---

---

|UNITED STATES SECURITIES AND EXCHANGE COMMISSION                                                                                
|--------------------------------------------------------------------------------------------------------------------------------
|Washington, D.C. 20549                                                                                                          
|                                                                                                                                
|Form 10-K                                                                                                                       
|                                                                                                                                
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

# Commission File
Number 000-26881

E.piphany, Inc.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction ofincorporation or organization) | 77-0443392(I.R.S. EmployerIdentification number)
|--------------------------------------------------------------------- | ------------------------------------------------

|1900 South Norfolk Street, Ste. 310San Mateo, California(Address of principal executive offices) | 94403(Zip code)
|------------------------------------------------------------------------------------------------ | ---------------

# Registrants
telephone number, including area code: (650) 356-3800

# Securities
Registered Pursuant to Section 12(b) of the Act: None

Securities
Registered Pursuant to Section 12(g) of the Act:Common Stock, $0.0001 par
value(Title of Class)

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

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

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

The
approximate  aggregate  market  value of the  registrants  Common Stock held by
nonaffiliates  on June 30, 2002 was  $233,307,266.  This amount  excludes shares held by
directors,  executive  officers,  and holders of 5% or more of the outstanding  Common
Stock since such persons may be deemed to be  affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination for other
purposes.

The
number of common shares outstanding as of January 31, 2003 was 72,844,597.

## DOCUMENTS
INCORPORATED BY REFERENCE:

|                                                                                                                                                                                                           |  | Form 10-K reference
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------
|(1)
Portions of the Registrants proxy statement to be filed pursuant to Regulation 14A
for the stockholder meeting scheduled for May 30, 2003 are incorporated by reference into
Part III of this Report. |  | Part III           

---

---



# PART I

This document contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if prove incorrect or never
materialize, could cause our results to differ materially from those expressed
or implied by such forward-looking statements. Such forward-looking statements
include, without limitation, any projections of earnings, revenues, or other
financial items; any statements of the plans, strategies, and objectives of
management for future operations, including the execution of restructuring
plans; any statements concerning proposed new products, services, developments,
anticipated performance of products or services; any statements regarding future
economic conditions or performance; statements of belief and any statement of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include, but are not limited to, those discussed
under the heading Risk Factors in Item 1 hereto and the risks
discussed from time to time in our other public filings. 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 these forward-looking
statements.

## Item 1.
Business

## Overview

We
develop, market and license the E.piphany® E.6 suite of software
products, an integrated set of customer relationship management, or CRM,
software products. These CRM products 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.6 Suite to gain insight into their customers
characteristics and preferences, and then take action on that insight in
real-time to better and more profitably serve those customers. To gain insight
into their customers, companies use our analytic CRM solutions, which utilize
customer data collected from E.piphany or other software products, or obtained
from third party data providers. To take action on this insight, companies use
our operational CRM software products to more effectively interact with their
customers across a variety of communication and distribution channels.

We
were founded in November 1996 and were primarily engaged in research and
development activities until early 1998 when we shipped our first software
product and generated our first revenues from software license, consulting and
maintenance fees. In September 1999 and January 2000 we raised a total of
approximately $426 million through the sale of our common stock in registered
public offerings to fund growth and to acquire complementary businesses and
technologies. During 2000 and 2001, we completed several acquisitions using
stock consideration including the acquisition of RightPoint Software, Inc.,
Octane Software, Inc., eClass Direct, Inc. and Moss Software, Inc. These
acquisitions increased our customer base, increased the number of our employees
and expanded our product suite.

## The E.piphany Suite
of CRM Software Products

In
order to increase the longevity and profitability of customer relationships, as
well as attract new customers, many companies seek to improve the manner in
which they market, sell and deliver products and services to their customers. To
improve these processes, companies seek to better understand their
customers characteristics and preferences by gaining a single view of each
customer across the companys various departments, distribution channels
and points of customer interaction. Based on the insight gained from this single
customer view, companies can then take action to address individual customer
preferences and characteristics through more personalized customer interactions.
When companies understand individual customer preferences, they are also better
able to market complementary products and make personalized offers to meet each
customers individual needs.

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 or collecting and analyzing customer data to
better understand and market to customers. Moreover, the channels of
communication, or touch points, between companies and their 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 such as e-mail, web commerce sites and web self-service sites. As a
result, valuable customer data is stored in numerous, disparate front-office
software applications as well as back-office applications such as accounting and
manufacturing systems. To gain a single 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.

2

---



The
E.6 Suite includes multiple CRM software products designed to solve specific
business problems in areas such as customer analytics, marketing, service and
sales. Our software solutions can be deployed simultaneously or in incremental
steps as our customers seek to address new business problems. Our customers can
deploy our software solutions to enhance, supplement or replace previously
installed software products.

The
E.6 Suite is made up of several software modules within each of the following
product families:

| |  |  | E.piphany
Insight,
| | - |  | ------------------

| |  |  | E.piphany
Marketing,
| | - |  | --------------------

| |  |  | E.piphany
Sales,
| | - |  | ----------------

| |  |  | E.piphany
Service, and
| | - |  | ----------------------

| |  |  | E.piphany
Interaction Advisor.
| | - |  | ------------------------------

## E.piphany Insight

E.piphany
Insight allows 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.6 Suite to extract and manage
data from a wide variety of electronic data sources regardless of their format.
The analytical capabilities of our software applications 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 has analyzed the
data, it presents the resulting information in easy-to-use formats, such as
graphs and tables.

## E.piphany Marketing

E.piphany
Marketing allows 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 applications can execute the campaign through
direct mail, personalized e-mail, customized web pages and other points of
customer interaction. When campaigns are executed, E.piphany Marketing analyzes
response data to refine campaigns. We make use of our real-time decision-making
capabilities within E.piphany Marketing, among other things, to make optimal
marketing recommendations based on customer data collected during an ongoing
customer interaction, as well as data collected historically.

## E.piphany Sales

E.piphany
Sales allows a companys sales people and sales managers to be more
effective in managing their relationships with customers by enabling them to
plan for and execute various types of interactions with prospects and customers.
E.piphany Sales enables sales teams to more effectively and efficiently manage
the entire sales life cycle, including identifying the most promising leads,
preparing for sales interactions and following up in the most appropriate
manner. Companies use this sales solution to achieve higher sales success rates,
deeper account penetration, and increased revenue. E.piphany Sales provides
sales professionals access to real-time information through web browsers,
disconnected laptop computers, wireless phones, personal digital assistants, and
other devices. We make use of our real-time decision-making capabilities within
E.piphany Sales to intelligently guide sales personnel through the sales process
with optimal recommendations.

## E.piphany Service

E.piphany
Service helps customer care representatives and call center agents respond to
customer requests, issues, inquiries and opportunities, as well as enable
customers to help themselves over the web. E.piphany Service, built on a
web-based architecture, provides an integrated view of a companys
communication channels, including the internet, e-mail, telephone, fax, and
chat. By incorporating the technology of our E.piphany Insight and E.piphany
Marketing software applications, 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. We make
use of our real-time decision-making capabilities within E.piphany Service, for
example, to optimize the routing of inbound customer calls and prompt customer
service agents with information to optimize the interaction with the customer.

3

---



## E.piphany Interaction Advisor

E.piphany
Interaction Advisor enables real-time decision-making which allows for immediate
analysis of data collected during customer interactions so that optimal
decisions can be made during each interaction. As a stand-alone product,
E.piphany Interaction Advisor can be deployed at an organizations call
center or web site to provide product or service recommendations that are
personalized for each customer. When deployed in conjunction with other
E.piphany software products, E.piphany Interaction Advisor enhances the
effectiveness of the total software solution by improving an organizations
ability to make optimal use of every customer interaction by making appropriate
selling recommendations or providing a higher level of customer support.

## Professional,
Maintenance and Training Services

Although
  our primary strategy is to encourage our customers to rely on our strategic
  systems integration partners for the implementation of our software, our internal
  professional services organization plays an integral role in implementing our
  software for our customers. We believe that our consulting services enhance
  the use and administration of our software products, facilitate the implementation
  of our software products and result in sharing best business practices relating
  to our software with client and systems integrator project teams. In addition
  to implementing our software, our professional services organization works closely
  with our internal research and development organization to enhance existing,
  and design new, E.piphany software applications. Experience gained by our professional
  services organization through repeated implementation of our products is routinely
  shared with our research and development staff.

We
provide our customers with maintenance services including telephone support,
web-based self-service support and updates to our products and documentation. We
believe that providing a high level of technical support is critical to customer
satisfaction. We also offer training programs to our customers and other
companies with which we have relationships to accelerate the implementation and
adoption of our products by the users within our customers. Fees for our
training services are typically charged separately from our software license,
maintenance and consulting fees.

## E.piphany
Technology

The
E.6 Suite includes numerous analytic and operational CRM technologies and
supports various industry standards. The major elements of these technologies
and standards support include:

Web-based
architecture. E.piphanys brower-based, web architecture
allows information and application functionality to be broadly shared within and
outside a company. The application logic, however, is managed centrally so that
there is no need to install special desktop software and so that administrators
can make changes in a single location.

J2EE compliance. The E.6 Suite is developed on the Java Two,
Enterprise Edition, or J2EE, development platform. This industry standard set of
development specifications leverages the strengths of the Java programming
language to enable software applications that are easier to develop, configure
and integrate with our customers existing systems.

Modular
architecture.The E.6 Suite 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 E.piphany Sales applications and
later add E.piphany Service or E.piphany Marketing applications. Another
customer may start with E.piphany Insight and then expand with E.piphany
Marketing, Sales or Service applications.

Metadata-driven
architecture.Our integrated metadata defines the information that flows
through the system, from external systems, to data models, to application logic,
and 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 of changes over time, and to
reduce the cost and complexity of system upgrades when new versions of the
software are released.

Offline
and real-time analytics. We provide a broad range of analytics 
including online analytical processing, data mining, collaborative filtering and
real-time likelihood estimation  and integrate them tightly into
marketing, service and sales applications.

Optimized,
scaleable systems.The E.6 Suite is designed to scale to meet the needs
of the worlds largest enterprises. The various application components are
designed to efficiently handle hundreds of millions of customer records,
thousands of simultaneous users and millions of transactions each day.

4

---



Advanced
data integration technologies.Our data integration technologies enable
system implementers to easily integrate data from disparate source systems using
a variety of techniques, including database access for query and transaction
processing, Enterprise Application Integration (EAI) middleware from a range of
third-party vendors, emerging J2EE data integration standards, and batch
Extract, Transform and Load (ETL) processes. To accelerate implementations, we
offer packaged and template integration adapters for many third party software
systems commonly found in large companies.

Open
architecture.Our open architecture allows the E.6 Suite to fit into
existing software environments. The E.6 Suite is built on industry standards
such as J2EE, XML/SOAP, SQL, JDBC, which are commonly used across large
enterprises. The E.6 Suite runs on industry-standard relational databases,
operating systems and hardware platforms from vendors such as IBM, Microsoft,
Oracle, Sun and HP.

## Sales, Marketing and
Distribution

To
date, we have marketed our products primarily through our direct sales force. We
have expanded our sales channels, however, through additional relationships with
system integrators and indirect channel vendors. 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.

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

## Customers

As
of December 31, 2002, we have sold our software products and services to
approximately 450 customers. Our customers represent entities of all sizes, but
our sales focus is on large global institutions, in industries such as
communications, financial services, manufacturing, retail, and travel and
leisure. For the three years ended December 31, 2002, no customer accounted for
more than 10% of our revenues.

Total
  international revenues for 2002, 2001 and 2000 were $25.0 million, $33.8 million
  and $10.3 million, respectively. This represented 30%, 26% and 8% of total revenues
  in 2002, 2001 and 2000, respectively. Please refer to Note 2 in the accompanying
  consolidated financial statements for further discussion of our geographic operations.

## Research and
Development

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

Our
total research and development expenses were $34.1 million, $41.0 million and
$26.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively. 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 Software and RightPoint Software.

## Relationships and
Alliances

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

5

---



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

Technology
relationships.To help ensure that our products are compatible with industry
standards and take advantage of current and emerging technologies, we have
formed relationships with vendors of software and hardware technology. We
currently maintain relationships with vendors such as Avaya, BEA Systems,
ChannelWave, Cisco, Comergent, Crystal Decisions, Genesys, Hewlett-Packard, IBM,
Microsoft, Oracle, Selectica, Sun Microsystems and Tibco. Many of these
companies voluntarily provide us with early releases of new products, education
related to those products and in some cases, access to technical resources to
facilitate adoption of their products. As a result, we are able to integrate our
products with these vendors products, and can anticipate required changes
to our products based on new versions of these vendors products. We
believe that these relationships allow us to focus on the development,
distribution and support of our software and reduce the time necessary to make
our software compatible with these technology platforms. Some relationships
consist of non-exclusive arrangements to co-market each others products
and share technical resources in order to better integrate each others
products.

Indirect
channel relationships.We have entered into reseller agreements with vendors
under which we license software products to them for sublicensing to their
customers, as well as outsourcing and application service provider (ASP)
agreements under which such vendors install and use our software products to
provide hosted CRM services to their customers over the internet. We believe
that these relationships extend our sales presence in new and existing markets.
We currently have reseller relationships with Accenture, EDS, Harte-Hanks and
Hewlett-Packard, among others. We currently have outsourcing and ASP
relationships with EDS and Harte-Hanks, among others. Under these agreements, we
offer our software products to these companies at a discount from our list
prices and provide sales, marketing, training and technical support. Many of
these companies have committed resources to training their employees, developing
co-marketing programs and incorporating our products into their CRM marketing
strategies.

## Intellectual Property
and Other Proprietary Rights

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

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

## Competition

The
market for our products is intensely competitive, subject to rapid change and
significantly affected by new product introductions and other market activities
of industry participants. Our integrated software competes against various
vendors software tools designed to accomplish specific elements of a
complete process, including analyzing data, managing marketing campaigns or
automating sales and service interactions. We compete principally with vendors
of traditional customer relationship management, enterprise resources planning,
and data analysis and marketing software. Our competitors include, among others,
companies such as Chordiant, Informatica, Kana Communications, NCR, Onyx,
Oracle, PeopleSoft, Pivotal, SAP AG, SAS Institute, Siebel Systems and Unica.

We
compete on the basis of the following principal factors:

| |  |  | analytic
capabilities,
| | - |  | ----------------------

| |  |  | cost
of ownership,
| | - |  | ------------------

| |  |  | customer
support,
| | - |  | -----------------

| |  |  | ease
of use,
| | - |  | ------------

6

---



| |  |  | technology,
| | - |  | -----------

| |  |  | open
architecture,
| | - |  | ------------------

| |  |  | product
features,
| | - |  | -----------------

| |  |  | product
performance,
| | - |  | --------------------

| |  |  | product
pricing,
| | - |  | ----------------

| |  |  | product
reliability,
| | - |  | --------------------

| |  |  | time
to market, and
| | - |  | -------------------

| |  |  | user
scalability.
| | - |  | -----------------

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

## Employees

As
of December 31, 2002, we had 524 full-time employees. Of these employees, 166
were engaged in research and development, 153 were engaged in sales and
marketing, 134 were engaged in professional services and 71 were engaged in
general and administrative activities. Of these employees, 412 were located in
the United States and 112 were located outside the United States.

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

## Available
Information

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

7

---



# RISK FACTORS

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

We have a history of
losses, expect losses in the future and may not ever become profitable.

