................  $ 4,959    $21,444
Furniture and fixtures...................................       --      4,180
Leasehold improvements...................................      197      3,762
                                                           -------    -------
                                                             5,156     29,386
Less: Accumulated depreciation...........................   (1,224)    (7,597)
                                                           -------    -------
                                                           $ 3,932    $21,789
                                                           =======    =======
</TABLE>

     Included in property and equipment are assets acquired under capital leases
with original cost of approximately $2,608,000 as of December 31, 2000.
Accumulated amortization on the leased assets is approximately $1,543,000 as of
December 31, 2000.

     Future minimum lease payments on capital leases are as follows at December
31, 2000 (in thousands):

<TABLE>
<CAPTION>
                 YEARS ENDING DECEMBER 31,
                 -------------------------
<S>                                                           <C>
2001........................................................  $  765
2002........................................................     515
2003........................................................     154
                                                              ------
Total minimum lease payments................................   1,434
Less: Imputed interest (11.0%)..............................    (158)
                                                              ------
Present value of payments under capital leases..............   1,276
Less: Current portion.......................................    (658)
                                                              ------
Long-term capital lease obligations.........................  $  618
                                                              ======
</TABLE>

  Goodwill and Purchased Intangibles

     Goodwill and purchased intangible assets are as follows at December 31,
2000 (in thousands):

<TABLE>
<S>                                                        <C>
Goodwill.................................................  $3,110,858
Assembled workforce......................................      21,093
Developed technology.....................................     106,400
                                                           ----------
                                                            3,238,351
Less: Accumulated amortization...........................    (697,106)
                                                           ----------
                                                           $2,541,245
                                                           ==========
</TABLE>

     There were no goodwill and purchased intangible assets as of December 31,
1999.

     Goodwill represents the excess of the purchase price paid over the fair
value of tangible and identifiable intangible net assets acquired in business
combinations. Identifiable intangible assets primarily include intellectual
property, business partner agreements, assembled workforce, covenants
not-to-compete, trademarks, and core technology. E.piphany uses modeling
techniques on new acquisitions and long-range business plans, revised annually,
to assess whether a revision of the existing estimated useful lives of
intangible assets is necessary. E.piphany regularly performs reviews to
determine if the carrying value of the goodwill and other

                                        46
<PAGE>   48
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

intangible assets is impaired. The purpose for the review is to identify any
facts or circumstances, either internal or external, which indicate that the
carrying value of the asset cannot be recovered. No such impairment has been
indicated to date. Goodwill and other intangible assets are stated net of
accumulated amortization and are amortized on a straight-line basis over their
expected useful lives of three years.

  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.

  Accrued Liabilities

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                            -----------------
                                                             1999      2000
                                                            ------    -------
<S>                                                         <C>       <C>
Professional services.....................................  $  603    $ 2,889
Sales tax.................................................      20      1,345
Royalties.................................................     156      1,050
Vacation..................................................     739      3,328
Commissions and bonus.....................................   1,877      6,316
Marketing expenses........................................     660      1,882
ESPP......................................................     888      1,845
Merger costs..............................................      --        528
Other.....................................................     753     10,821
                                                            ------    -------
                                                            $5,696    $30,004
                                                            ======    =======
</TABLE>

  Stock-Based Compensation

     The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect to employ the method proscribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method. E.piphany has elected to continue to account for its
stock-based compensation arrangements under the provisions of APB 25, and
accordingly, has included in Note 6 the pro forma disclosures required under
SFAS No. 123.

     The shares issued to consultants for services rendered were in the form of
stock options that were fully vested on the date of grant and the fair value of
these shares was estimated using the Black-Scholes model.

  Revenue Recognition

     E.piphany generates several types of revenue including the following:

     License Fees. E.piphany's standard end user license agreement for
E.piphany's products provides for an initial fee to use the product in
perpetuity up to a maximum number of users. E.piphany also enters into other

                                        47
<PAGE>   49
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

license agreement types, which allow for the use of E.piphany's products,
usually restricted by the number of users or the license term. Fees from
licenses are recognized as revenue upon contract execution, provided all
shipment obligations have been met, fees are fixed or determinable, collection
is probable, and vendor specific objective evidence exists to allocate the total
fee between all delivered and undelivered elements of the arrangement. If vendor
specific objective does not exist to allocate the total fee to all delivered and
undelivered elements of the arrangement, revenue is deferred until the earlier
of a) such evidence does exist for the undelivered elements, or b) all elements
are delivered. Fees from license agreements which include the right to receive
unspecified future products are recognized over the term of the arrangement or,
if not specified, the estimated economic life of the product.

     When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the above
criteria have been met, (2) payment of the license fees is not dependent upon
the performance of the consulting services, and (3) the services do not include
significant alterations to the features and functionality of the software. To
date, services have been essential to the functionality of the software products
for substantially all license agreements entered into which included
implementation services. For these arrangements and other arrangements which
don't meet the above criteria, both the product license revenues and services
revenues are recognized in accordance with the provisions of Statement of
Position ("SOP") 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." When reliable estimates are available for
the costs and efforts necessary to complete the implementation services, the
Company accounts for the arrangements under the percentage of completion
contract method pursuant to SOP 81-1. When such estimates are not available, the
completed contract method is utilized.

     E.piphany provides for sales returns based on historical rates of return
which, to date, have not been material.

     Maintenance Agreements. Maintenance agreements generally call for E.piphany
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the maintenance agreement and is included in services revenue in the
accompanying consolidated statements of operations.

     Consulting, Implementation and Training Services. E.piphany provides
consulting, implementation and training services to its customers. Revenue from
such services, when not sold in conjunction with product licenses, is generally
recognized as the services are performed.

     As of December 31, 1999 and 2000, $0.5 million and $3.3 million,
respectively, of accounts receivable was unbilled due to services performed in
advance of billings.

  Advertising Costs

     The Company expenses all advertising costs as incurred and totaled $20,000,
$0.8 million, and $1.7 million during the years ended December 31, 1998, 1999,
and 2000, respectively.

  Comprehensive Income (Loss)

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which E.piphany adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that results from transactions and other economic events of the period other
than transactions with stockholders ("comprehensive income"). Comprehensive
income is the total of net income and all other non-owner changes in equity.

                                        48
<PAGE>   50
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Computation of Basic and Diluted Net Loss Per Share and Pro Forma Basic and
Diluted Net Loss Per Share

     Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings Per Share," for all periods presented. In
accordance with SFAS No. 128, basic 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. Basic and diluted pro forma net
loss per common share, as presented in the consolidated statements of
operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock (using the if-converted method)
from the original date of issuance (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1998        1999        2000
                                                    --------    --------    ---------
<S>                                                 <C>         <C>         <C>
Net loss..........................................  $(10,330)   $(22,390)   $(768,478)
                                                    ========    ========    =========
Basic and diluted:
  Weighted average shares of common stock
     outstanding..................................    10,853      21,324       59,848
Less: Weighted average shares subject to
  repurchase......................................    (7,404)     (5,953)      (3,810)
                                                    --------    --------    ---------
Weighted average shares used in computing basic
  and diluted net loss per common share...........     3,449      15,371       56,038
                                                    ========    ========    =========
  Basic and diluted net loss per common share.....  $  (3.00)   $  (1.46)   $  (13.71)
                                                    ========    ========    =========
  Net loss........................................  $(10,330)   $(22,390)   $(768,478)
                                                    ========    ========    =========
Shares used above.................................     3,449      15,371       56,038
Pro forma adjustment to reflect weighted effect of
  assumed conversion of convertible preferred
  stock (unaudited)...............................    11,092      11,931           --
                                                    --------    --------    ---------
Shares used in computing pro forma basic and
  diluted net loss per common share (unaudited)...    15,541      27,302       56,038
                                                    --------    --------    ---------
Pro forma basic and diluted net loss per common
  share (unaudited)...............................  $  (0.71)   $  (0.82)   $  (13.71)
                                                    ========    ========    =========
</TABLE>

     E.piphany has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share were
approximately 22,428,000, 24,384,000, and 11,750,194 for the years ended
December 31, 1998, 1999 and 2000, respectively. See Note 6 for further
information on these securities.

  Segment Reporting

     During 1998, E.piphany adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for segment information
disclosure. On this basis, E.piphany is organized and operates as one business
segment, the design, development, and marketing of software solutions. The
Company markets its products in the United States and in foreign countries
through its sales personnel and its subsidiaries.

                                        49
<PAGE>   51
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Information regarding geographic areas are as follows (in thousands):

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                              1998    1999      2000
                                                              ----    ----    --------
<S>                                                           <C>     <C>     <C>
Revenues:
  North America.............................................   $--     $--    $116,982
  International.............................................   --      --       10,299
                                                               --      --     --------
          Total.............................................   $--     $--    $127,281
                                                               ==      ==     ========
</TABLE>

  Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS
133"), which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. As amended,
this statement is effective for fiscal years beginning after June 15, 2000.
E.piphany will apply the new rules prospectively to transactions beginning in
the first quarter of 2001. Based on current circumstances, E.piphany believes
the application of the new rules will not have a material impact on its
financial position or results of operations.

     In March 2000, the FASB issued Financial Standards Board Interpretation
("FIN") No. 44, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25." FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues (a) the definition of
"employee" for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occurred after either December
15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying the interpretation have been recognized on a prospective
basis from July 1, 2000. E.piphany adopted FIN No. 44 in July 2000. The adoption
did not have a material effect on its financial position or results of
operations.

 3. LONG-TERM DEBT

     E.piphany had the following long-term debt arrangements as of December 31
(in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                               1999     2000
                                                              ------    ----
<S>                                                           <C>       <C>
Subordinated convertible debt facility for $10.0 million.
  Expired in February 2000. Borrowings bear interest at 10%
  and are payable in equal monthly installments of interest
  only through June 2001 and equal installments of principal
  and interest from June 2001 to December 2002..............  $5,000     $--
Non-revolving equipment line of credit with a bank for $3.0
  million. Expired in March 2000 with all payments due March
  2003. Borrowings bear interest at the bank's prime rate
  plus 0.5% (9.0% at December 31, 1999).....................   3,000     --
Non-revolving equipment line of credit with a bank for $1.25
  million. Borrowings bear interest at the bank's prime rate
  plus 0.5% (9.0% at December 31, 1999) and are payable in
  monthly installments through September 2001...............     319     --
                                                              ------     --
  Total borrowings outstanding..............................   8,319     --
  Less: current portion.....................................    (894)    --
                                                              ------     --
          Total long-term debt..............................  $7,425     $--
                                                              ======     ==
</TABLE>

                                        50
<PAGE>   52
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     All of the debt arrangements above were collateralized by substantially all
of E.piphany's assets. E.piphany was required to comply with certain covenants
under some of these arrangements including minimum deposits and liquidity
ratios.

     Under the subordinated convertible debt facility, the lender had the option
to convert a portion of the outstanding borrowings under the facility to 527,345
shares of E.piphany's Series C preferred stock at a price of $4.27 per share.
The fair value of the warrant at the date of issuance was determined to be
$391,000 and was estimated using the Black-Scholes model with the following
assumptions: risk-free interest rate of 5.6%; expected life of 0.25 years; and
expected volatility of 85%. This amount was recognized as additional interest
expense over the term of this arrangement with the lender. This warrant was
exercised during 1999.

 4. COMMITMENTS

     E.piphany leases certain equipment and its facilities under operating lease
agreements. The leases expire at various dates through 2004. Future minimum
lease payments under these leases as of December 31, 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
                 YEAR ENDING DECEMBER 31,
                 ------------------------
<S>                                                          <C>
2001.......................................................  $12,931
2002.......................................................   11,310
2003.......................................................    9,804
2004.......................................................    7,704
2005.......................................................    4,971
Thereafter.................................................   20,636
                                                             -------
                                                             $67,356
                                                             =======
</TABLE>

     Total rent expense for the years ended December 31, 1998, 1999 and 2000,
was approximately $610,000, $1,220,000 and $6,965,000, respectively.