We
incurred net losses of $71.7 million for the year ended December 31, 2002, $2.6
billion for the year ended December 31, 2001 and $768.5 million for the year
ended December 31, 2000. We had an accumulated deficit of $3.5 billion as of
December 31, 2002. We expect to continue to incur losses in the foreseeable
future. These losses will be substantial and we may never become profitable. Our
operating results will be harmed if our revenues do not keep pace with our
expenses or are not sufficient for us to achieve profitability. 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 revenues may be
harmed if general and industry specific economic conditions do not improve or
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 does not improve, our
customers may continue to delay or reduce their spending on customer
relationship management software. When economic conditions weaken, sales cycles
for software products tend to lengthen and companies information
technology budgets tend to be reduced. When this happens, our revenues suffer
and our stock price may decline. Further, if the economic conditions in the
United States or in other territories in which we do business worsen or do not
improve, we may experience a material adverse impact on our business, operating
results and financial condition.

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

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

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

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

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

8

---



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

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

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

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

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

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

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

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

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

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

| |  |  | our
ability to integrate acquisitions,
| | - |  | --------------------------------------

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

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

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

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

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

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

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

9

---



Our limited operating
history makes financial forecasting and evaluation of our business difficult.

Our
limited operating history makes it difficult to forecast our future operating
results. We were 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
we do not 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 we had a longer business history.

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

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

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 our products after introduction. We may not be able to detect and
correct errors before releasing our products commercially. If our commercial
products contain errors, we may be required to:

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

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

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

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

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

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

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

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

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

We do not have
substantial experience in international markets.

We
have limited experience in marketing, selling and supporting our products and
services abroad. Doing business internationally involves greater expense and
many additional risks and challenges, particularly:

10

---



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

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

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

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

| |  |  | greater
difficulty in managing foreign operations,
| | - |  | --------------------------------------------------

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

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

Our
international operations require a significant amount of attention from our
management and substantial financial resources. As of December 31, 2002, we had
112 employees located in Asia, Australia, Canada, Europe and Latin America.

Our service revenues
have a substantially lower margin than our product license revenues, and a
decrease in license revenues relative to service revenues could harm our gross
margins.

Our
service revenues, which includes fees for professional, maintenance and training
services, were 60% of our revenues for the year ended December 31, 2002, 45% of
our revenues for the year ended December 31, 2001 and 44% of our revenues for
the year ended December 31, 2000. Our service revenues have substantially lower
gross margins than our license revenues. Our cost of service revenues as a
percentage of our service revenues for the years ended December 31, 2002, 2001
and 2000 was 63%, 98% and 101%, respectively. A decrease in license revenues
relative to service 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 service revenues have varied significantly from quarter to
quarter. The amount and profitability of services can depend in large part on:

| |  |  | the
number of licenses sold,
| | - |  | ----------------------------

| |  |  | the
extent to which customers obtain services directly from us rather than from third party
consulting organizations,
| | - |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  | the
nature of the products licensed,
| | - |  | ------------------------------------

| |  |  | the
complexity of the customers information technology environment,
| | - |  | --------------------------------------------------------------------

| |  |  | the
resources allocated by customers to their implementation projects,
| | - |  | ----------------------------------------------------------------------

| |  |  | the
extent to which customers desire to customize our products,
| | - |  | ---------------------------------------------------------------

| |  |  | the
scope of licensed rights, and
| | - |  | ---------------------------------

| |  |  | the
extent to which customers expand rights to use our previously installed software
products.
| | - |  | ----------------------------------------------------------------------------------------------

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

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

11

---



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

When
we provide consulting and implementation services to our customers, we do so
either directly through our internal professional services organization or
indirectly through subcontractors we hire to perform these services on our
behalf. Because our margins on service revenues are less than our margins on
license revenues, our overall margins decline when we provide these services to
customers. This is particularly true if we hire subcontractors to perform these
services because it costs us more to hire subcontractors to perform these
services than to provide the services ourselves.

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

It
typically takes us between six and twelve months to complete our sales, but it
can take us longer. It is difficult, therefore, to predict if, and the quarter
in which, a particular sale will occur and to plan expenditures accordingly. The
period between initial contact with a potential customer and 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 potential customers require competitive evaluation and internal approval before
purchasing our products,
| | - |  | --------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

12

---



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

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

If we fail to manage
reductions in the size of our business, our operating results will be harmed.

We
have grown quickly, both through acquisitions and hiring, at times since our
inception. Recently, however, we have restructured our operations by, among
other things, reducing the size of our workforce. Although we have significantly
reduced our expenses, we may need to further reduce expenses in the future. If
we are unable to effectively address the effects of reducing the workforce, such
as the deterioration of employee morale and productivity, unfavorable publicity
and the general reduction of available human resources, our business may be
harmed. In addition, future expansion in the size of our business will require
that we hire, train and integrate new personnel in key areas. If future
expansion becomes necessary and we are unable to successfully expand our
workforce, our revenues will be harmed.

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

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

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

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

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

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

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

| |  |  | make
available international versions of our software,
| | - |  | ------------------------------------------------------

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

13

---



| |  |  | 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.

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

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

E.piphany
has made a strategic decision to base its products on the Java 2, Enterprise
Edition (J2EE) family of technologies. Although J2EE is a widely adopted
industry standard, a competing technology from Microsoft called .NET seeks to
challenge J2EE as an enterprise IT architecture. If .NET gains competitive
advantage over J2EE in the marketplace at large, E.piphany may be competitively
disadvantaged, and may need to re-engineer its products to adopt the .NET
architecture. This capability affords our customers greater flexibility in the
deployment of our software products. If we fail to successfully develop and
maintain products compatible with these operating systems, database versions or
programming standards, we may lose sales and revenues. In addition, users access
our products on their network through standard Internet browsers such as
Microsoft Internet Explorer. If we fail to obtain access to developer versions
of any of these software products, we may be unable to build and enhance our
products on schedule. After installation, our products collect and analyze 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 and existing
customers. If we lose customers, our revenues and profitability may be harmed.

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

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

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

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

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

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

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

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

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

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

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

14

---



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 our technology.

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

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

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

Our
pending patent and trademark applications may not be allowed or competitors may
successfully challenge the validity or scope of these applications. In addition,
our patents may not provide 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, we typically charge for our software based on the number of users at a
particular site that are authorized to use the software. Customers that have
licenses to use our products could allow unauthorized use of our software.
Unauthorized use is difficult to detect and, to the extent that our software is
used without authorization, we may lose potential license fees.

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

Our
future success will depend in large part on our ability to hire and retain a
sufficient number of qualified personnel, particularly in sales, marketing,
research and development, service and support. If we are unable to do so, our
ability to advance our business could be affected. Our future success also
depends upon the continued service of our executive officers and other key
sales, engineering and technical staff. The loss of the services of our
executive officers and other key personnel would harm our operations. None of
our officers or key personnel 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 stock options are priced above market value may choose
not to remain employed by us. In that case, our ability to attract or retain
employees will be adversely affected.

15

---



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

The
effectiveness of our software products relies on the storage and use of customer
data collected from various sources, including information collected on web
sites, as well as other data derived from customer registrations, billings,
purchase transactions and surveys. The collection and use of such data for
customer profiling may raise privacy and security concerns. Our customers
generally have implemented security measures to protect customer data from
disclosure or interception by third parties. However, the security measures may
not be effective against all potential security threats. If a well-publicized
breach of customer data security were to occur, our software products may be
perceived as less desirable, impacting our future sales and profitability.

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

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

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

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

## Item 2.
Properties

We
currently lease approximately 91,000 square feet of office space for our
headquarters in one building in San Mateo, California. We also lease
approximately 83,000 square feet of office space in three other buildings in San
Mateo, California. In addition, we lease sales and support offices in or near
Atlanta, Boston, Chicago, Dallas, Detroit, Los Angeles, New York, Philadelphia,
Phoenix, Seattle, Toronto and Washington, DC that comprise approximately 127,000
square feet. We also lease sales and support offices outside of North America
including locations in Australia, Brazil, France, Germany, Japan, Singapore,
Spain, Switzerland, the Netherlands and the United Kingdom that total
approximately 43,000 square feet. Approximately 51% of the square footage of our
U.S. facilities is currently subleased to third parties and approximately 15% is
available for sublease. Approximately 11% of the square footage of our
international facilities is currently subleased to third parties and 29% is
available for sublease. We believe that our facilities are adequate to meet our
current and anticipated business needs.

## Item 3. Legal
Proceedings

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

E.piphany, two
of our current officers, one of our former officers and three underwriters in
our initial public offering (IPO) were named as defendants in a
consolidated shareholder lawsuit in the United States District Court
for the Southern District of New York, In re E.piphany,
Inc. Initial Public Offering Securities Litigation,01-CV-6158.
This is one of a number of actions coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, 21 MC 92. Plaintiffs in
the coordinated proceeding have brought claims under the federal securities laws
against numerous underwriters, companies, and individuals, alleging generally
that defendant underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than 300 companies
during the period from late 1998 through 2000. Specifically, among other
things, the plaintiffs allege that the prospectus pursuant to which shares of
our common stock were sold in our IPO contained certain false and misleading
statements regarding the practices of our underwriters with respect to their
allocation of shares of common stock in our IPO to their customers and their
receipt of commissions from those customers related to such allocations, and
that such statements and omissions caused our post-IPO stock price to be
artificially inflated.The consolidated amended complaint in
our case seeks unspecified damages on behalf of a purported class of purchasers
of our common stock between September 21, 1999 and December 6, 2000. The
court has appointed a lead plaintiff for the consolidated action. The
underwriter and issuer defendants have filed motions to dismiss. These motions
were denied as to all of the underwriter defendants and the majority of issuer
defendants including E.piphany. The individual defendants have been dismissed
from the action without prejudice pursuant to a tolling agreement. We believe we
have meritorious defenses to the claims against us and will defend
ourselves vigorously.

16

---



On February 28, 2003, a purported securities class action lawsuit entitled Liu
v. Credit Suisse First Boston et al., Civil Action Number 03-20459, was filed in
the United States District Court for the Southern District of Florida. Among the
166 parties named as defendants are Credit Suisse First Boston and its
personnel, issuers that completed IPOs underwritten by Credit Suisse First
Boston, and certain directors and officers of these issuers, including E.piphany
and two of its current officers. The complaint alleges that the defendants
violated federal and state laws by, among other things, publishing false and
misleading information regarding the issuers' projected financial performance
and revenue potential and by incorrectly pricing issuers IPOs. The complaint
relates generally to the ongoing IPO-related litigation currently pending in the
United States District Court for the Southern District of New York. We anticipate that this action will be transferred to the United States District
Court for the Southern District of New York and coordinated with existing
IPO-related litigation, discussed above. We believe that we have meritorious
defenses to the claims against us and intend to defend the action vigorously.

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

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

No
  matters were submitted to a vote of security holders during the fourth quarter
  of 2002.

# PART II

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

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

|                    | High |  | Low |      
|------------------- | ---- |  | --- | -----
|Fourth Quarter 2002 |      |  | $   | 5.20 
|Third Quarter 2002  |      |  | $   | 4.50 
|Second Quarter 2002 |      |  | $   | 7.35 
|First Quarter 2002  |      |  | $   | 12.26
|                   
|Fourth Quarter 2001 |      |  | $   | 10.33
|Third Quarter 2001  |      |  | $   | 10.99
|Second Quarter 2001 |      |  | $   | 17.15
|First Quarter 2001  |      |  | $   | 52.75

The
last reported sale price for our common stock on the Nasdaq Stock Markets
National Market was $4.22 per share on January 31, 2003. As of January 31, 2003,
there were 699 holders of record of our common stock. This does not include
persons whose stock is held in nominee or street name accounts
through brokers.

## Dividend
Policy

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

17

---



## Item 6. Selected
Financial Data

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

|                                                      | Year Ended December 31 | 
|----------------------------------------------------- | ---------------------- | 
|
|
|Statement of Operations Data:                         |                        | 
|Revenues (1)                                          |                        | 
|Cost of product license                               |                        | 
|Cost of services (1)                                  |                        | 
|Amortization of purchased technology (2)              |                        | 
|Gross profit                                          |                        | 
|Restructuring charges                                 |                        | 
|In-process research and development charge            |                        | 
|Amortization and write-down of goodwill and purchased |                        | 
|Intangibles (2)                                       |                        | 
|Loss from operations                                  |                        | 
|Net loss                                              |                        | 
|Basic and diluted net loss per share                  |                        | 
|Shares used in computing basic and diluted net loss   |                        | 
|per share (3)                                         |                        | 

|                                                      | As of December 31 | 
|----------------------------------------------------- | ----------------- | 
|
|
|Balance Sheet Data:                                   |                   | 
|Cash, cash equivalents and short-term investments (4) |                   | 
|Working capital (4)                                   |                   | 
|Long-term investments                                 |                   | 
|Total assets                                          |                   | 
|Long-term obligations, net of current portion         |                   | 
|Total stockholders equity                            |                   | 

(1) Pursuant to the Emerging
  Issues Task Force No. 01-14 (ETIF 01-14), Income Statement
  Characterization of Reimbursements Received for Out-of-Pocket Expenses
  Incurred, reimbursable expenses have been reclassified into revenues, with a
  corresponding increase in cost of services. The impact of the reclassification
  was to increase revenues and cost of services by $3,142, $3,565, $252 and $0
  in the years ended December 31, 2001 through 1998, respectively. See Note 2
  of Notes to Consolidated Financial Statements for further discussion.

(2) Amortization of
purchased technology has been reclassified from amortization and write-down of
goodwill and purchased intangibles in operating expenses to cost of revenues. As
a result, amortization and write-down of goodwill and purchased intangibles have
been reduced from previously reported amounts by $9,727, $32,695 and $25,690 for
the years ended December 31, 2002, 2001 and 2000, respectively.

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

(4) Restricted cash and
interest receivable have been reclassified from cash and cash equivalents to
long-term restricted cash and to prepaid expenses and other current assets,
respectively. As a result, cash, cash equivalents and short-term investments
have been reduced from previously reported amounts by $10,562, $6,739 and $717,
and working capital has been reduced by $9,367, $5,329 and $500, as of December
31, 2001, 2000 and 1999, respectively.

18

---



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

This document contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if prove incorrect or never
materialize, could cause our results to differ materially from those expressed
or implied by such forward-looking statements. Such forward-looking statements
include, without limitation, any projections of earnings, revenues, or other
financial items; any statements of the plans, strategies, and objectives of
management for future operations, including the execution of restructuring
plans; any statements concerning proposed new products, services, developments,
anticipated performance of products or services; any statements regarding future
economic conditions or performance; statements of belief and any statement of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include, but are not limited to, those discussed
under the heading Risk Factors in Item 1 hereto and the risks
discussed from time to time in our other public filings. 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 these forward-looking
statements.

## Overview

We
develop, market and sell the E.piphany E.6 suite of software products, a set of
customer relationship management, or CRM, software products. These CRM products
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.6 Suite 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 products,
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 products to more effectively interact
with their customers across a variety of communication and distribution
channels.