 5. PREFERRED STOCK

     During 1997 through 1999, E.piphany issued 17,340,000 shares of preferred
stock. These shares were converted to shares of common stock upon the closing of
the Company's initial public offering (IPO) on September 21, 1999. Upon the
closing of the IPO, E.piphany authorized 5,000,000 shares of undesignated
preferred stock for future issuance. The Company held a special meeting of
stockholders on December 6, 2000 and increased the number of authorized shares
of preferred stock, $0.0001 par value, of the Company from 5,000,000 to
25,000,000 shares.

 6. COMMON STOCK

     During January and February 1997, E.piphany issued 8,400,000 shares of
common stock, under restricted stock purchase agreements, for $0.00033 per share
in exchange for cash. Pursuant to the restricted stock purchase agreements,
E.piphany has the right to repurchase the common stock at the original purchase
price upon the occurrence of certain events. The repurchase right expires over a
48-month period. In July 1998, E.piphany's chief executive officer purchased
2,400,000 shares of common stock under a restricted stock purchase agreement in
exchange for a promissory note (see Note 8). Pursuant to the stock purchase
agreement, E.piphany has the right to repurchase the common stock at the
original purchase price upon the occurrence of certain events. The repurchase
right expires over a 48-month period. As of December 31, 2000, 871,875 shares of
common stock were subject to repurchase under these agreements. All exercised
but unvested stock options are also subject to repurchase by E.piphany at the
original purchase price. As of

                                        51
<PAGE>   53
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2000 2,199,492 shares of common stock were subject to repurchase
under these stock options agreements.

     The number of authorized shares of common stock was 100,000,000 shares. The
Company held a special meeting of stockholders on December 6, 2000 and increased
the number of authorized shares of common stock, $0.0001 par value, of the
Company from 100,000,000 to 500,000,000 shares.

     As of December 31, 2000, E.piphany had reserved the following shares of
authorized but unissued common stock:

<TABLE>
<S>                                                           <C>
Stock options outstanding under the 1997 stock option
  plan......................................................   3,263,959
Stock options outstanding under the 1999 stock option
  plan......................................................   5,860,969
Stock options available for grant under the 2000
  nonstatutory stock option plan............................   2,250,000
Stock options available for grant under the 1999 stock
  plan......................................................   1,181,865
Stock reserved for issuance under the 1999 employee stock
  purchase plan.............................................   4,189,918
Stock options outstanding under plans assumed through
  acquisition...............................................   1,971,792
Warrants assumed through acquisition........................       5,366
                                                              ----------
          Total shares reserved.............................  18,723,869
                                                              ==========
</TABLE>

  Warrants

     In January 1998, E.piphany issued a warrant to purchase shares of Series B
preferred stock at $1.67 per share in connection with obtaining a line of credit
with a bank. The number of shares is calculated based on $97,500 plus a
percentage of borrowings under the revolving line of credit divided by the share
price. The fair value of the warrant at the date of issuance was estimated using
the Black-Scholes model with the following assumptions: risk-free interest rate
of 5.6%; expected life of 3 years; and expected volatility of 85%. The value was
determined to be immaterial. This warrant was exercised during 1999 for 112,500
shares.

     In June 1999, E.piphany issued a warrant to purchase 46,875 shares of
Series C preferred stock at $2.25 per share in connection with obtaining an
equipment lease line. The fair value of the warrant at the date of issuance was
determined to be $141,000 and was estimated using the Black-Scholes model with
the following assumptions: risk-free interest rate of 5.2%; expected life of 3
years; and expected volatility of 85%. This warrant was exercised during 2000.

     Upon the closing of the Company's IPO, all warrants to purchase preferred
stock converted to warrants to purchase common stock.

  Stock-Based Compensation

     In connection with the grant of certain stock options to employees during
the years ended December 31, 1998 and 1999, the Company recorded deferred
compensation of approximately $5.8 million, representing the difference between
the deemed value of the common stock for accounting purposes and the option
exercise price or stock sale price at the date of the option grant or stock
sale. Such amount is presented as a reduction of stockholders' equity and
amortized over the vesting period of the applicable options in a manner
consistent with FASB Interpretation No. 28. Approximately $0.7 million, $2.5
million, and $1.5 million was expensed during the years ended December 31, 1998,
1999 and 2000, respectively. Compensation expense is decreased in the period of
forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services.

     During the years ended December 31, 1998, 1999 and 2000, E.piphany recorded
stock-based compensation of $0.1 million, $0.4 million, and $2.0 million,
respectively, related to equity instruments issued to non-employees. Stock-based
compensation related to stock options to purchase common stock which are issued
to

                                        52
<PAGE>   54
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

non-employees is determined based upon the fair value at the date of issuance in
accordance with the provisions of SFAS No. 123.

  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
4,189,918 shares of common stock have been reserved for issuance under the
Purchase Plan as of December 31, 2000. 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, 2000, 433,000 shares had been purchased.

  Initial Public Offering

     On September 21, 1999, E.piphany completed an IPO of 7,158,750 shares of
its common stock at a price of $10.66 per share and received net proceeds of
approximately $69.9 million.

  Secondary Offering

     In January 2000, E.piphany completed a public offering (the "Offering") of
5,550,000 shares of common stock. E.piphany sold 2,990,796 shares of common
stock and the selling stockholders sold 2,559,204 shares of common stock. In
addition, the underwriters exercised their option to purchase 627,750 shares, of
which 156,513 were from E.piphany and 471,237 were from selling stockholders, to
cover over-allotments of shares. The net proceeds to the Company from the
Offering totaled $356 million.

  Stock Split

     On October 17, 2000 the Board of Directors authorized a three-for-two stock
split of the Company's common stock, in the form of a stock dividend, which was
paid on November 13, 2000. The financial information included in this report has
been restated to give effect to the stock split.

  Stock Options

     In 1997, E.piphany adopted the 1997 Stock Plan (the "1997 Plan") under
which 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 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. E.piphany's board of directors determined that no further
options would be granted under the 1997 Plan after the IPO. 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, 2000.

     On June 30, 1999, the board of directors approved the adoption of
E.piphany's 1999 Stock Plan (the "1999 Plan"). A total of 7,042,834 shares of
common stock have been reserved for issuance related to stock options under the
1999 Plan. As of December 31, 2000, 1,181,865 shares were available for grant.
The period over which the options vest and the term of the options are
substantially the same as the 1997 Plan.

                                        53
<PAGE>   55
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     On October 18, 2000, the board of directors approved the adoption of
E.piphany's 2000 Nonstatutory Stock Option Plan (the "Nonstatutory Plan"). A
total of 2,250,000 shares of common stock have been reserved for issuance under
the Nonstatutory Plan. As of December 31, 2000, no shares had been granted from
this plan. The period over which the options vest and the term of the options
are substantially the same as the 1997 Plan.

     E.piphany accounts for its stock option plans pursuant to APB 25 whereby
the difference between the exercise price and the fair value at the date of
grant is recognized as compensation expense. Had compensation expense for stock
option plans been determined consistent with SFAS No. 123, net losses would have
increased to the following pro forma amounts (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1998        1999        2000
                                                    --------    --------    ---------
<S>                                                 <C>         <C>         <C>
Net loss as reported..............................  $(10,330)   $(22,390)   $(768,478)
Net loss pro forma................................  $(10,457)   $(24,956)   $(825,942)
Net loss per share as reported....................  $  (3.00)   $  (1.46)   $  (13.71)
Net loss per share pro forma......................  $  (3.03)   $  (1.62)   $  (14.74)
</TABLE>

     The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1998, 1999, and 2000:

<TABLE>
<CAPTION>
                                                       1998         1999         2000
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
Risk-free interest rate............................    5.50%        6.07%        5.77%
Expected life of the option........................  4.5 years    4.5 years    4.5 years
Dividend yield.....................................     --%          --%          --%
Volatility.........................................     85%          85%         149%
</TABLE>

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

<TABLE>
<CAPTION>
                                     YEAR ENDED             YEAR ENDED             YEAR ENDED
                                  DECEMBER 31, 1998      DECEMBER 31, 1999      DECEMBER 31, 2000
                                 -------------------    -------------------    -------------------
                                            WEIGHTED               WEIGHTED               WEIGHTED
                                            AVERAGE                AVERAGE                AVERAGE
                                            EXERCISE               EXERCISE               EXERCISE
                                 SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                                 -------    --------    -------    --------    -------    --------
<S>                              <C>        <C>         <C>        <C>         <C>        <C>
Outstanding at beginning of
  period.......................    1,815     $0.08        2,491     $0.38        4,754     $ 8.95
Granted........................    3,840     $0.37        5,188     $8.81        8,437     $49.89
Exercised......................   (2,310)    $0.21       (2,283)    $1.13       (1,174)    $ 3.03
Canceled.......................     (854)    $0.17         (642)    $2.35         (920)    $40.10
                                 -------                -------                -------
Outstanding at end of period...    2,491     $0.38        4,754     $8.95       11,097     $38.11
                                 =======                =======                =======
Vested and exercisable at end
  of period....................      234     $0.09          347     $2.58        1,278     $14.74
                                 =======                =======                =======
Weighted average fair value per
  share........................  $  0.19                $  8.95                $ 38.11
                                 =======                =======                =======
</TABLE>

                                        54
<PAGE>   56
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                 OPTIONS VESTED
                                  OPTIONS OUTSTANDING           AND EXERCISABLE
                            -------------------------------    ------------------
                                      WEIGHTED     WEIGHTED              WEIGHTED
                                       AVERAGE     AVERAGE               AVERAGE
   DECEMBER 31, 2000                  REMAINING    EXERCISE              EXERCISE
RANGE OF EXERCISE PRICES    NUMBER      YEARS       PRICE      NUMBER     PRICE
------------------------    ------    ---------    --------    ------    --------
<S>                         <C>       <C>          <C>         <C>       <C>
$  0.01 - $  1.80.......     1,217      7.94       $  1.06       288     $  1.14
$  1.97 - $  4.27.......     1,271      8.55       $  3.55       363     $  3.73
$  4.76 - $  7.33.......     1,459      8.60       $  7.14       357     $  7.23
$  8.51 - $ 31.67.......     1,624      9.23       $ 24.93        76     $ 19.39
$ 32.59 - $ 40.83.......     1,355      9.61       $ 39.65        41     $ 38.22
$ 41.33 - $ 54.58.......     1,175      9.56       $ 49.75        38     $ 46.76
$ 54.79 - $ 66.37.......     1,329      9.58       $ 61.90        44     $ 62.17
$ 66.67 - $121.29.......     1,460      9.03       $ 97.90        56     $ 89.38
$122.59 - $190.33.......       207      9.06       $138.85        15     $133.60
                            ------      ----       -------     -----     -------
$  0.01 - $190.33.......    11,097      9.02       $ 38.11     1,278     $ 14.74
                            ======      ====       =======     =====     =======
</TABLE>

     During the year ended December 31, 1998, E.piphany issued 60,000 shares
under the 1997 Plan for services rendered. The fair value of these shares is
reflected in operating expenses in the respective year.