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

From
the shipment of our first software product in early 1998 through the fourth
quarter of 2000, our revenues increased steadily each quarter due primarily to
the market acceptance and success of our products such as E.piphany Insight and
E.piphany Marketing, as well as the shipment of new products such as E.piphany
Service which were introduced through a combination of acquisitions and internal
development. Our annual revenues grew to $131 million in 2000 from $19 million
in 1999 and $3 million in 1998. Our net losses, however, increased to $768
million for the year ended December 31, 2000 from $22 million for the year ended
December 31, 1999, primarily due to non-cash charges of $744 million for the
amortization of goodwill and intangibles and the write-off of in-process
research and development related to our acquisitions. To a lesser extent, the
net loss for 2000 increased due to the expansion of our sales and marketing
activities and increased investment in product development.

During
2001, the worldwide economy weakened and a slowdown in technology spending by
businesses occurred. As a result, our revenues declined each quarter during
2001, although annual revenues declined only slightly from $131 million in 2000
to $129 million in 2001. During this economic slowdown, we initiated a plan in
the third quarter of 2001 to restructure our worldwide operations by reducing
our workforce and consolidating our operating facilities. We also reviewed the
impact of the change in market conditions on the carrying value of our goodwill
and intangible assets. We determined that these assets were impaired and wrote
down their fair value by recording a non-cash charge of $1.7 billion in
September 2001. Net loss for the year ended December 31, 2001 increased to $2.6
billion from $768 million for the year ended December 31, 2000, primarily as a
result of the $1.7 billion non-cash impairment and an increase in non-cash
amortization of goodwill and purchased intangibles to $836 million. To a lesser
extent, our net loss increased due to the restructuring charges of $43 million
recorded in 2001 as well as increased investment in research and development and
the growth in our sales and marketing costs which occurred prior to the
initiation of our restructuring plan.

19

---



Economic
and technology spending weakness continued into 2002 and our revenues continued
to decline through the first half of 2002, but increased during the second half
of 2002. During early 2002, we completed restructuring activities that began in
the third quarter of 2001 and recorded related charges totaling $16 million. The
net loss decreased to $72 million in 2002 from $2.6 billion in 2001, primarily
due to a reduction of approximately $2.5 billion in non-cash amortization and
impairment charges related to goodwill and purchased intangibles, and to a
lesser extent, lower restructuring charges, a reduction of our workforce and
lower facilities costs. As of December 31, 2002, we have approximately 450
customers, 524 employees, and $287 million in cash and investments, including $9
million of restricted cash.

## Sources of
Revenue

We
generate revenues principally from licensing our software products directly to
customers and providing related services including implementation, consulting,
maintenance and training services. Through December 31, 2002, substantially all
of our revenues were generated by our direct sales force. Our license agreements
generally provide that customers pay a software license fee to perpetually use
one or more software products within specified limits. The amount of the license
fee varies depending on which software products are purchased, the number of
software products purchased and the scope of usage rights. Customers can
subsequently pay additional license fees to expand the right to use previously
licensed software products, or to purchase additional software products. Our
software products are made available either on compact disc or electronically.

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

## Cost of Revenues and
Operating Expenses

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

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

## Critical Accounting
Policies and Estimates

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

20

---



Revenue Recognition

Our
revenue recognition policy is significant because it determines if, and when, we
can record revenue from the sale of software licenses and related services. We
follow detailed guidelines discussed below and in Note 2 of Notes to
Consolidated Financial Statements. We recognize revenue in accordance with
generally accepted accounting principles, which have been prescribed for the
software industry. The accounting rules related to revenue recognition are
complex and are affected by interpretations of the rules and an understanding of
industry practices, both of which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant
judgments.

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

To
date, when we have been primarily responsible for the implementation of the
software on an arrangement, both product license revenues and service revenues
are recognized under the percentage of completion contract method in accordance
with the provisions of Statement of Position 81-1, Accounting for
Performance of Construction Type and Certain Production-Type Contracts
(SOP 81-1). This is based on our assessment that the implementation
services for these arrangements are essential to the functionality of our
software. Prior to the 2001, E.piphany was primarily responsible for the
implementation services for the majority of its license arrangements. From the
first quarter of 2001 through the second quarter of 2002, third-party consulting
organizations were primarily responsible for the implementation services for the
majority of E.piphanys license arrangements and as a result, the
percentage of total license revenue recognized under SOP 81-1 has declined.
Approximately 19%, 37% and 71% of license revenue was recognized under SOP 81-1
during 2002, 2001 and 2000, respectively. Since the second quarter of 2002,
E.piphany has increasingly been responsible for implementation services and
therefore the Company expects that the proportion of license revenue recognized
under the percentage of completion method will increase in the first half of
2003.

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

*Allowances for Doubtful
  Accounts*

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

Acquisitions, Goodwill and Purchased Intangible Assets

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

As
a result of the adoption of SFAS 142 as of January 1, 2002, we ceased
amortization of approximately $81.8 million of goodwill. In lieu of
amortization, we were required to perform a transitional impairment test of
goodwill. Further, we perform impairment tests annually or when impairment
indicators are identified with respect to previously recorded intangible assets.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value. Fair market value is determined using, among other things,
discounted future cash flow techniques. Estimating discounted future cash flows
requires significant management judgment concerning revenue, profitability and
discount rates. Differences between forecasted and actual results as well as
changes in the general economic environment could result in material write downs
of goodwill and purchased intangible assets. We performed the transitional
impairment test on January 1, 2002 and the annual impairment test on December
31, 2002 and determined that no impairment existed.

21

---



Restructuring Costs

As
discussed in Note 5 of Notes to Consolidated Financial Statements, we have
recorded significant restructuring costs in connection with our abandonment of
certain leased facilities. The lease abandonment costs were estimated to include
remaining lease liabilities and brokerage fees offset by estimated sublease
income. Estimates related to sublease costs and income are based on assumptions
regarding the period required to sublease the facilities and the likely sublease
rates. These estimates are based on market trend information analyses provided
by commercial real estate brokerage firms retained by us. We review these
estimates each reporting period and, to the extent that our assumptions change,
adjustments to the restructuring accrual are recorded. If the real estate market
continues to worsen and we are not able to sublease the properties as early as,
or at the rates estimated, the accrual will be increased, which would result in
additional restructuring costs in the period in which such determination is
made. If the real estate market strengthens and we are able to sublease the
properties earlier or at more favorable rates than projected, the accrual may be
decreased, which would increase net income in the period in which such
determination is made.

## Results of
Operations

The
following table sets forth statement of operations data for the three years
ended December 31, 2002 (in thousands, except per share amounts):

|                                               | Years Ended December 31, | 
|---------------------------------------------- | ------------------------ | 
|
|Revenues:                                      |                          | 
|Product license                                |                          | 
|Services (1)                                   |                          | 
|                                               |                          | 
|                                               |                          | 
|                                               |                          | 
|Cost of revenues:                              |                          | 
|Product license                                |                          | 
|Services (1)                                   |                          | 
|Amortization of purchased technology (2)       |                          | 
|                                               |                          | 
|                                               |                          | 
|                                               |                          | 
|Gross profit                                   |                          | 
|                                               |                          | 
|Operating expenses:                            |                          | 
|Research and development                       |                          | 
|Sales and marketing                            |                          | 
|General and administrative                     |                          | 
|Restructuring charges                          |                          | 
|In-process research and development charge     |                          | 
|Amortization of goodwill and                   |                          | 
|purchased intangibles (2)                      |                          | 
|Write-down of goodwill and purchased           |                          | 
|intangibles                                    |                          | 
|Stock-based compensation                       |                          | 
|                                               |                          | 
|Total operating expenses                       |                          | 
|                                               |                          | 
|Loss from operations                           |                          | 
|Other income, net                              |                          | 
|                                               |                          | 
|Net loss                                       |                          | 
|                                               |                          | 
|Basic and diluted net loss per share           |                          | 
|                                               |                          | 
|Shares used in computing basic and diluted net |                          | 
|Loss per share                                 |                          | 
|                                               |                          | 

| | (1)
Pursuant to the Emerging Issues Task Force No. 01-14 (EITF 01-14),
Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred, services revenues and cost of services
revenues have been reclassified for years prior to December 31, 2002 to reflect
out-of-pocket expenses billed to customers as revenue rather than a reduction of the
related expense. See Note 2 of Notes to the Consolidated Financial Statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---



| | (2) Amortization of
purchased technology has been reclassified from amortization of goodwill and purchased
intangibles in operating expenses to cost of revenues. As a result, amortization of
goodwill and purchased intangibles have been reduced from previously reported amounts by
$9,727, $32,695 and $25,690 for the years ended December 31, 2002, 2001 and 2000,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Years Ended December 31, 2002 and 2001

Revenues

Revenues
decreased to $83.8 million for the year ended December 31, 2002 from $128.8
million for the year ended December 31, 2001. The decrease in revenues was
primarily due to fewer sales of our product licenses resulting primarily from an
economic slowdown and a significant decline in spending by companies on
information technology. For the year ended December 31, 2002, revenue from the
United States declined by $36.2 million, or 38%, revenue from the United Kingdom
declined by $16.1 million, or 68%, and revenue from the rest of the world
increased by $7.3 million, or 74%. The 74% increase in revenue from the rest of
the world is a function of the relatively small revenues in 2001 and we do not
expect these revenues to increase at the same rate in the future. We expect to
focus the majority of our direct sales and marketing activities in the United
States and Europe and, therefore, expect that a higher percentage of our revenue
will be derived from these geographies in the future.

Product
license revenues decreased to $33.8 million, or 40% of total revenue, for the
year ended December 31, 2002 from $71.1 million, or 55% of total revenue, for
the year ended December 31, 2001. This decrease in product license revenues was
primarily due to fewer sales resulting primarily from the downturn in the
economy and weakness in information technology spending. Although sequentially
down in 2002 as compared to 2001, license revenues were sequentially flat from
the second to the third quarter of 2002 and up to a small degree in the fourth
quarter of 2002. We expect the economic slowdown to continue to adversely impact
our ability to forecast license revenues for the next several quarters and
perhaps longer.

Services
revenues consist of revenue from professional, maintenance and training
services. Services revenues decreased to $50.0 million, or 60% of total
revenues, for the year ended December 31, 2002 from $57.7 million, or 45% of
revenues, for the year ended December 31, 2001. The decrease in services revenue
was driven primarily by a decrease in consulting services, offset in part by an
increase in maintenance revenue attributable to maintenance contracts sold to
our new customers. The decrease in consulting services was primarily the result
of less services rendered due to a decrease in product sales.

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

Cost of Revenues

Total
cost of revenues decreased to $42.5 million for the year ended December 31, 2002
as compared to $91.0 million for the year ended December 31, 2001. Cost of
revenues include the cost of product license revenues, the cost of services
revenues and the amortization of purchased technology.

Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements and, as a percentage of license
revenues, has not been significant to date.

Cost
of services revenues consists primarily of personnel and related costs of
providing professional, maintenance and training services. Cost of services
revenues decreased to $31.5 million, or 63% of services revenues, for the year
ended December 31, 2002 from $56.3 million, or 98% of services revenues, for the
year ended December 31, 2001. The decrease was the result of a reduction in the
number of internal professional services employees and the related overhead and
facilities costs as well as a reduction in the use of services subcontracted
from third parties. The decrease in cost of services as a percentage of revenue
is due to a higher proportion of maintenance revenue, which has more favorable
margins than professional services and training revenue, as well as a reduction
in the number of services employees from 174 at December 31, 2001 to 134 at
December 31, 2002, which resulted in improved margins for consulting,
maintenance and training revenues. Of the total reduction in the number of
services employees during 2002, 25 related to the restructuring of our
operations and the remainder related to voluntary and other terminations.

23

---



Amortization
of purchased technology decreased to $9.7 million for the year ended December
31, 2002 from $32.7 million for the year ended December 31, 2001 primarily due
to a write-down of the carrying value of the assets during the third quarter of
2001. See discussion of Amortization and Write-Down of Goodwill and Purchased
Intangibles below. Purchased technology assets of $5.5 million are included in
purchased intangibles on our Consolidated Balance Sheet and are being amortized
on a straight-line basis over their remaining useful lives. Amortization of
purchased technology is expected to be $4.8 million for the year ending December
31, 2003 and $0.7 million for the year ending December 31, 2004.

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 decreased to $34.1
million for the year ended December 31, 2002 from $41.0 million for the year
ended December 31, 2001. The decrease was due in part to the restructuring of
our operations, which resulted in lower overhead and facilities costs. The
decrease was also due to a reduction in consulting fees associated with
localizing our product for international markets and translating our product
into various languages. Research and development expenses as a percentage of
total revenues increased to 41% for the year ended December 31, 2002 from 32%
for the year ended December 31, 2001. We believe that investments in product
development are essential to our future success and, therefore, the cost
reductions we implemented did not reduce our research and development expenses
as much as other expense items. The number of research and development employees
decreased from 183 as of December 31, 2001 to 166 as of December 31, 2002. Of
this total decrease, 10 related to the restructuring of our operations and the
remainder related to voluntary and other terminations. We anticipate that
research and development expenses will increase over the long term in absolute
dollars.

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 decreased to $54.4 million for the year ended
December 31, 2002 from $88.0 million for the year ended December 31, 2001. Sales and marketing
expenses as a percentage of total revenues decreased to 65% for the year ended December 31, 2002
from 68% for the year ended December 31, 2001. The decrease was primarily due to a reduction in the
number of sales and marketing employees from 240 at December 31, 2001 to 153 as of December 31,
2002. Of the total reduction, 53 related to the restructuring of our operations and the remainder
related to voluntary and other terminations. The decrease was also due to lower overhead and
facilities costs as a result of our restructuring plans and lower spending on other sales and
marketing programs.

General
  and Administrative. General and administrative expenses consist primarily
  of employee salaries and related expenses for executive, finance, legal and
  administrative personnel. General and administrative expenses decreased to $12.7
  million for the year ended December 31, 2002 from $24.3 million for the year
  ended December 31, 2001. General and administrative expenses as a percentage
  of total revenues decreased to 15% for the year ended December 31, 2002 from
  19% for the year ended December 31, 2001. The decrease was primarily due to
  a reduction in the number of general and administrative employees from 99 at
  December 31, 2001 to 71 at December 31, 2002. Of this reduction, 22 related
  to the restructuring of our operations and the remainder related to voluntary
  and other terminations. The decline was also due to lower overhead and facilities
  costs as a result of our restructuring plans and a decline in bad debt expense
  due to an increase in collection rates.

Restructuring
Costs. In the quarter ended September 30, 2001, the Company began restructuring worldwide
operations to reduce costs and improve efficiencies in response to a slower economic environment. A
detailed review was performed between the third quarter of 2001 and the second quarter of 2002 to
improve the Companys cost structure in light of market conditions. Under EITF No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and
Activity, actions were deemed to be the commencement of separate restructuring plans in the
quarter in which those actions could be specifically identified. The first plan was initiated in the
quarter ended September 30, 2001 and was completed in the quarter ended March 31, 2002 (Plan
1). The second plan was initiated and completed during the quarter ended June 30, 2002
(Plan 2). Charges were recorded to restructuring expense as the costs associated with
each plan could be reasonably estimated. These charges were based on assumptions and related
estimates that were appropriate for the economic environment that existed at the time these charges
were recorded. However, due to the continued deterioration of the commercial real estate market,
primarily in the U.S., and the final settlement of certain lease obligations, we have made
subsequent adjustments to the initial restructuring charges recorded.