 7. INCOME TAXES

     E.piphany accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes." A valuation allowance has been recorded for the total
deferred tax assets of E.piphany as a result of uncertainties regarding the
realization of the assets based on the limited operating history of E.piphany,
the lack of profitability to date, and the uncertainty of future profitability.
The components of net deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           1999        2000
                                                         --------    --------
<S>                                                      <C>         <C>
Net operating loss carryforwards.....................    $ 10,511    $ 40,190
Accruals and reserves................................       1,455       4,876
Plant and equipment..................................         150         135
Startup and organization costs.......................         166         108
Research and development credits.....................         503       1,667
                                                         --------    --------
Total deferred tax assets............................      12,785      46,976
Valuation allowance..................................     (12,785)    (46,976)
                                                         --------    --------
Net deferred tax assets..............................    $     --    $     --
                                                         ========    ========
</TABLE>

     As of December 31, 2000, E.piphany had net operating loss carryforwards of
approximately $95.8 million and $55.3 million for federal and state tax
purposes, respectively. The federal net operating loss and other credit
carryforwards expire on various dates beginning on 2012 through 2020. The state
net operating loss carryforwards will expire in 2004. The deferred tax assets at
December 31, 2000 also include approximately $11.3 million related to the
acquisitions of Right Point, Octane, eClass and iLeverage (including net
operating losses of $29.8 million and $20 million, federal and state
respectively) and when realized, will be used to reduce the amount of goodwill
recorded at the date of the acquisitions. In addition, approximately $15.4
million of the deferred tax asset relates to employee stock option deductions
and accordingly will be credited directly to stockholders' equity and will not
be available to reduce the provision for income taxes in future years.

                                        55
<PAGE>   57
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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 income (loss)
before taxes as follows:

<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                                   --------------------------
                                                    1998      1999      2000
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
Federal statutory rate...........................   (34.0)%   (34.0)%   (34.0)%
State taxes, net of federal benefit..............      (6)%      (6)%      (6)%
Amortization of stock compensation...............    2.92%     4.45%     0.18%
Amortization of goodwill and in-process R&D......      --        --     38.73%
Net operating loss not benefitted................   37.08%    35.55%     1.09%
                                                   ------    ------    ------
                                                       --%       --%       --%
                                                   ======    ======    ======
</TABLE>

 8. RELATED PARTY TRANSACTIONS

     In 1998, E.piphany loaned its chief executive officer $175,000 for
relocation expenses. In accordance with the loan agreement, the entire amount of
the loan was forgiven on March 31, 1999. The loan was charged to compensation
expense and is included in general and administrative expense in the
accompanying consolidated statement of operations for the year ended December
31, 1998. The chief executive officer was also offered a loan of $250,000 per
year for two years, drawable monthly. This loan bears interest at 5.6% per annum
compounded monthly and was repaid in January 2000 upon the officer's first stock
sales. As the repayment of this amount was contingent on future stock sales,
this amount has been expensed as paid. Advances under the loan were charged to
compensation expense in the period in which the amounts were loaned to the
officer, and thus, $104,000, $250,000 and $146,000 are included in general and
administrative expense in the accompanying statements of operations for the
years ended December 31, 1998, 1999 and 2000, respectively. The chief executive
officer was also given a loan to purchase 2,400,000 shares of common stock at
$0.40 per share. This loan is collateralized by the underlying shares of
E.piphany. This loan is due on July 1, 2008 and accrues interest at 5.88% per
annum. As of December 31, 2000, the outstanding balance on this loan was
$734,000.

 9. ACQUISITIONS

  The RightPoint Acquisition

     On January 4, 2000, E.piphany acquired RightPoint Software, Inc.
("RightPoint") in a merger transaction. RightPoint developed and marketed real
time marketing software solutions that enable companies to optimize and present
marketing offers, promotions, and communications while a customer is interacting
with a web site, call center agent or other point of customer interaction. Under
the terms of the RightPoint Merger Agreement, stockholders of RightPoint
received approximately 0.1185 shares of E.piphany common stock for each share of
RightPoint common stock they owned at the time the merger was consummated. In
connection with this transaction, E.piphany acquired all of the outstanding
shares of capital stock of RightPoint in exchange for 4,614,992 shares of
E.piphany's common stock. In addition, options and warrants of RightPoint were
converted into options and warrants to purchase approximately 795,000 shares of
E.piphany's common stock. E.piphany accounted for the acquisition under the
purchase method of accounting and the results of RightPoint's operations
subsequent to January 4, 2000 have been included in E.piphany's operating
results for the year ended December 31, 2000. The total purchase price was
approximately $496.8 million, of which $22.0 million was allocated to in-process
research and development and expensed upon closing of the acquisition as it had
not reached technological feasibility and, in management's opinion,

                                        56
<PAGE>   58
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

had no alternative future use. Purchased intangibles, representing purchase
price in excess of identified tangible and intangible assets, of approximately
$479.3 million were recorded and are being amortized on a straight-line basis
over a useful life of three years. Accumulated amortization was approximately
$159.9 million at December 31, 2000.

     The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility had not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. There can be no
assurance that the value of the other purchased intangible assets may not become
impaired prior to its amortization.

     In connection with the acquisition of RightPoint, net assets acquired were
as follows (in thousands):

<TABLE>
<S>                                                           <C>
Cash, receivables and other current assets..................  $  3,076
Property, plant and equipment and other noncurrent assets...       817
Note receivable from stockholder............................     1,185
Purchased intangibles, including in-process technology......   501,318
Current liabilities assumed.................................    (9,633)
                                                              --------
          Net assets acquired...............................  $496,763
                                                              ========
</TABLE>

  The iLeverage Acquisition

     On May 1, 2000, E.piphany acquired iLeverage Corporation ("iLeverage") in a
merger transaction. iLeverage developed marketing solutions for digital
marketplaces. Under the terms of the iLeverage Merger Agreement, stockholders of
iLeverage received approximately 0.007 and 0.008097 shares of E.piphany common
stock for each share of iLeverage common stock and preferred stock,
respectively. In connection with this transaction, E.piphany acquired all of the
outstanding shares of capital stock of iLeverage in exchange for 177,146 shares
of E.piphany's common stock. In addition, options of iLeverage were converted
into options to purchase approximately 95,231 shares of E.piphany's common
stock. E.piphany accounted for the acquisition under the purchase method of
accounting and the results of iLeverage's operations subsequent to May 1, 2000
have been included in E.piphany's operating results for the year ended December
31, 2000. The total purchase price was approximately $29.0 million. The total
purchase price is subject to adjustments based upon finalization of management's
integration plans, which may include elimination of duplicate facilities and
fixed assets as well as employee severance. Purchased intangibles, representing
purchase price in excess of identified tangible and intangible assets, of
approximately $29.1 million were recorded and are being amortized on a
straight-line basis over a useful life of three years. Accumulated amortization
was approximately $6.5 million at December 31, 2000. There can be no assurance
that the value of the other purchased intangible assets may not become impaired
prior to its amortization.