24

---



During
  2001, we recorded a charge of $43.0 million, of which $32.4 million reflects
  the initial restructuring charge for Plan 1 recorded in the third quarter of
  2001 and $10.6 million related to changes in estimated costs associated with
  Plan 1. During 2002, we recorded a charge of $16.1 million, of which $1.4 million
  related to additional restructuring charges taken when the related liabilities
  could be reasonably estimated for Plan 1, $8.5 million was the initial restructuring
  charge for Plan 2 and $6.2 million related to changes in estimated costs recorded
  during 2001 and 2002. At December 31, 2002, we had an accrued liability of $32.9
  million with respect to the restructuring plans.

In
connection with our intention to further focus our direct sales and marketing
activities in the United States and Europe, the Company expects to incur
additional restructuring charges between $2.0 million and $3.0 million,
predominantly related to the abandonment of facilities in certain international
regions.

Amortization
and Write-Down of Goodwill and Purchased Intangibles. Our acquisitions of iLeverage, Octane,
eClass Direct and Rightpoint in 2001 and the acquisitions of Moss and certain intellectual property
assets of Radnet 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 amortization of goodwill and intangible assets
decreased to $0.9 million for the year ended December 31, 2002 from $803.3 million for the year
ended December 31, 2001. The decrease was due to the cessation of the amortization of goodwill in
accordance with SFAS 142 and to a $1.7 billion charge for the impairment of goodwill and intangible
assets recorded in the year ended December 31, 2001.

In
accordance with SFAS 142, we performed impairment tests of purchased intangible
assets and goodwill in connection with all of our acquisitions upon the adoption
of SFAS 142 on January 1, 2002 and again on December 31, 2002. The impairment
tests were performed with the assistance of a third party valuation firm and it
was determined that no impairment existed.

We
will continue to perform impairment tests of goodwill and purchased intangibles
on an annual basis and when events or changes in circumstances indicate that it
is more likely than not that the carrying value is not recoverable. We have
recorded significant impairment charges for goodwill and intangible assets in
the past and to the extent that events or changes in circumstances cause our
assumptions to change, additional charges, which could be material, may be
required.

We
will continue to amortize purchased intangible assets of $5.7 million on a
straight-line basis over their remaining useful lives. As discussed above, the
amortization expense related to purchased technology assets of $5.5 million as
of December 31, 2002 will be recorded in cost of revenues. The amortization
expense related to other purchased intangible assets of $0.2 million will be
recorded in operating expense and will be fully amortized by June 30, 2003. See
Note 4 of Notes to Consolidated Financial Statements for more detailed
information.

Stock-Based
Compensation. Stock-based compensation consists of amortization of deferred compensation in
connection with stock option grants and sales of stock to employees at exercise or sales prices
below the deemed fair market value of our common stock and compensation related to equity
instruments issued to non-employees for services rendered. As of December 31, 2002, deferred
compensation remaining to be amortized totaled $0.1 million. 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. See Note 8 of Notes to Consolidated Financial
Statements for further discussion regarding the accounting treatment for stock-based
compensation.

The
  Company accounts for stock issued to employees in accordance with Accounting
  Principles Board Opinion No. 25 (APB 25), Accounting for Stock
  Issued to Employees and complies with the disclosure provisions of SFAS
  No. 123 (SFAS 123), Accounting for Stock-Based Compensation
  and SFAS No. 148 (SFAS 148), Accounting for Stock-Based Compensation
   Transition and Disclosure. Under APB 25, compensation expense for
  fixed stock options is based on the difference between the market value of the
  Companys stock and the exercise price of the option on the date of grant,
  if any. Had we recognized stock-based compensation expense under SFAS 123, our
  stock-based compensation expense would have been $61.5 million, $108.0 million
  and $64.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

The
  accounting profession and regulatory agencies continue to consider whether companies
  will be required to record an expense for stock options granted with an exercise
  price equal to the fair market value of the Companys stock on the date
  of grant, as well as the methodology under which the amount of such expense
  will be determined. We believe that the use of equity compensation is important
  to our ability to attract and retain a sufficient number of qualified personnel.

25

---



Other Income, Net

Other
income decreased to $5.8 million for the year ended December 31, 2002 from $15.0
million for the year ended December 31, 2001. The decrease was due to a decrease
in interest income primarily as a result of a decrease in the average rate of
return on our investments and lower average cash and investment balances.

Provision for Income Taxes

From
inception through December 31, 2002, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. Due to
uncertainties regarding realization of the assets based on the limited operating
history of E.piphany, the lack of profitability to date, and the uncertainty of
future profitability we have a valuation allowance equal to the total deferred
tax assets of $135 million as of December 31, 2002 and therefore have no net
deferred tax assets.

## Years Ended December 31, 2001 and 2000

Revenues

Total
revenues decreased to $128.8 million for the year ended December 31, 2001, from
$130.8 million for the year ended December 31, 2000. Total revenues increased
for the first two quarters of 2001 as compared to the first two quarters of
2000. However, this increase was offset by a decrease in revenues for the last
two quarters of 2001 as compared to the last two quarters of 2000. The decrease
in revenues was primarily due to fewer sales of our product licenses resulting
from an economic slowdown and the significant decline in spending by companies
on information technology, particularly in the United States. For the year ended
December 31, 2001, domestic revenue declined by $25.5 million or 21%. This
decrease was offset in part by an increase in international revenues of $23.5
million or 228%. This rapid growth in international revenues primarily reflected
the early stage of development of our international operations.

Product
license revenues decreased to $71.1 million, or 55% of total revenue, for the
year ended December 31, 2001 from $73.5 million, or 56% of total revenue, for
the year ended December 31, 2000. Product license revenues increased for the
first two quarters of 2001 as compared to the first two quarters of 2000. This
increase was offset by a decrease for the last two quarters of 2001 as compared
to the last two quarters of 2000. This decrease in product license revenues was
primarily due to fewer sales of our product licenses resulting from a downturn
in the economy and weakness in information technology spending, particularly in
the United States. Although sequentially down from 2000 to 2001, license
revenues were sequentially flat for the last three quarters of 2001.

Services
revenues increased to $57.7 million, or 45% of total revenues, for the year
ended December 31, 2001 from $57.4 million, or 44% of revenues, for the year
ended December 31, 2000. Services revenues increased for the first two quarters
of 2001 as compared to the first two quarters of 2000. This increase was offset
by a decrease for the last two quarters of 2001 as compared to the last two
quarters of 2000. The decrease was due in part to the delivery of fewer services
as a result of a decrease in product license sales and in part to the change in
our strategy from fulfilling most of our customers consulting needs with
our internal services professionals to encouraging our customers to contract
directly with third-party integrators. This approach was adopted in conjunction
with our overall strategy to strengthen our alliances with system integrators
that recommend and implement our software on customers computer systems.
The decrease in consulting revenue was offset by an increase in maintenance
revenue attributable to maintenance contracts sold to our new customers.

Cost of Revenues

Total
cost of revenues was $91.0 million for the year ended December 31, 2001 as
compared to $84.6 million for the year ended December 31, 2000.

26

---



Cost
of services revenues decreased to $56.3 million, or 98% of services revenues,
for the year ended December 31, 2001 from $57.7 million, or 101% of services
revenues, for the year ended December 31, 2000. Cost of services revenue
increased for the first two quarters of 2001 as compared to the first two
quarters of 2000. This increase was offset by a decrease in the cost of services
revenue for the last two quarters of 2001 as compared to the last two quarters
of 2000. The decrease was due to the reduction in the number of professional
services employees from 353 as of December 31, 2000 to 174 as of December 31,
2001 which was primarily the result of our change in strategy from fulfilling all
of our customers consulting needs with our internal services professionals
to encouraging our customers to contract directly with third-party integrators.
This approach was adopted in conjunction with our overall strategy to strengthen
our alliances with system integrators that recommend and implement our software.
Of the total decrease in professional services employees, 55 related to the
restructuring of our operations. The decrease in cost of services as a
percentage of revenue from 2000 to 2001 is primarily due to a higher proportion
of maintenance revenue, which has more favorable margins.

Amortization
of purchased technology increased to $32.7 million in the year ended December
31, 2001 from $25.7 million in the year ended December 31, 2000. Amortization
expense increased due to an increase in purchased technology assets resulting
primarily from the acquisitions of Octane and eClass Direct in the second
quarter of 2000 and the acquisition of Moss and of certain intellectual property
of Radnet in the first quarter of 2001.

Operating Expenses

Research and
Development. Research and development expenses increased to $41.0 million for the year ended
December 31, 2001 from $26.8 million for the year ended December 31, 2000. Research and development
expenses as a percentage of total revenues increased to 32% for the year ended December 31, 2001
from 20% for the year ended December 31, 2000. The increase in absolute dollars was primarily due to
a higher number of research and development employees entering 2001 as compared to 2000 as a result
of internal growth and acquisitions, and increased fees paid to outside contractors for the
translation of our products. This increase in absolute dollars was offset by a reduction in our
overhead and facilities costs resulting from the restructuring of our operations that occurred in
the third quarter of 2001. No research and development employees were reduced as a result of the
restructuring of our operations during 2001.

Sales and
Marketing. Sales and marketing expenses increased to $88.0 million for the year ended December
31, 2001 from $67.7 million for the year ended December 31, 2000. Sales and marketing expenses as a
percentage of total revenues increased to 68% for the year ended December 31, 2001 from 52% 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 entering 2001
as compared to 2000, resulting from internal growth and acquisitions. In this regard, we established
sales offices in additional domestic and international locations including ones in Asia, Australia,
Europe and Latin America. This increase in absolute dollars was offset by the restructuring of our
operations that occurred in the third quarter of 2001, which resulted in a reduction of 43 sales and
marketing employees and of overhead and facilities costs.

General and
Administrative. General and administrative expenses increased to $24.3 million for the year
ended December 31, 2001 from $21.5 million for the year ended December 31, 2000. General and
administrative expenses as a percentage of total revenues increased to 19% for the year ended
December 31, 2001 from 16% for the year ended December 31, 2000. The increase in general and
administrative expenses in absolute dollars was primarily attributable to an increase in the number
of general and administrative employees entering 2001 as compared to 2000, which were necessary to
support our expanding operations. This increase in absolute dollars was offset by the restructuring
of our operations that occurred in the third quarter of 2001, which resulted in a reduction of 18
general and administrative employees and of overhead and facilities costs. This increase was further
offset by a reduction in bad debt expense relative to 2000 when worsening economic conditions had
caused less predictable collections.

Restructuring
Costs. In the third quarter of 2001, we initiated a plan to restructure our worldwide operations
by reducing our workforce and consolidating our operating facilities and recorded a restructuring
charge of $32.4 million. An additional charge of $10.6 million was taken during the quarter ended
December 31, 2001, which primarily reflected changes in the estimated costs of abandoning certain
facilities associated with the plan initiated during the quarter ended September 30,
2001.

In-Process
Research and Development Charge. In connection with the acquisitions of RightPoint and Octane,
we recorded charges for in-process research and development of $22.0 million and $25.0 million,
respectively, in the year ended December 31, 2000. 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, Octane and their competitors. At the acquisition dates, 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 dates of
acquisition.

27

---



There
was no in-process research and development charge incurred during the year ended
December 31, 2001. Please see Note 4 of Notes to Consolidated Financial
Statements for more detailed information.

Amortization
and Write-Down of Goodwill and Purchased Intangibles. Our acquisitions of Moss, Octane, eClass,
iLeverage and RightPoint were each 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 amortization of goodwill and
other intangible assets was $803.3 million and $671.4 million for the years ended December 31, 2001
and 2000, respectively. The increase was due to the intangible assets recorded during 2000 and
2001.

As
part of our review of our third quarter 2001 financial results we performed an
impairment test due to the existence of impairment indicators. The impairment
indicators included, among others, the significant decline in our stock price,
the net book value of assets significantly exceeded our market capitalization,
and the overall decline in industry growth rates that have negatively impacted
our revenues and forecasted revenue growth rates. We recorded an impairment
charge of $1.7 billion in the quarter ended September 30, 2001 to reduce
goodwill and other intangible assets associated with all of our acquisitions to
reflect their current estimated fair market value. Fair market value was
determined based on discounted future cash flows. It is possible that the
estimates and assumptions used under our impairment test may change in the
short-term resulting in the need to further write-down our goodwill and other
long-lived assets.

Stock-Based
Compensation. Stock-based compensation consists of amortization of deferred compensation in
connection with stock option grants and sales of stock to employees at exercise or sales prices
below the deemed fair market value of our common stock and compensation related to equity
instruments issued to non-employees for services rendered. As of December 31, 2001, deferred
compensation remaining to be amortized totaled $0.9 million.

Other Income, Net

Other
income decreased to $15.0 million for the year ended December 31, 2001 from
$23.1 million for the year ended December 31, 2000. The decrease was due to a
decrease in interest income primarily as a result of a decrease in the average
rate of return on our investments and lower average cash and investment
balances.

## Liquidity and Capital
Resources

As
of December 31, 2002, our primary sources of liquidity consisted of $162.7
million in cash, cash equivalents and short-term investments and $115.1 million
in long-term investments for a total of $277.8 million in cash and investments.

Net
cash used in operating activities totaled $41.7 million, $69.5 million and $20.2
million for the years ended December 31, 2002, 2001 and 2000, respectively. Cash
used in operating activities for each period was primarily the result of net
losses in those periods, less non-cash charges for amortization and write-down
of goodwill and purchased intangibles, restructuring costs, and in-process
research and development costs. Cash used in operating activities for the year
ended December 31, 2002 also was the result of a decrease in accrued
liabilities, which was offset by a decrease in accounts receivable and an
increase in deferred revenue. Cash used in operating activities for the year
ended December 31, 2001 also was the result of a decrease in accrued liabilities
and in deferred revenue, which was offset by a decrease in accounts receivable.
Cash used in operating activities for the year ended December 31, 2000 also was
the result of an increase in accounts receivable, which was partially offset by
an increase in deferred revenue. We expect to continue to incur net losses and
to use cash in operating activities but at reduced levels compared to 2002. We
expect to incur significant operating expenses, particularly research and
development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. We anticipate that such operating expenses
will comprise a material expenditure of our cash resources. As a result, our net
cash flows will depend on the level of future revenues and our ability to
effectively manage infrastructure costs.

Net
cash used in investing activities totaled $64.9 million, $58.5 million and $79.0
million for the years ended December 31, 2002, 2001 and 2000, respectively. Cash
used in investing activities for these years resulted primarily from the
purchases of investments, net of sales of investments. Net investments purchased
are primarily comprised of investment grade securities such as government notes
and bonds with maturities which do not exceed 24 months. To a lesser extent,
cash used from investing activities resulted from the purchase of property and
equipment. Cash used in investing activities for the year ended December 31,
2000 was also the result of the direct costs of our acquisitions which was
partially offset by cash acquired in acquisitions.

28

---



Net
cash provided by financing activities totaled $7.4 million, $7.6 million and
$355.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Cash provided by financing activities for the years ended December
31, 2002 and 2001 resulted from the receipt of proceeds from the issuance of
common stock pursuant to the exercise of stock options and our employee stock
purchase plan. Cash provided by financing activities for the year ended December
31, 2000 was primarily the result of the receipt of proceeds from our secondary
offering completed during the first quarter of 2000.

From
time to time, we are required to obtain letters of credit that serve as
collateral for our obligations to third parties under facility lease agreements.
These letters of credit are secured by cash and cash equivalents and are
recorded as restricted cash in the balance sheet. As of December 31, 2002, we
had $9.2 million of restricted cash, $1.2 million of which are classified as
short-term and relate to facility lease agreements that have expiration dates in
2003, and $8.0 million of which are classified as long-term and relate to
facility lease agreements that have expiration dates greater than twelve months
from December 31, 2002.

We
lease certain equipment and our facilities under capital and operating lease
agreements which expire at various dates through 2017. In addition, we receive
sublease income from noncancelable subleases of excess facilities. Future
minimum lease payments due and receivable under these leases as of December 31,
2002 were as follows (in thousands):

|Year Ending December 31, | CapitalLeases Due |  | OperatingLeases Due |     | SubleaseIncomeReceivable |   | Total,Net | 
|------------------------ | ----------------- |  | ------------------- | --- | ------------------------ | - | --------- | 
|2003                     |                   |  | $                   | 162 |                          | $ | 14,857    | 
|2004                     |                   |  |                     |    |                          |   | 11,546    | 
|2005                     |                   |  |                     |    |                          |   | 8,980     | 
|2006                     |                   |  |                     |    |                          |   | 6,324     | 
|2007                     |                   |  |                     |    |                          |   | 6,363     | 
|2008 and thereafter      |                   |  |                     |    |                          |   | 28,736    | 
|                         |                   |  |                     |     |                          |   |           | 
|                         |                   |  | $                   | 162 |                          | $ | 76,806    | 
|                         |                   |  |                     |     |                          |   |           | 

Net
operating lease commitments shown above include $32.9 million of operating lease
commitments under leases for abandoned facilities which are recorded as
restructuring costs in the accompanying balance sheet as of December 31, 2002.
We do not have commercial commitments under lines of credit, standby lines of
credit, guarantees, standby repurchase obligations or other such arrangements.

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

## Recent Accounting
Pronouncements

In
July 2002, the staff of the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit and Disposal Activities
(SFAS 146). This statement revises the accounting treatment for the
cost of exit and disposal activities under Emerging Issues Task Force Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (EITF No. 94-3). SFAS 146
requires companies to record exit or disposal costs when they are
incurred and can be measured at fair value. The recorded liability
will subsequently be adjusted for changes in estimated cash flows. Commitment to
a plan to exit an activity or dispose of long-lived assets will no longer be
sufficient to record a one-time charge for most anticipated costs. The
provisions of SFAS 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Companies may not restate
previously issued financial statements for the effect of the provisions of SFAS
146 and liabilities that a company previously recorded under EITF Issue No. 94-3
will not be affected. We do not believe that the adoption of SFAS 146 will have
a material impact on our consolidated financial statements.

In
  November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
  and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
  Indebtedness of Others, (FIN 45). In general, FIN 45
  applies to contracts or indemnification agreements that require the guarantor
  to make payments to the guaranteed party contingent upon the occurrence of a
  specified event that is related to an asset, liability, or an equity security
  of the guaranteed party. FIN 45 requires a guarantor to make significant new
  disclosures, even when the likelihood of making any payments under the guarantee
  is remote, which is a change from current practice. The disclosure requirements
  are effective for financial statements of interim or annual periods ending after
  December 15, 2002. In accordance with these disclosure requirements, we discuss
  in Notes to Consolidated Financial Statements our warranty and intellectual
  property indemnification provisions generally included in our software license
  agreements with our customers.

In addition, FIN 45 requires on a prospective
  basis that certain guarantees issued or modified after December 31, 2002 be
  recorded at fair value. This differs from current practice, under which a liability
  is recorded when a loss is probable and reasonably estimable. We do not believe
  that these provisions will result in a material impact to our financial statements
  or that our standard warranty and indemnification provisions will be required
  to be recorded at fair value in future periods. However, the accounting profession
  and regulatory agencies continue to discuss various provisions of this pronouncement
  with the objective of providing additional guidance on its application. This
  could result in an unanticipated change in the way we account for these provisions
  in future periods.

29

---



In
  November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
  Arrangements with Multiple Deliverables (EITF No. 00-21).
  EITF No. 00-21 provides guidance on how to account for arrangements that involve
  the delivery or performance of multiple products, services or rights to use
  assets. The provisions of EITF No. 00-21 will apply to revenue arrangements
  entered into after January 1, 2004. We do not believe that the adoption of EITF
  No. 00-21 will have a material impact on our consolidated financial statements.

On
  December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
  Compensation  Transition and Disclosure. SFAS 148 amends SFAS 123
  to provide alternative methods of transition to SFAS 123s fair value method
  of accounting for stock-based employee compensation. SFAS 148 also amends the
  disclosure provisions of SFAS 123 and APB No. 28, Interim Financial Reporting,
  to require disclosure in the summary of significant accounting policies of the
  effects of an entitys accounting policy with respect to stock-based employee
  compensation on reported net income and earnings per share in annual and interim
  financial statements. While SFAS 148 does not amend SFAS 123 to require companies
  to account for employee stock options using the fair value method, the disclosure
  provisions of SFAS 148 are applicable to all companies with stock-based employee
  compensation, regardless of whether they account for that compensation using
  the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since
  we account for our stock-based compensation under APB 25, and have no current
  plans on switching to SFAS 123, the impact of SFAS 148 will be limited to the
  interim reporting of the effects on net income and earnings per share if the
  Company accounted for stock-based compensation under SFAS 123. SFAS 148 is effective
  for fiscal years ending after December 15, 2002.

In
  January 2003, the FASB issued Interpretation No. 46, Consolidation of
  Variable Interest Entities (FIN 46), an interpretation of
  Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements.
  FIN 46 establishes accounting guidance for consolidation of a variable interest
  entity (VIE), formerly referred to as special purpose entities.
  FIN 46 applies to any business enterprise, both public and private, that has
  a controlling interest, contractual relationship or other business relationship
  with a VIE. FIN 46 provides guidance for determining when an entity, the Primary
  Beneficiary, should consolidate another entity, a VIE, that functions to support
  the activities of the Primary Beneficiary. We currently have no contractual
  relationship or other business relationship with a VIE and therefore the adoption
  will not have a material impact on our consolidated financial
  statements.

## Related Party
  Transactions

In
  connection with the employment of our chief executive officer, Roger Siboni,
  in 1998, we agreed to extend to Mr. Siboni credit in the form of two personal
  loans.

First,
  in July 1998, we loaned $640,000 to Mr. Siboni, in order to purchase 2,400,000
  shares of our common stock at $0.26 2/3 per share. This loan is due on July
  1, 2008 and accrues interest at 5.88% per annum. As of December 31, 2002, the
  outstanding principal balance of this loan was $377,000 and accrued interest
  was $6,000. As of December 31, 2001, the outstanding principal balance of this
  loan was $446,000 and accrued interest was $129,000. This loan is secured by
  1,245,661 shares of our common stock. Mr. Siboni has indicated, and we expect,
  that this loan will be repaid by August 2004.

Second,
  Mr. Siboni was also offered a loan of $250,000 per year for a period beginning
  August 1, 1998 and ending July 31, 2000, drawable on a monthly basis. This loan
  accrued interest at 5.6% per annum. As of December 31, 2002, the loan had been
  repaid in full. As of December 31, 2001, the outstanding balance including accrued
  interest was $160,000.

In
  addition, Mr. Siboni was extended a loan in the aggregate sum of $173,000 for
  the payment of taxes arising from bonus payments made to him during the years
  1999 and 2000. This loan bears interest at 5.6% per annum. As of December 31,
  2002 and 2001, the outstanding balance including accrued interest was $43,000
  and $197,000, respectively. Subsequent to December 31, 2002, this loan was repaid
  in full.

30

---



Mr.
Siboni is currently a member of the board of directors of two of our customers.
Total revenues to E.piphany from these customers were $0.2 million, $0.4 million
and $0.9 million for the years ended December 31, 2002, 2001 and 2000,
respectively. We had accounts receivable balances from these customers totaling
$0.1 million and $0 for the years ended December 31, 2002 and 2001,
respectively.

In
addition, four of our customers have board members or executive officers that
are also on our board of directors. Total revenues to E.piphany from these
customers were $1.0 million, $3.1 million and $0.4 million for the years ended
December 31, 2002, 2001 and 2000, respectively. We had accounts receivable
balances from these customers totaling $0.3 million and $0.5 million for the
years ended December 31, 2002 and 2001, respectively.

## Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

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

## Foreign Currency
Exchange Rate Risk

The
majority of our operations are based in the United States and, accordingly, the
majority of our transactions are denominated in U.S. dollars. We do have
foreign-based operations, however, where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. As of December 31, 2002, we had international
operations in Asia, Australia, Europe and Latin America and conduct transactions
in the local currency of each location. To date, our exposure to fluctuations in
the relative value of other currencies has been limited because substantially
all of our assets are denominated in U.S. dollars, and those assets which are
not denominated in U.S. dollars have generally been denominated in historically
stable currencies. The impact to our financial statements has therefore not been
material. To date, we have not entered into any foreign exchange hedges or other
derivative financial instruments. We will continue to evaluate our exposure to
foreign currency exchange rate risk on a regular basis.

## Interest Rate
Risk

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

As
of December 31, 2002, we held $102.6 million in cash, cash equivalents and
restricted cash consisting of highly liquid short-term investments having
original maturity dates of no more than 90 days. Declines of interest rates over
time would reduce our interest income from our highly liquid short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 100 basis points would cause a corresponding decrease in our
annual interest income of approximately $1.0 million. Due to the nature of our
highly liquid cash equivalents, a change in interest rates would not materially
change the fair market value of our cash, cash equivalents and restricted cash.

31

---



As
  of December 31, 2002, we held $184.3 million in short-term investments and long-term
  investments, each of which consisted of taxable fixed income securities having
  original maturity dates between three months and two years. A decline in interest
  rates over time would reduce our interest income from our short-term and long-term
  investments. A decrease in interest rates of 100 basis points would cause a
  corresponding decrease in our annual interest income of approximately $1.8 million.
  An increase in interest rates over time would cause the fair market value of
  our portfolio to decline. An immediate and uniform increase in interest rates
  of 100 basis points would cause the fair market value of these items to decrease
  by approximately $2.0 million.

As
of December 31, 2002, we did not have any debt outstanding other than capital
lease obligations.

The
following summarizes our investments, weighted average yields and expected
maturity dates as of December 31, 2002 (in thousands, except interest rates):

|                                  | 2003 |  | 2004 |        | 2005 |   | 2006    |   | 2007 |   | Thereafter |   | Total | 
|--------------------------------- | ---- |  | ---- | ------ | ---- | - | ------- | - | ---- | - | ---------- | - | ----- | 
|                                  |      | 
|Corporate
      bonds             |      |  | $    | 38,954 |      | $ | 17,343  |   | $    |  |            | $ |      | 
|                                 
|Weighted
      average yield      |      |  |      | 2.34   | %    |   | 2.2     | % |      |  |            |   |      | 
|                                 
|Government
      notes/bonds (1)  |      |  | $    | 30,325 |      | $ | 97,725  |   |      |  |            |   |      | 
|                                 
|Weighted
      average yield      |      |  |      | 1.69   | %    |   | 2.28    | % |      |  |            |   |      | 
|                                  |      | 
|Total
      investment securities |      |  | $    | 69,279 |      | $ | 115,068 |   | $    |  |            | $ |      | 
|                                  |      | 

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

32

---



## Item 8. Financial
Statements and Supplementary Data

# E.PIPHANY,
INC.

# INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

|                                                  | Page
|------------------------------------------------- | ----
|Report of Ernst & Young LLP, Independent Auditors |     
|Consolidated Balance Sheets                       |     
|Consolidated Statements of Operations             |     
|Consolidated Statements of Stockholders Equity   |     
|Consolidated Statements of Cash Flows             |     
|Notes to Consolidated Financial Statements        |     

33

---



## REPORT OF ERNST &
YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the
accompanying consolidated balance sheet of E.piphany, Inc. as of December 31,
2002, and the related consolidated statements of operations, stockholders
equity, and cash flows for the year then ended. These financial statements are
the responsibility of E.piphany, Inc.s management. Our responsibility is
to express an opinion on these financial statements based on our audit. The
financial statements of E.piphany, Inc. as of December 31, 2001 and for each of
the two years in the period ended December 31, 2001 were audited by other
auditors who have ceased operations and whose report dated January 21, 2002
expressed an unqualified opinion on those statements before the adjustments
described in Notes 2, 3 and 4.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of E.piphany, Inc. at December 31, 2002, and
the consolidated results of its operations and its cash flows for year then
ended, in conformity with accounting principles generally accepted in the United
States.

As disclosed in Note 2,
effective January 1, 2002, E.piphany, Inc. changed the manner in which it
recognizes and presents reimbursements for out of pocket expenses. As disclosed
in Note 4, effective January 1, 2002, E.piphany, Inc. changed its method of
accounting for goodwill. As disclosed in Note 3, E.piphany, Inc. has
reclassified certain cash and cash equivalents to restricted cash in the
consolidated balance sheet for the year ended December 31, 2001. As disclosed in
Note 4, E.piphany, Inc. has reclassified the amortization of purchased
technology to cost of revenues. As discussed above, the consolidated financial
statements of E.piphany, Inc. as of December 31, 2001 and for each of the two
years in the period ended December 31, 2001 were audited by other auditors who
have ceased operations. Accordingly, we have audited the reclassification
adjustments described above. In addition, we have audited the adjustments in the
transitional disclosures in Note 4. In our opinion, all such adjustments and
disclosures are appropriate and the adjustments have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 financial statements of the Company other than with respect to
such adjustments and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 financial statements taken as a whole.

| |  | /s/ ERNST & YOUNG LLP
| |  | ---------------------

San Francisco, CaliforniaJanuary 17, 2003

34

---



The following is a copy
  of the audit report previously issued by Arthur Andersen LLP and has not been
  reissued by Arthur Andersen LLP See Exhibit 23.2 for further discussion.
  As disclosed in Note 2, effective January 1, 2002, E.piphany, Inc. changed the
  manner in which it recognizes and presents reimbursements for out of pocket
  expenses. As disclosed in Note 4, effective January 1, 2002, E.piphany, Inc.
  changed its method of accounting for goodwill. As disclosed Note 3, E.piphany,
  Inc. has reclassified certain cash and cash equivalents to restricted cash in
  the consolidated balance sheet for the year ended December 31, 2001. As disclosed
  in Note 4, E.piphany, Inc. has reclassified the amortization of purchased technology
  to cost of revenues. The Arthur Andersen LLP report does not extend to these
  changes to the 2001 and 2000 consolidated financial statements. The adjustments
  to the 2001 and 2000 consolidated financial statements were reported on by Ernst
  & Young LLP as stated in their report appearing herein. The consolidated
  balance sheet as of December 31, 2000 and the consolidated statements of operations,
  stockholders equity and cash flows for the year ended December 31, 1999
  have not been included in the accompanying financial statements.

## REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

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

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

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

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of E.piphany, Inc. and subsidiaries as
of December 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

| |  | ARTHUR
ANDERSEN LLP
| |  | -------------------

San Jose, CaliforniaJanuary 21, 2002

35

---



# E.PIPHANY,
INC.

# CONSOLIDATED
BALANCE SHEETS

|                                                              | December
      31, | 
|------------------------------------------------------------- | ------------------ | 
|
|
|ASSETS                                                        |                    | 
|Current
      assets:                                         |                    | 
|Cash
      and cash equivalents                               |                    | 
|Short-term
      investments                                  |                    | 
|Accounts
      receivable, net of allowance for doubtful      |                    | 
|accounts
      of $2,508 and $4,332                           |                    | 
|Prepaid
      expenses and other current assets               |                    | 
|Short-term
      restricted cash                              |                    | 
|                                                              |                    | 
|Total
      current assets                                    |                    | 
|Long-term
      investments                                   |                    | 
|Long-term
      restricted cash                               |                    | 
|Property
      and equipment, net                             |                    | 
|Goodwill,
      net                                           |                    | 
|Purchased
      intangibles, net                              |                    | 
|Other
      assets                                            |                    | 
|                                                              |                    | 
|                                                              |                    | 
|                                                              |                    | 
|LIABILITIES
      AND STOCKHOLDERS EQUITY                    |                    | 
|Current
      liabilities:                                    |                    | 
|Current
      portion of capital lease obligations            |                    | 
|Accounts
      payable                                        |                    | 
|Accrued
      compensation                                    |                    | 
|Accrued
      other                                           |                    | 
|Current
      portion of restructuring costs                  |                    | 
|Deferred
      revenue                                        |                    | 
|                                                              |                    | 
|Total
      current liabilities                               |                    | 
|Restructuring
      costs, net of current portion             |                    | 
|Capital
      lease obligations, net of current portion       |                    | 
|Other
      long-term liabilities                             |                    | 
|                                                              |                    | 
|Total
      liabilities                                       |                    | 
|                                                              |                    | 
|Commitments
      and contingencies (Note 6)                  |                    | 
|Minority
      interest                                       |                    | 
|Stockholders
      equity:                                   |                    | 
|Preferred
      stock, $0.0001 par value;                     |                    | 
|Authorized
      25,000 shares as of December 31, 2002;      |                    | 
|None
      issued and outstanding                             |                    | 
|Common
      stock, $0.0001 par value;                        |                    | 
|Authorized
       500,000 shares as of December 31, 2002;    |                    | 
|Issued
      and outstanding  72,820 and 70,972 shares as of |                    | 
|December
      31, 2002 and 2001                              |                    | 
|Additional
      paid-in capital                              |                    | 
|Stockholders
      notes receivable                          |                    | 
|Accumulated
      other comprehensive income (loss)           |                    | 
|Deferred
      compensation                                   |                    | 
|Accumulated
      deficit                                     |                    | 
|                                                              |                    | 
|Total
      stockholders equity                              |                    | 
|                                                              |                    | 
|                                                              |                    | 
|                                                              |                    | 

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

36

---



# E.PIPHANY,
INC.

# CONSOLIDATED
STATEMENTS OF OPERATIONS

|                                                        | Years Ended December 31, | 
|------------------------------------------------------- | ------------------------ | 
|
|
|Revenues:                                               |                          | 
|Product license                                         |                          | 
|Services                                                |                          | 
|                                                        |                          | 
|                                                        |                          | 
|                                                        |                          | 
|Cost of revenues:                                       |                          | 
|Product license                                         |                          | 
|Services                                                |                          | 
|Amortization of purchased technology                    |                          | 
|                                                        |                          | 
|                                                        |                          | 
|                                                        |                          | 
|Gross profit                                            |                          | 
|                                                        |                          | 
|Operating expenses:                                     |                          | 
|Research and development                                |                          | 
|Sales and marketing                                     |                          | 
|General and administrative                              |                          | 
|Restructuring charges                                   |                          | 
|In-process research and development charge              |                          | 
|Amortization of goodwill and purchased                  |                          | 
|intangibles                                             |                          | 
|Write-down of goodwill and purchased intangibles        |                          | 
|Stock-based compensation                                |                          | 
|                                                        |                          | 
|Total operating expenses                                |                          | 
|                                                        |                          | 
|Loss from operations                                    |                          | 
|                                                        |                          | 
|Other income, net                                       |                          | 
|                                                        |                          | 
|Net loss                                                |                          | 
|                                                        |                          | 
|Basic and diluted net loss per share                    |                          | 
|                                                        |                          | 
|Shares used in computing basic and diluted net loss per |                          | 
|share                                                   |                          | 
|                                                        |                          | 

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

37

---



# E.PIPHANY,
INC.

# CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

|                                     | CommonStockShares |  | Amount |        | AdditionalPaid-inCapital |   | Warrants |  | StockholdersNotesReceivable |           | AccumulatedOtherComprehensiveIncome (Loss) |   | DeferredCompensation |   | AccumulatedDeficit |        | TotalStockholdersEquity |   | ComprehensiveLoss |  
|------------------------------------ | ----------------- |  | ------ | ------ | ------------------------ | - | -------- |  | ---------------------------- | --------- | ------------------------------------------ | - | -------------------- | - | ------------------ | ------ | ------------------------ | - | ----------------- | -
|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              | )
|Exercise of common stock options     |                   |  |        | 690    |                          |   |         |  |                              | 2,819     |                                            |   |                     |   |                    |       |                          |   |                  |  
|Issuance of common stock under       |                   | 
|employee stock purchase plan         |                   |  |        | 896    |                          |   |         |  |                              | 5,679     |                                            |   |                     |   |                    |       |                          |   |                  |  
|Issuance of stock in connection with |                   | 
|acquisitions                         |                   |  |        | 1,608  |                          |   | 1        |  |                              | 50,957    |                                            |   |                     |   |                    |       |                          |   |                  |  
|Repurchase of stock                  |                   |  |        | (666   | )                        |   |         |  |                              | (469      | )                                          |   |                     |   |                    |       |                          |   |                  |  
|Payments received on notes           |                   | 
|receivable                           |                   |  |        |       |                          |   |         |  |                              |          |                                            |   |                     |   |                    | 1,890  |                          |   |                  |  
|Acceleration of common stock option  |                   | 
|vesting                              |                   |  |        |       |                          |   |         |  |                              | 452       |                                            |   |                     |   |                    |       |                          |   |                  |  
|Deferred stock compensation          |                   |  |        |       |                          |   |         |  |                              | 1,213     |                                            |   |                     |   |                    |       |                          |   |                  |  
|Amortization of deferred stock       |                   | 
|compensation                         |                   |  |        |       |                          |   |         |  |                              |          |                                            |   |                     |   |                    |       |                          |   |                  |  
|Comprehensive loss:                  |                   | 
|Foreign currency translation         |                   | 
|adjustment                           |                   |  |        |       |                          |   |         |  |                              |          |                                            |   |                     |   |                    |       |                          |   | (97               | )
|Unrealized gain on investments       |                   |  |        |       |                          |   |         |  |                              |          |                                            |   |                     |   |                    |       |                          |   | 83                |  

38

---



|                                        | CommonStockShares |  | Amount |        | AdditionalPaid-inCapital |   | Warrants |  | StockholdersNotesReceivable |           | AccumulatedOtherComprehensiveIncome (Loss) |  | DeferredCompensation |  | AccumulatedDeficit |      | TotalStockholdersEquity |   | ComprehensiveLoss |  
|--------------------------------------- | ----------------- |  | ------ | ------ | ------------------------ | - | -------- |  | ---------------------------- | --------- | ------------------------------------------ |  | -------------------- |  | ------------------ | ---- | ------------------------ | - | ----------------- | -
|Net loss                                |                   |  |        |       |                          |   |         |  |                              |          |                                            |  |                     |  |                    |     |                          |   |                  |  
|                                        |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |   |                   |  
|Total comprehensive loss                |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |   |                   |  
|                                        |                   | 
|Balance at December 31, 2001            |                   |  |        | 70,972 |                          | $ | 7        |  | $                            | 3,807,410 |                                            |  | 0                    |  | $                  | (778 | )                        | $ | (564              | )
|                                        |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |  
|Exercise of common stock options        |                   |  |        | 667    |                          |   |         |  |                              | 2,680     |                                            |  |                     |  |                    |     |                          |   |                  |  
|Repurchase of stock                     |                   |  |        | (41    | )                        |   |         |  |                              | (127      | )                                          |  |                     |  |                    |     |                          |   |                  |  
|Issuance of common stock under employee |                   |  |        |       |                          |   |         |  |                              |          |                                           
|stock purchase plan                     |                   |  |        | 1,222  |                          |   |          |  |                              | 5,166     |                                            |  |                     |  |                    |     |                          |   |                  |  
|Payments received on notes receivable   |                   |  |        |       |                          |   |         |  |                              |          |                                            |  |                     |  |                    | 222  |                          |   |                  |  
|Deferred stock compensation             |                   |  |        |       |                          |   |         |  |                              | 87        |                                            |  |                     |  |                    |     |                          |   |                  |  
|Amortization of deferred stock          |                   |  |        |       |                         
|compensation                            |                   |  |        |       |                          |   |          |  |                              |          |                                            |  |                     |  |                    |     |                          |   |                  |  
|Comprehensive loss:                     |                   | 
|Foreign currency translation adjustment |                   |  |        |       |                          |   |         |  |                              |          |                                            |  |                     |  |                    |     |                          |   | 208               |  
|Unrealized gain on investments          |                   |  |        |       |                          |   |         |  |                              |          |                                            |  |                     |  |                    |     |                          |   | 652               |  
|Net loss                                |                   |  |        |       |                          |   |         |  |                              |          |                                            |  |                     |  |                    |     |                          |   |                  |  
|                                        |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |   |                   |  
|Total comprehensive loss                |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |   |                   |  
|                                        |                   | 
|Balance at December 31, 2002            |                   |  |        | 72,820 |                          | $ | 7        |  | $                            | 3,815,216 |                                            |  |                     |  | $                  | (556 | )                        | $ | 296               |  
|                                        |                   |  |        |        |                          |   |          |  |                              |           |                                            |  |                      |  |                    |      |                          |  

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

39

---



# E.PIPHANY,
INC.

# CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                              | Years Ended December 31, | 
|------------------------------------------------------------- | ------------------------ | 
|
|
|Cash flows from operating activities:                         |                          | 
|Net loss                                                      |                          | 
|Adjustments to reconcile net loss to net cash used in         |                          | 
|operating activities:                                         |                          | 
|Depreciation                                                  |                          | 
|Provision for doubtful accounts                               |                          | 
|Amortization of goodwill and purchased                        |                          | 
|intangibles                                                   |                          | 
|Write-down of goodwill and purchased intangibles              |                          | 
|In-process research and development charge                    |                          | 
|Stock-based compensation                                      |                          | 
|Non-cash restructuring charge                                 |                          | 
|Minority interest in net loss of consolidated subsidiary      |                          | 
|Changes in operating assets and liabilities                   |                          | 
|Accounts receivable                                           |                          | 
|Prepaid expenses and other assets                             |                          | 
|Accounts payable                                              |                          | 
|Accrued liabilities                                           |                          | 
|Restructuring costs                                           |                          | 
|Deferred revenue                                              |                          | 
|                                                              |                          | 
|Net cash used in operating activities                         |                          | 
|                                                              |                          | 
|Cash flows from investing activities:                         |                          | 
|Purchases
      of property and equipment                     |                          | 
|Restricted cash                                               |                          | 
|Cash acquired in acquisitions                                 |                          | 
|Acquisition related costs and changes in accruals             |                          | 
|Proceeds from the sales of investments                        |                          | 
|Purchases of investments                                      |                          | 
|                                                              |                          | 
|Net cash used in investing activities                         |                          | 
|                                                              |                          | 
|Cash flows from financing activities:                         |                          | 
|Repayments on line of credit                                  |                          | 
|Repayments of notes payable                                   |                          | 
|Principal payments on capital lease obligations               |                          | 
|Proceeds from public offerings of common stock, net           |                          | 
|Repayments on stockholders notes receivable                  |                          | 
|Proceeds from exercise of warrant                             |                          | 
|Subsidiary stock offering                                     |                          | 
|Issuance of common stock, net of repurchases                  |                          | 
|                                                              |                          | 
|Net cash provided by financing activities                     |                          | 
|                                                              |                          | 
|Effect of foreign exchange rates on cash and cash equivalents |                          | 
|                                                              |                          | 
|Net increase (decrease) in cash and cash equivalents          |                          | 
|Cash and cash equivalents at beginning of year                |                          | 
|                                                              |                          | 
|Cash and cash equivalents at end of year                      |                          | 
|                                                              |                          | 
|Supplemental cash flow information:                           |                          | 
|Cash paid for interest                                        |                          | 
|                                                              |                          | 
|Unrealized gain (loss) on available for sale securities       |                          | 
|                                                              |                          | 

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

40

---



# 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 develops, markets and licenses analytic and
operational CRM software products, and related services, 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. E.piphany has regional
domestic offices in the United States, as well as international offices in Asia,
Australia, Europe and Latin America.

## 2. Summary of
Significant Accounting Policies

## Basis of Presentation

The
consolidated financial statements include the accounts of Epiphany, Inc. and its
subsidiaries. As of December 31, 2002, the Company held 93% of the capital stock
of its subsidiary, Nihon E.piphany, K.K. The company maintains an ownership
percentage of 100% for all other subsidiaries. Intercompany accounts and
transactions have been eliminated.

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

## Reclassification

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

## Foreign Currency Translation

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

## Impairment of Long-Lived Assets

The
Company evaluates long-lived assets for impairment on a periodic basis or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair market value.

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

41

---



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

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

## Accounts Receivable and Deferred Revenue

Accounts
receivable consists of amounts due from customers for which revenue has been
recognized. Deferred revenue consists of amounts received from customers for
which revenue has not been recognized. Deferred license revenue is recognized
upon delivery of our product, as services are rendered, or as other requirements
requiring the initial deferral are satisfied. Deferred maintenance revenue is
recognized ratably over the term of the maintenance agreement, typically one
year, and deferred services revenue is recognized as services are rendered.

## Allowances for Doubtful Accounts

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

## Property and Equipment

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

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

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

The
Companys customer base consists of businesses in Asia, Australia, Europe,
Latin America and North America. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral on accounts
receivable. The Company maintains reserves for potential credit losses;
historically, such reserves have been adequate to cover the actual losses
incurred. No individual customer accounted for more than 10% of our total
revenues for the years ended December 31, 2002, 2001 or 2000. No individual
customer account receivable balance accounted for more than 10% of our total
accounts receivable as of December 31, 2002 or 2001.

## Warranties and
Indemnification

The
Company generally provides a warranty for its software products and services to
its customers and accounts for its warranties under the FASBs Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5).
The Companys products are generally warranted to perform substantially as
described in the associated product documentation for a period of one year. The
Companys services are generally warranted to be performed consistent with
industry standards for a period of ninety days from delivery. In the event there
is a failure of such warranties, the Company generally is obligated to correct
the product or service to conform to the warranty provision or, if the Company is unable
to do so, the customer is entitled to seek a refund of the purchase price of the
product or service. The Company has not provided for a warranty accrual as of
December 31, 2002 or December 31, 2001. To date, the Companys product
warranty expense has not been significant.

42

---



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

## Software
Development Costs

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

## Income
Taxes

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

## Revenue
Recognition

E.piphany
recognizes revenue according to the following policies:

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

When
licenses are sold together with consulting and implementation services, license
fees are recognized upon delivery, provided that (1) the criteria set forth in
the above paragraph have been met, (2) payment of the license fees is not
dependent upon the performance of the consulting or implementation services, and
(3) the services are not essential to the functionality of the software. For
arrangements that do not meet the above criteria, both the product license
revenues and services revenues are recognized under the percentage of completion
contract method in accordance with the provisions of SOP 81-1, Accounting
for Performance of Construction Type and Certain Production Type
Contracts. The Company follows the percentage of completion method since
reasonably dependable estimates of progress toward completion of a contract can
be made. We estimate the percentage of completion on contracts utilizing hours
incurred to date as a percentage of the total estimated hours to complete the
project. Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known. To
date, when the Company has been primarily responsible for the implementation of
the software, services have been considered essential to the functionality of
the software products and therefore license and services revenues have been
recognized pursuant to SOP 81-1.