     In connection with the acquisition of iLeverage, net assets acquired were
as follows (in thousands):

<TABLE>
<S>                                                             <C>
Cash, receivables and other current assets..................    $   285
Purchased intangibles.......................................     29,143
Current liabilities assumed.................................       (391)
                                                                -------
          Net assets acquired...............................    $29,037
                                                                =======
</TABLE>

                                        57
<PAGE>   59
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  The eClass Acquisition

     On May 31, 2000, E.piphany acquired eClass Direct, Inc. ("eClass") in a
merger transaction. eClass was an application service provider of
permission-based e-mail marketing services. Under the terms of the eClass Merger
Agreement, stockholders of eClass received approximately 0.1411 shares of
E.piphany common stock for each share of eClass common stock. In connection with
this transaction, E.piphany acquired all of the outstanding shares of capital
stock of eClass in exchange for 1,084,031 shares of E.piphany's common stock. In
addition, options of eClass were converted into options to purchase
approximately 69,575 shares of E.piphany's common stock. E.piphany accounted for
the acquisition under the purchase method of accounting and the results of
eClass' operations subsequent to May 31, 2000 have been included in E.piphany's
operating results for the year ended December 31, 2000. The total purchase price
was approximately $50.3 million. The total purchase price is subject to
adjustments based upon finalization of management's integration plans, which may
include elimination of duplicate facilities and fixed assets as well as employee
severance. Purchased intangibles, representing purchase price in excess of
identified tangible and intangible assets, of approximately $48.6 million were
recorded and are being amortized on a straight-line basis over a useful life of
three years. Accumulated amortization was approximately $9.5 million at December
31, 2000. There can be no assurance that the value of the other purchased
intangible assets may not become impaired prior to its amortization.

     In connection with the acquisition, net assets acquired were as follows (in
thousands):

<TABLE>
<S>                                                             <C>
Cash, receivables and other current assets..................    $ 1,571
Property, plant and equipment...............................        250
Purchased intangibles.......................................     48,620
Current liabilities assumed.................................       (127)
                                                                -------
          Net assets acquired...............................    $50,314
                                                                =======
</TABLE>

  The Octane Acquisition

     On May 31, 2000, E.piphany acquired Octane Software, Inc. ("Octane") in a
merger transaction. Octane was a provider of next-generation multi-channel
customer interaction applications and infrastructure software for sales, service
and support. Under the terms of the Octane Merger Agreement, stockholders of
Octane received approximately 0.5097 shares of E.piphany common stock for each
share of Octane common stock they owned at the time the merger was consummated.
In connection with this transaction, E.piphany acquired all of the outstanding
shares of capital stock of Octane in exchange for 17,353,426 shares of
E.piphany's common stock. In addition, options and warrants of Octane were
converted into options and warrants to purchase approximately 1,836,839 shares
of E.piphany's common stock. E.piphany accounted for the acquisition under the
purchase method of accounting and the results of Octane's operations subsequent
to May 31, 2000 have been included in E.piphany's operating results for the year
ended December 31, 2000. The total purchase price was approximately $2.7
billion, of which $25.0 million was allocated to in-process research and
development and expensed upon closing of the acquisition as it had not reached
technological feasibility and, in management's opinion, had no alternative
future use. The total purchase price is subject to adjustments based upon
finalization of management's integration plans, which may include elimination of
duplicate facilities and fixed assets as well as employee severance. Purchased
intangibles, representing purchase price in excess of identified tangible and
intangible assets, of approximately $2.7 billion were recorded and are being
amortized on a straight-line basis over a useful life of three years.
Accumulated amortization was approximately $521.3 million at December 31, 2000.

     The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility had not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable

                                        58
<PAGE>   60
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. There can be no
assurance that the value of the other purchased intangible assets may not become
impaired prior to its amortization.

     In connection with the acquisition of Octane, net assets acquired were as
follows (in thousands):

<TABLE>
<S>                                                           <C>
Cash, receivables and other current assets..................  $   24,828
Property, plant and equipment and other noncurrent assets...       4,518
Note receivable from stockholder............................       1,179
Purchased intangibles, including in-process technology......   2,705,946
Current liabilities assumed.................................     (26,078)
                                                              ----------
          Net assets acquired...............................  $2,710,393
                                                              ==========
</TABLE>

     The following table presents the unaudited pro forma results assuming that
E.piphany had merged with Octane, eClass, iLeverage and RightPoint at the
beginning of fiscal year 1999. Net loss has been adjusted to exclude the
write-offs of acquired in-process research and development of approximately
$47.0 million and includes amortization of purchased intangibles of
approximately $1.1 billion for the years ended December 31, 1999 and 2000. Net
loss also includes $2.9 million and $3.5 million of stock based compensation for
the years ended December 31, 1999 and 2000, respectively. This information may
not necessarily be indicative of the future combined results of operations of
Epiphany (in thousands, except per share amounts).

<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                           DECEMBER 31,
                                                    --------------------------
                                                       1999           2000
                                                    -----------    -----------
<S>                                                 <C>            <C>
Revenues..........................................  $    29,484    $   135,169
Net loss..........................................  $(1,127,287)   $(1,137,549)
Basic net loss per share..........................  $    (22.31)   $    (17.85)
</TABLE>

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 15% 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.

11. VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                 BALANCE AT     CHARGED TO    CHARGED TO    BALANCE AT
                                                BEGINNING OF    COSTS AND       OTHER         END OF
                                                   PERIOD        EXPENSES      ACCOUNTS       PERIOD
                                                ------------    ----------    ----------    ----------
<S>                                             <C>             <C>           <C>           <C>
Allowance for doubtful accounts
  Years ended December 31, (in thousands):
     1998.....................................      $ --          $   30          $--         $   30
     1999.....................................      $ 30          $  270          $--         $  300
     2000.....................................      $300          $4,450          $--         $4,750
</TABLE>

                                        59
<PAGE>   61
                                E.PIPHANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following table presents selected quarterly information for 1999 and
2000 (in thousands except share data):

<TABLE>
<CAPTION>
                                                FIRST       SECOND        THIRD       FOURTH
                                               QUARTER      QUARTER      QUARTER      QUARTER
                                               --------    ---------    ---------    ---------
<S>                                            <C>         <C>          <C>          <C>
1999:
Revenues.....................................  $  1,894    $   3,230    $   5,344    $   8,714
Gross profit.................................     1,062        1,549        2,329        4,893
Net loss.....................................    (3,959)      (5,387)      (6,789)      (6,255)
Basic and diluted net loss per share.........  $  (0.56)   $   (0.70)   $   (0.61)   $   (0.12)
Pro forma basic and diluted net loss per
  share (unaudited)..........................  $  (0.17)   $   (0.23)   $   (0.25)   $   (0.12)
2000:
Revenues.....................................  $ 14,415    $  24,519    $  39,140    $  49,207
Gross profit.................................     8,286       14,828       21,491       27,371
Net loss.....................................   (66,968)    (147,556)    (277,269)    (276,685)
Basic and diluted net loss per share.........  $  (1.57)   $   (2.87)   $   (4.35)   $   (4.26)
Pro forma basic and diluted net loss per
  share (unaudited)..........................  $  (1.57)   $   (2.87)   $   (4.35)   $   (4.26)
</TABLE>

13. SUBSEQUENT EVENTS (UNAUDITED)

     On February 20, 2001, E.piphany signed an Agreement and Plan of
Reorganization to acquire Moss Software, Inc. through a merger with a
wholly-owned subsidiary of E.piphany. Under the terms of the agreement,
E.piphany will issue up to 1,641,791 shares of common stock. The acquisition of
Moss Software is subject to certain closing conditions, including the approval
of Moss Software's stockholders and other customary closing conditions.

     On January 29, 2001, E.piphany acquired the intellectual property assets of
Radnet, Inc. Under the terms of the asset purchase agreement, E.piphany issued
238,032 shares of common stock. This transaction will add to E.piphany's
strategic intellectual property and complement its current product development
plan.

                                        60
<PAGE>   62

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

     The information concerning the Company's directors required by this Item is
incorporated by reference to the information under the heading "Proposal No.
1 -- Election of Directors" in E.piphany's Proxy Statement.

     The information concerning the Company's executive officers required by
this Item is incorporated by reference to the information under the heading
"Other Information -- Executive Officers" in E.piphany's Proxy Statement.

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 E.piphany's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in E.piphany's 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
E.piphany's Proxy Statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements.

        The consolidated financial statements of E.piphany as set forth under
Item 8 are filed as part of this Annual Report on Form 10-K.

     (a)(2) Financial Statements Schedules.

        See Item 14 (d) below.

     (a)(3) Exhibits.

<TABLE>
<CAPTION>
    NUMBER                            EXHIBIT TITLE
    -------                           -------------
    <C>        <S>
     2.1+      Agreement and Plan of Reorganization by and among the
               Registrant, Yosemite Acquisition Corporation and RightPoint
               Software, Inc.
     2.2++     Agreement and Plan of Merger and Reorganization dated March
               14, 2000 by and among the Registrant, Octane Software, Inc.
               and Orchid Acquisition Corporation.
     2.3++     Form of Octane Software, Inc. shareholder Voting Agreement
               relating to the proposed acquisition of Octane Software,
               Inc.
     2.4++     Form of Registrant's stockholder Voting Agreement relating
               to the proposed acquisition of Octane Software, Inc.
     3.1*      Restated Certificate of Incorporation of the Registrant.
</TABLE>

                                        61
<PAGE>   63

<TABLE>
<CAPTION>
    NUMBER                            EXHIBIT TITLE
    -------                           -------------
    <C>        <S>
     3.2*      Restated Bylaws of the Registrant.
    10.1*      Form of Indemnification Agreement between the Registrant and
               each of its directors and officers.
    10.2*      1999 Stock Plan and form of agreements thereunder.
    10.3*      1999 Employee Stock Purchase Plan and form of agreements
               thereunder.
    10.4*      1997 Stock Plan and form of agreements thereunder.
    10.5*      Fourth Amended and Restated Investors' Rights Agreement
               dated June 16, 1999.
    10.6*      Loan and Security Agreement entered into as of January 9,
               1998 with Silicon Valley Bank.
    10.7*      Loan Modification Agreement between the Registrant and
               Silicon Valley Bank dated December 1, 1998.
    10.8*      Master Lease Agreement dated June 2, 1999 by and between
               Comdisco, Inc. and the Registrant.
    10.9*      Subordinated Loan and Security Agreement dated as of June 2,
               1999 by and between the Registrant and Comdisco, Inc.
    10.10*     Sublease Portion of Third Floor of 1900 Norfolk Street, San
               Mateo, California dated April 23, 1999 by and between
               Inktomi Corporation and the Registrant.
    10.11*     Form of Amended and Restated Common Stock Purchase Agreement
               dated March 18, 1997 between the Registrant and four
               stockholders.
    10.12*     Restricted Stock Purchase Agreement, Promissory Note, Stock
               Pledge Agreement and Joint Escrow Instructions dated July 1,
               1998 between Roger S. Siboni and the Registrant.
    10.13*     Promissory Note dated August 15, 1998 between Roger S.
               Siboni and the Registrant.
    10.14**    RightPoint Software, Inc. (formerly Datamind Corporation)
               1996 Stock Option Plan.
    10.15***   2000 Nonstatutory Stock Option Plan and form of agreements
               thereunder.
    23.1       Consent of Arthur Andersen LLP, Independent Public
               Accountants.
    24.1       Power of Attorney (see page 60).
</TABLE>

---------------
  *  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.