43

---



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

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

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

We
have adopted the provision of Emerging Issues Task Force No. 01-14 (EITF
01-14), Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred. This pronouncement
addresses whether reimbursements received for out of pocket expenses incurred
should be characterized in the income statement as revenue or as a reduction of
expenses incurred. The staff of the FASB concluded that reimbursements received
for out of pocket expenses incurred should be characterized as revenue in the
income statement. Prior to January 1, 2002, we recorded reimbursements as a
reduction of cost of services revenues. Beginning in the first quarter of 2002,
we have adopted EITF 01-14 and have recorded reimbursable expenses as services
revenue. For all comparative periods, reimbursable expenses have been
reclassified into services revenues, with a corresponding increase in cost of
revenues. The impact of EITF 01-14 on services revenues and cost of revenues is
presented as follows (in thousands):

|                                            | Year EndedDecember 31, | 
|------------------------------------------- | ---------------------- | 
|
|Services revenues (as originally presented) |                        | 
|Impact of  EITF 01-14                       |                        | 
|                                            |                        | 
|Services revenues (as currently presented)  |                        | 
|                                            |                        | 

|                                                    | Year EndedDecember 31, | 
|--------------------------------------------------- | ---------------------- | 
|
|Cost of services revenues (as originally presented) |                        | 
|Impact of EITF 01-14                                |                        | 
|                                                    |                        | 
|Cost of services revenues (as currently presented)  |                        | 
|                                                    |                        | 

With
the adoption of EITF 01-14, the Company typically recognizes reimbursable
expenses as revenue when an agreement to bill the customer for reimbursable
expenses exists, the expenses have been incurred and billed, and collection is
probable.

As
of December 31, 2002 and 2001, $0.7 million and $1.7 million, respectively, of
accounts receivable was unbilled and recognized as revenue due to services
performed in advance of billings.

## Advertising
Costs

The
Company expenses all advertising costs as they are incurred, which totaled $1.5
million, $3.9 million, and $1.7 million during the years ended December 31,
2002, 2001 and 2000, respectively.

## Stock-Based
Compensation

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

44

---



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

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

## Computation of
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 (in thousands, except per share amounts).

|                                                    | Years Ended December 31, | 
|--------------------------------------------------- | ------------------------ | 
|
|Net loss                                            |                          | 
|                                                    |                          | 
|Basic and diluted:                                  |                          | 
|Weighted average shares of common stock             |                          | 
|outstanding                                         |                          | 
|Less: Weighted average shares subject to repurchase |                          | 
|                                                    |                          | 
|Weighted average shares used in computing basic and |                          | 
|diluted net loss per common share                   |                          | 
|                                                    |                          | 
|Basic and diluted net loss per common share         |                          | 
|                                                    |                          | 

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

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

45

---



## Segment
Reporting

E.piphany
is organized and operates as one business segment which manages the development,
distribution, and support of software products and related services. The Company
distributes its products in the United States and in foreign countries through
its sales personnel and indirect channel partners.

Revenues
according to geographic areas are as follows (in thousands):

|               | Years Ended December 31, | 
|-------------- | ------------------------ | 
|
|Revenues:      |                          | 
|United States  |                          | 
|United Kingdom |                          | 
|Rest of World  |                          | 
|               |                          | 
|Total          |                          | 
|               |                          | 

## Recent Accounting
Pronouncements

In
  July 2002, the staff of the FASB issued Statement of Financial Accounting Standards
  No. 146, Accounting for Costs Associated with Exit and Disposal Activities
  (SFAS 146). This statement revises the accounting treatment for
  the cost of exit and disposal activities under Emerging Issues Task Force Issue
  94-3, Liability Recognition for Certain Employee Termination Benefits
  and Other Costs to Exit an Activity (EITF No. 94-3). SFAS
  146 requires companies to record exit or disposal costs when they are incurred
  and can be measured at fair value. The recorded liability will subsequently
  be adjusted for changes in estimated cash flows. Commitment to a plan to exit
  an activity or dispose of longlived assets will no longer be sufficient
  to record a one-time charge for most anticipated costs. The provisions of SFAS
  146 are effective prospectively for exit or disposal activities initiated after
  December 31, 2002. Companies may not restate previously issued financial statements
  for the effect of the provisions of SFAS 146 and liabilities that a company
  previously recorded under EITF Issue No. 94-3 will not be affected. The Company
  does not believe that the adoption of SFAS 146 will have a material impact on
  the Companys consolidated financial statements.

In
  November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
  and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
  Indebtedness of Others, (FIN 45). In general, FIN 45 applies
  to contracts or indemnification agreements that require the guarantor to make
  payments to the guaranteed party contingent upon the occurrence of a specified
  event that is related to an asset, liability, or an equity security of the guaranteed
  party. FIN 45 requires a guarantor to make significant new disclosures, even
  when the likelihood of making any payments under the guarantee is remote, which
  is a change from current practice. The disclosure requirements are effective
  for financial statements of interim or annual periods ending after December
  15, 2002. See Note 2 for a discussion of the Companys warranty and intellectual
  property indemnification provisions generally included in the Company's software license
  agreements with customers. 
       In addition, FIN 45 requires on a prospective
  basis that certain guarantees issued or modified after December 31, 2002 be
  recorded at fair value. This differs from current practice, under which a liability
  is recorded when a loss is probable and reasonably estimable. The Company does
  not believe that these provisions will result in a material impact to its financial
  statements or that the Companys standard warranty and indemnification
  provisions will be required to be recorded at fair value in future periods.
  However, the accounting profession and regulatory agencies continue to discuss
  various provisions of this pronouncement with the objective of providing additional
  guidance on its application. This could result in an unanticipated change in
  the way the Company accounts for these provisions in future periods.

In
  November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
  Arrangements with Multiple Deliverables (EITF No. 00-21).
  EITF No. 00-21 provides guidance on how to account for arrangements that involve
  the delivery or performance of multiple products, services or rights to use
  assets. The provisions of EITF No. 00-21 will apply to revenue arrangements
  entered into after January 1, 2004. The Company does not believe that the adoption
  of EITF No. 00-21 will have a material impact on the Companys consolidated
  financial statements.

On
  December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
  Compensation  Transition and Disclosure. SFAS 148 amends SFAS 123
  to provide alternative methods of transition to SFAS 123s fair value method
  of accounting for stock-based employee compensation. SFAS 148 also amends the
  disclosure provisions of SFAS 123 and APB No. 28, Interim Financial Reporting,
  to require disclosure in the summary of significant accounting policies of the
  effects of an entitys accounting policy with respect to stock-based employee
  compensation on reported net income and earnings per share in annual and interim
  financial statements. While SFAS 148 does not amend SFAS 123 to require companies
  to account for employee stock options using the fair value method, the disclosure
  provisions of SFAS 148 are applicable to all companies with stock-based employee
  compensation, regardless of whether they account for that compensation using
  the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since
  the Company accounts for stock-based compensation under APB 25, and has no current
  plans on switching to SFAS 123, the impact of SFAS 148 will be limited to the
  interim reporting of the effects on net income and earnings per share if the
  Company accounted for stock-based compensation under SFAS 123. SFAS 148 is effective
  for fiscal years ending after December 15, 2002.

46

---



In
  January 2003, the FASB issued Interpretation No. 46, Consolidation of
  Variable Interest Entities (FIN 46), an interpretation of
  Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements.
  FIN 46 establishes accounting guidance for consolidation of a variable interest
  entity (VIE), formerly referred to as special purpose entities.
  FIN 46 applies to any business enterprise, both public and private, that has
  a controlling interest, contractual relationship or other business relationship
  with a VIE. FIN 46 provides guidance for determining when an entity, the Primary
  Beneficiary, should consolidate another entity, a VIE, that functions to support
  the activities of the Primary Beneficiary. The Company currently has no contractual
  relationship or other business relationship with a VIE and therefore the adoption
  will not have an effect on the Companys consolidated financial
  statements.

## 3. Financial
Statement Details

## Investments

Cash,
cash equivalents, short-term investments, and long-term investments consisted of
the following as of December 31, 2002 and 2001 (in thousands):

|                                 | Unrealized | 
|-------------------------------- | ---------- | 
|
|December 31, 2002:               |            | 
|Cash and cash equivalents:       |            | 
|Cash                             |            | 
|Money market funds               |            | 
|Short-term municipal notes/bonds |            | 
|Government notes/bonds           |            | 
|                                 |            | 
|                                 |            | 
|                                 |            | 
|Short-term investments:          |            | 
|Corporate bonds                  |            | 
|Government notes/bonds           |            | 
|                                 |            | 
|                                 |            | 
|                                 |            | 
|Long-term investments:           |            | 
|Corporate bonds                  |            | 
|Government notes/bonds           |            | 
|                                 |            | 
|                                 |            | 
|                                 |            | 
|December 31, 2001:               |            | 
|Cash and cash equivalents:       |            | 
|Cash                             |            | 
|Certificates of deposit          |            | 
|Money market funds               |            | 
|Commercial paper                 |            | 
|Short-term municipal notes/bonds |            | 
|Government notes/bonds           |            | 
|                                 |            | 
|                                 |            | 
|                                 |            | 
|Short-term investments:          |            | 
|Commercial paper                 |            | 
|Corporate bonds                  |            | 
|Government notes/bonds           |            | 
|                                 |            | 
|                                 |            | 
|                                 |            | 

47

---



Short-term
investments of $69,279 and $121,324 as of December 31, 2002 and 2001,
respectively, mature in less than one year. Long-term investments of $115,068 as
of December 31, 2002, mature within two years.

## Restricted
Cash

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

|                            | December 31, | 
|--------------------------- | ------------ | 
|
|Short-term restricted cash: |              | 
|Letters of credit           |              | 
|Long-term restricted cash:  |              | 
|Letters of credit           |              | 
|Bank deposits               |              | 
|                            |              | 
|                            |              | 
|                            |              | 

Long-term
restricted cash of $9.4 million, as of December 31, 2001, has been reclassified
from cash and cash equivalents to long-term restricted cash to conform to the
current year presentation. See further discussion of restricted cash in Note 6,
Commitments and Contingencies.

## Property and
Equipment

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

|                                | December 31, | 
|------------------------------- | ------------ | 
|
|Computer software and equipment |              | 
|Furniture and fixtures          |              | 
|Leasehold improvements          |              | 
|                                |              | 
|                                |              | 
|Less: Accumulated depreciation  |              | 
|                                |              | 
|                                |              | 
|                                |              | 

Included in
property and equipment as of December 31, 2001 are assets acquired under capital
leases with an original cost of approximately $2.6 million. Accumulated
amortization of the leased assets was approximately $2.2 million. As of December
31, 2002, all assets acquired under capital leases have been fully depreciated
and written off. Amortization expense was $0.4 million, $0.7 million and $0.7
million for the years ended December 31, 2002, 2001 and 2000, respectively.

The
present value of payments under capital leases are as follows as of December 31,
2002 (in thousands):

|Minimum
      lease payments for the year ending December 31, 2003 |  |  | $ | 162 |  
|------------------------------------------------------------------ |  |  | - | --- | -
|Less:
      Imputed interest (12.0%)                               |  |  |   | (6  | )
|                                                                   |  | 
|Present
      value of payments under capital leases               |  |  | $ | 156 |  
|                                                                   |  |  |   |    

## Accrued
Liabilities

Accrued
compensation consists of the following (in thousands):

|                             | December 31, | 
|---------------------------- | ------------ | 
|
|Vacation                     |              | 
|Commissions and bonus        |              | 
|Employee Stock Purchase Plan |              | 
|Other                        |              | 
|                             |              | 
|                             |              | 
|                             |              | 

48

---



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

|                                      | December 31, | 
|------------------------------------- | ------------ | 
|
|Professional services                 |              | 
|Sales tax                             |              | 
|Marketing expenses                    |              | 
|Royalties                             |              | 
|Third-party cost of services revenues |              | 
|Other                                 |              | 
|                                      |              | 
|                                      |              | 
|                                      |              | 

## Accumulated Other
Comprehensive Income (Loss)

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

|                                      | December 31, | 
|------------------------------------- | ------------ | 
|
|Unrealized gain (loss) on investments |              | 
|Cumulative translation adjustment     |              | 
|                                      |              | 
|                                      |              | 
|                                      |              | 

## Other Income,
net

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

|                 | Years Ended December 31, | 
|---------------- | ------------------------ | 
|
|Interest income  |                          | 
|Interest expense |                          | 
|Other expense    |                          | 
|                 |                          | 
|                 |                          | 
|                 |                          | 

## 4. Acquisitions,
Goodwill and Purchased Intangible Assets

## 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 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. 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, had no alternative future use.

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.

49

---



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 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. The total purchase price was
approximately $29.0 million. 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.

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 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. The total purchase
price was approximately $50.3 million.

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
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. 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
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.

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

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

50

---



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 2000. The unaudited pro forma results of Moss and Radnet were
excluded from the table because they did not have a material effect on the
Companys pro forma results of operations. 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 year ended December 31, 2000. Net loss
also includes $3.5 million of stock based compensation for the year ended
December 31, 2000. This information may not necessarily be indicative of the
future combined results of operations of E.piphany (in thousands, except per
share amounts).

|                         | Year EndedDecember 31,2000 | 
|------------------------ | -------------------------- | 
|Revenues                 |                            | 
|Net loss                 |                            | 
|Basic net loss per share |                            | 

The
following table details the net assets acquired in each of the Companys
purchase transactions for the three-year period ended December 31, 2002 (in
thousands):

|Entity     |  | Consideration |   | Goodwill andPurchasedIntangibles,including IPRD |  | Other Net Assets(Liabilities) |          
|---------- |  | ------------- | - | ----------------------------------------------- |  | ----------------------------- | ---------
|RightPoint |  |               | $ | 496,763                                         |  | $                             | 501,318  
|iLeverage  |  |               |   | 29,037                                          |  |                               | 29,143   
|eClass     |  |               |   | 50,314                                          |  |                               | 48,620   
|Octane     |  |               |   | 2,710,393                                       |  |                               | 2,705,946
|Radnet     |  |               |   | 10,325                                          |  |                               | 10,325   
|Moss       |  |               |   | 40,628                                          |  |                               | 45,548   
|           |  |               |   |                                                 |  |                               |          

## Goodwill and
Purchased Intangibles

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

51

---



The
following table summarizes the impairment charge by acquisition for the related
goodwill and purchased intangibles (in thousands):

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

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

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

|                                                           | Year ended December 31, | 
|---------------------------------------------------------- | ----------------------- | 
|
|Beginning balance                                          |                         | 
|Goodwill acquired during year                              |                         | 
|Adjustment of estimated liabilities related to acquisition |                         | 
|Goodwill amortization prior to the adoption of SFAS 142    |                         | 
|Impairment charge                                          |                         | 
|                                                           |                         | 
|Ending balance                                             |                         | 
|                                                           |                         | 

The following
table reconciles previously reported net loss and net loss per share for the
three years ended December 31, 2002, prior to the adoption of SFAS 142, to the
amounts adjusted for the exclusion of amortization of goodwill, to reflect what
comparative results would have been in those years if the provisions of SFAS 142
had been applied to the three years ended December 31, 2002 (in thousands,
except per share amounts):

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

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

|                            | December 31, 2002 |  | December 31, 2001 |       
|--------------------------- | ----------------- |  | ----------------- | ------
|
|Purchased technology        |                   |  | $                 | 17,652
|Customer list               |                   |  |                   | 1,332 
|                            |                   |  |                   |       
|Total purchased intangibles |                   |  | $                 | 18,984
|                            |                   |  |                   |       

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

52

---



E.piphany
will continue to amortize purchased intangible assets of $5.7 million on a
straight-line basis over their remaining useful lives. Estimated useful lives of
purchased intangible assets are three years. The amortization of purchased
technology has been reclassified to cost of revenues in all periods presented
and was $9.7 million, $32.7 million and $25.7 million in the years ended
December 31, 2002, 2001 and 2000, respectively. The amortization of customer
list assets is recorded in operating expenses and was $0.9 million, $4.0 million
and $3.3 million in the years ended December 31, 2002, 2001 and 2000,
respectively. Estimated amortization expense for the years ending December 31,
2003 and 2004 are $5.0 million and $0.7 million, respectively.