 **  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (Registration No. 333-94033) declared effective by the Securities
     and Exchange Commission on January 20, 2000.

***  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.

  +  Incorporated by reference to Registrant's Registration Statement on Form
     S-4 (File No. 333-92013), declared effective on December 3, 1999.

++  Incorporated by reference to Registrant's Current Report on Form 8-K dated
    March 14, 2000 filed with the Commission on March 28, 2000.

     (b) Reports on Form 8-K.

     None.

     (c) Exhibits.

     See Item 14(a)(3) above.

     (d) Financial Statement Schedules.

     Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

                                        62
<PAGE>   64

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Mateo, State of California, on the 2nd day of April, 2001.

                                          E.PIPHANY, INC.

                                          By:      /s/ ROGER S. SIBONI

                                            ------------------------------------
                                                      Roger S. Siboni
                                               President and Chief Executive
                                                           Officer

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Roger S. Siboni and Kevin J. Yeaman, his
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, any
do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act of 1934, as amended,
this Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.

<TABLE>
<CAPTION>
                     SIGNATURE                                      TITLE                      DATE
                     ---------                                      -----                      ----
<C>                                                    <C>                                 <S>

                /s/ ROGER S. SIBONI                       President, Chief Executive       April 2, 2001
---------------------------------------------------          Officer and Director
                  Roger S. Siboni                       (Principal Executive Officer)

                /s/ KEVIN J. YEAMAN                        Chief Financial Officer         April 2, 2001
---------------------------------------------------        (Principal Financial and
                  Kevin J. Yeaman                            Accounting Officer)

                 /s/ PAUL M. HAZEN                                 Director                April 2, 2001
---------------------------------------------------
                   Paul M. Hazen

                /s/ ROBERT L. JOSS                                 Director                April 2, 2001
---------------------------------------------------
                  Robert L. Joss

                  /s/ SAM H. LEE                                   Director                April 2, 2001
---------------------------------------------------
                    Sam H. Lee

             /s/ DOUGLAS J. MACKENZIE                              Director                April 2, 2001
---------------------------------------------------
               Douglas J. Mackenzie

                 /s/ GAYLE CROWELL                                 Director                April 2, 2001
---------------------------------------------------
                   Gayle Crowell
</TABLE>

                                        63
<PAGE>   65

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER                            EXHIBIT TITLE
-------                           -------------
<C>        <S>
 2.1+      Agreement and Plan of Reorganization by and among the
           Registrant, Yosemite Acquisition Corporation and RightPoint
           Software, Inc.
 2.2++     Agreement and Plan of Merger and Reorganization dated March
           14, 2000 by and among the Registrant, Octane Software, Inc.
           and Orchid Acquisition Corporation.
 2.3++     Form of Octane Software, Inc. shareholder Voting Agreement
           relating to the proposed acquisition of Octane Software,
           Inc.
 2.4++     Form of Registrant's stockholder Voting Agreement relating
           to the proposed acquisition of Octane Software, Inc.
 3.1*      Restated Certificate of Incorporation of the Registrant.
 3.2*      Restated Bylaws of the Registrant.
10.1*      Form of Indemnification Agreement between the Registrant and
           each of its directors and officers.
10.2*      1999 Stock Plan and form of agreements thereunder.
10.3*      1999 Employee Stock Purchase Plan and form of agreements
           thereunder.
10.4*      1997 Stock Plan and form of agreements thereunder.
10.5*      Fourth Amended and Restated Investors' Rights Agreement
           dated June 16, 1999.
10.6*      Loan and Security Agreement entered into as of January 9,
           1998 with Silicon Valley Bank.
10.7*      Loan Modification Agreement between the Registrant and
           Silicon Valley Bank dated December 1, 1998.
10.8*      Master Lease Agreement dated June 2, 1999 by and between
           Comdisco, Inc. and the Registrant.
10.9*      Subordinated Loan and Security Agreement dated as of June 2,
           1999 by and between the Registrant and Comdisco, Inc.
10.10*     Sublease Portion of Third Floor of 1900 Norfolk Street, San
           Mateo, California dated April 23, 1999 by and between
           Inktomi Corporation and the Registrant.
10.11*     Form of Amended and Restated Common Stock Purchase Agreement
           dated March 18, 1997 between the Registrant and four
           stockholders.
10.12*     Restricted Stock Purchase Agreement, Promissory Note, Stock
           Pledge Agreement and Joint Escrow Instructions dated July 1,
           1998 between Roger S. Siboni and the Registrant.
10.13*     Promissory Note dated August 15, 1998 between Roger S.
           Siboni and the Registrant.
10.14**    RightPoint Software, Inc. (formerly Datamind Corporation)
           1996 Stock Option Plan.
10.15***   2000 Nonstatutory Stock Option Plan and form of agreements
           thereunder.
23.1       Consent of Arthur Andersen LLP, Independent Public
           Accountants.
24.1       Power of Attorney (see page 60).
</TABLE>

---------------
  *  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.

 **  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 (Registration No. 333-94033) declared effective by the Securities
     and Exchange Commission on January 20, 2000.

***  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.

  +  Incorporated by reference to Registrant's Registration Statement on Form
     S-4 (File No. 333-92013), declared effective on December 3, 1999.

++  Incorporated by reference to Registrant's Current Report on Form 8-K dated
    March 14, 2000 filed with the Commission on March 28, 2000.

                                        64