Total
expenses for the amortization and write-down of goodwill and other intangible
assets were $10.6 million, $2.5 billion and $697.1 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Prior to the adoption of SFAS
142, the Companys quarterly amortization expense included the amortization
of goodwill and was approximately $17.0 million. This compares to amortization
expense of approximately $2.6 million in the quarter following the adoption.

## 5.
Restructuring

In
the quarter ended September 30, 2001, the Company began restructuring worldwide
operations to reduce costs and improve efficiencies in response to a slower
economic environment. A detailed review was performed between the third quarter
of 2001 and the second quarter of 2002 to improve the Companys cost
structure in light of market conditions. Under EITF No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity, actions were deemed to be the commencement of separate
restructuring plans in the quarter in which those actions could be specifically
identified. The first plan was initiated in the quarter ended September 30, 2001
and was completed in the quarter ended March 31, 2002 (Plan 1). The
second plan was initiated and completed during the quarter ended June 30, 2002
(Plan 2). Charges were recorded to restructuring expense as the
costs associated with each plan could be reasonably estimated. These charges
were based on assumptions and related estimates that were appropriate for the
economic environment that existed at the time these charges were recorded.
However, due to the continued deterioration of the commercial real estate
market, primarily in the U.S., and the final settlement of certain lease
obligations, we have made subsequent adjustments to the initial restructuring
charges recorded.

During
2001, we recorded a charge of $43.0 million, of which $32.4 million reflects the
initial restructuring charge for Plan 1 recorded in the third quarter of 2001
and $10.6 million related to changes in estimated costs associated with Plan 1.
During 2002, we recorded a charge of $16.1 million, of which $1.4 million
related to additional restructuring charges taken when the related liabilities
could be reasonably estimated for Plan 1, $8.5 million was the initial
restructuring charge for Plan 2 and $6.2 million related to changes in estimated
costs recorded during 2001 and 2002. At December 31, 2002, we had an accrued
liability of $32.9 million with respect to the restructuring charges.

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

|                                            | Severanceand RelatedCharges |  | Impairment ofproperty andequipment |        | Lease Costs |   | Total  |  
|------------------------------------------- | --------------------------- |  | ---------------------------------- | ------ | ----------- | - | ------ | -
|Accrued balance at December 31, 2001        |                             |  | $                                  | 58     |             | $ |       |  
|Charges accrued during 2002 - Plan 1        |                             |  |                                    | 1,070  |             |   | 157    |  
|Charges accrued during 2002 - Plan 2        |                             |  |                                    | 1,542  |             |   | 2,290  |  
|Adjustments to previous estimates - Plan 1  |                             |  |                                    |       |             |   |       |  
|Adjustments to previous estimates - Plan 2  |                             |  |                                    | 131    |             |   | 791    |  
|Cash payments - Plan 1                      |                             |  |                                    | (914   | )           |   |       |  
|Cash payments - Plan 2                      |                             |  |                                    | (1,647 | )           |   |       |  
|Non-cash activity - Plan 1                  |                             |  |                                    | (214   | )           |   | (157   | )
|Non-cash activity - Plan 2                  |                             |  |                                    |       |             |   | (3,081 | )
|                                            |                             |  |                                    |        |             |   |        |  
|Accrued balance at December 31, 2002        |                             |  | $                                  | 26     |             | $ |       |  
|Less:  current portion                      |                             |  |                                    | (26    | )           |   |       |  
|                                            |                             |  |                                    |        |             |   |        |  
|Restructuring costs, net of current portion |                             |  | $                                  |       |             | $ |       |  
|                                            |                             |  |                                    |        |             |   |        |  

53

---



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

Year ended December 31,
2001

In
the third quarter of 2001, the Company recorded a charge of $32.4 million
consisting of $1.5 million of severance and related charges, $3.7 million
for the impairment of property and equipment and $27.2 million of lease costs
associated with Plan 1. The Company reduced the total number of employees by
116. Of these, 55 were engaged in professional services activities, 43 were
engaged in sales and marketing activities, and 18 were engaged in general and
administrative activities. The reduction included employees located in all
geographies. Excess facilities were eliminated and lease costs were recorded
related to the abandonment of leased facilities in or near Atlanta, Boston,
Chicago, New York and San Mateo.

During
the fourth quarter of 2001, we recorded an adjustment of $10.6 million to
reflect changes in estimated lease costs in or near Boston, Chicago and New
York. These changes resulted from the reduction of sublease income due to the
loss of sublease tenants and the continued deterioration of real estate markets
in these areas.

Year ended December 31,
2002

In
the first quarter of 2002, the Company recorded a charge of $1.4 million
consisting of $1.1 million of severance and related charges, $0.1 million for
the impairment of property and equipment and $0.2 million of lease costs
associated with Plan 1. The Company reduced the number of employees by 19. Of
these, 13 were engaged in sales and marketing activities, four were engaged in
professional services activities and two were engaged in general and
administrative activities. The reduction consisted primarily of sales employees
located in Asia, Australia and the United States. Included in severance and
related charges is a non-cash charge of $0.2 million for the acceleration of
vesting of certain stock options in connection with terminated employees.

In
the second quarter of 2002, the company initiated Plan 2 under which it recorded
a charge of $8.5 million consisting of $1.5 million of severance and
related charges, $2.3 million for the impairment of property and equipment
and $4.7 million of lease costs. The Company reduced the number of employees by
91. Of these, 40 were engaged in sales and marketing activities, 21 were engaged
in professional services activities, 20 were engaged in general and
administrative activities and 10 were engaged in research and development
activities. The reduction consisted of employees across all geographies. Lease
costs were recorded related to the abandonment of leased facilities in the
United States, Australia and the United Kingdom.

During
  2002, the Company recorded adjustments to previously recorded restructuring
  estimates totaling $6.2 million primarily to reflect changes in estimated lease
  costs related to the offices in or near Boston, New York, Chicago and the United
  Kingdom which resulted from continued deterioration of real estate markets in
  those locations.

The
  accrued liability of $32.9 million at December 31, 2002 is net of $36.5 million
  of estimated sublease income. Of this total sublease income, $13.1 million represents
  future sublease income due under non-cancelable subleases and $23.4 million
  represents our estimates of future sublease income on excess facilities we expect
  to sublease in the future. Our ability to generate this amount of sublease income,
  as well as our ability to terminate certain lease obligations at the amounts
  we have estimated, is highly dependent upon the existing economic conditions,
  particularly lease market conditions in certain geographies, at the time we
  negotiate the lease termination and sublease arrangements with third parties.
  While the amount we have accrued is our best estimate, these estimates are subject
  to change and may require routine adjustment as conditions change through the
  implementation period. If macroeconomic conditions, particularly as they pertain
  to the commercial real estate market, continue to worsen, we may be required
  to increase our estimated cost to exit certain facilities.

The
remaining cash expenditures relating to workforce reductions are expected to be
paid by the first quarter of 2003. The current estimates accrued for abandoned
leases, net of anticipated sublease proceeds, will be paid over their respective
lease terms through fiscal 2017.

54

---



## 6. Commitments and
Contingencies

## Lease
Commitments

E.piphany
leases certain equipment and facilities under operating lease agreements, which
expire at various dates through 2017. In addition, we receive sublease income
from non-cancelable subleases of excess facilities. Future minimum lease
payments due and receivable under these leases as of December 31, 2002 were as
follows (in thousands):

|Year Ending December 31, | LeasePaymentsDue |  | SubleasePaymentsReceivable |        | Total, Net |  
|------------------------ | ---------------- |  | -------------------------- | ------ | ---------- | -
|2003                     |                  |  | $                          | 14,857 |            | $
|2004                     |                  |  |                            | 11,546 |            |  
|2005                     |                  |  |                            | 8,980  |            |  
|2006                     |                  |  |                            | 6,324  |            |  
|2007                     |                  |  |                            | 6,363  |            |  
|2008 and thereafter      |                  |  |                            | 28,736 |            |  
|                         |                  |  |                            |        |            |  
|                         |                  |  | $                          | 76,806 |            | $
|                         |                  |  |                            |        |            |  

The
amounts shown above include operating lease commitments due under leases for
abandoned facilities of $32.9 million which are accrued as restructuring costs
as of December 31, 2002.

Rent
expense, excluding amounts charged to restructuring, was approximately $6.4
million, $10.3 million and $7.0 million for the years ended December 31, 2002,
2001 and 2000, respectively. For the years ended December 31, 2002, 2001 and
2000, the Company received sublease income, excluding amounts included in
restructuring charges, which reduced its rent expense by approximately $0.7
million, $0.4 million and $0, respectively.

## Legal
Proceedings

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

The
Company, two of its current officers, one of its former officers and three
underwriters in its initial public offering (IPO) were named as
defendants in a consolidated shareholder lawsuit in the United States
District Court for the Southern District of New York, In re E.piphany,
Inc. Initial Public Offering Securities Litigation,01-CV-6158.
This is one of a number of actions coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, 21 MC 92.  Plaintiffs in
the coordinated proceeding have brought claims under the federal securities laws
against numerous underwriters, companies, and individuals, alleging generally
that defendant underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than 300 companies
during the period from late 1998 through 2000.  Specifically, among other
things, the plaintiffs allege that the prospectus pursuant to which shares of
Company common stock were sold in the Companys IPO contained certain false
and misleading statements regarding the practices of the Companys
underwriters with respect to their allocation of shares of common stock in the
Companys IPO to their customers and their receipt of commissions from
those customers related to such allocations, and that such statements and
omissions  caused the Companys post-IPO stock price to be
artificially inflated. The consolidated amended complaint in
the Companys case seeks unspecified damages on behalf of a purported class
of purchasers of the Companys common stock between September 21, 1999 and
December 6, 2000.  The court has appointed a lead plaintiff for the
consolidated action. The underwriter and issuer defendants have filed motions to
dismiss. These motions were denied as to all the underwriter defendants and the
majority of issuer defendants including the Company. The individual defendants
have been dismissed from the action without prejudice pursuant to a tolling
agreement. The Company believes it has meritorious defenses to the claims
against it and will defend itself vigorously.

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

55

---



## Letters of
Credit

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

The table below lists the
Companys outstanding letters of credit as of December 31, 2002 (in
thousands):

|DateEffective |  | ExpirationDate |  | AmountSecured | 
|------------- |  | -------------- |  | ------------- | 
|5/17/2002     |  |                |  | 4/30/2003     | 
|7/27/2001     |  |                |  | 7/26/2003     | 
|9/17/2001     |  |                |  | 10/31/2003    | 
|11/3/2000     |  |                |  | 11/2/2003     | 
|1/5/2001      |  |                |  | 1/4/2004      | 
|2/7/2001      |  |                |  | 2/6/2004      | 
|2/8/2001      |  |                |  | 2/7/2004      | 
|              |  |               
|              |  |                |  |               | 
|              |  |               

## 7. Preferred
Stock

E.piphany
held a special meeting of stockholders on December 6, 2000, during which the
stockholders of E.piphany approved an increase in the number of authorized
shares of preferred stock, $0.0001 par value, from 5,000,000 to 25,000,000
shares.

## 8. Common
Stock

E.piphany
held a special meeting of stockholders on December 6, 2000, during which the
stockholders of E.piphany approved an increase in the number of authorized
shares of common stock, $0.0001 par value, from 100,000,000 to 500,000,000
shares.

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

In
addition, certain employees have exercised stock options that are not fully
vested. All exercised but unvested stock options are subject to repurchase by
E.piphany at the original exercise price if the employees employment is
terminated prior to the time the stock options vest. As of December 31, 2002,
47,233 shares of common stock were subject to repurchase under stock option
agreements with these employees.

As
of December 31, 2002, E.piphany had reserved the following shares of authorized
but unissued common stock:

|Stock options outstanding under the 1997 stock option plan                      |  |  |  | 1,871,748  | 
|------------------------------------------------------------------------------- |  |  |  | ---------- | 
|Stock options outstanding under the 1999 stock option plan                      |  |  |  | 9,191,979  | 
|Stock options outstanding under the 2000 nonstatutory stock option plan         |  |  |  | 1,314,786  | 
|Stock options outstanding under plans assumed through acquisition               |  |  |  | 624,948    | 
|Stock options available for grant under the 1999 stock option plan              |  |  |  | 3,078,552  | 
|Stock options available for grant under the 2000 nonstatutory stock option plan |  |  |  | 898,276    | 
|Stock reserved for issuance under the 1999 employee stock purchase plan         |  |  |  | 7,649,459  | 
|Warrants assumed through acquisition                                            |  |  |  | 5,366      | 
|                                                                                |  | 
|Total shares reserved                                                           |  |  |  | 24,635,114 | 
|                                                                                |  | 

## Warrants

As
of December 31, 2002, the Company had warrants outstanding to purchase 5,366
shares of common stock. Of these, warrants to purchase 911 shares have an
exercise price of $1.29 and expire on January 26, 2005 and warrants to purchase
4,455 shares have an exercise price of $15.71 and expire on July 25, 2005.

56

---



## Stock-Based
Compensation

Stock-based
compensation consists of amortization of deferred compensation in connection
with stock option grants and sales of stock to employees at exercise or sales
prices below the deemed fair market value of our common stock and compensation
related to equity instruments issued to non-employees for services rendered. As
of December 31, 2002, deferred compensation remaining to be amortized totaled
$0.1 million. This amount is being amortized over the respective vesting periods
of these equity instruments in a manner consistent with FIN No. 28. 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, 2002, 2001 and 2000, E.piphany recorded stock-based
compensation of $53,000, $50,000 and $2.0 million, respectively, related to
equity instruments issued to non-employees. Stock-based compensation related to
stock options to purchase common stock that are issued to non-employees is
determined based upon the fair value in accordance with the provisions of SFAS
No. 123 and EITF 96-18, Accounting for Equity Instruments that are Issued
to Other Employees for Acquiring, or in Conjunction with Selling Goods or
Services.

## 1999 Employee
Stock Purchase Plan

On
June 30, 1999, the Board of Directors approved the adoption of E.piphanys
1999 Employee Stock Purchase Plan (the Purchase Plan). A total of
10,199,455 shares of common stock have been reserved for issuance under the
Purchase Plan as of December 31, 2002. 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, 2002, 2,549,996 shares had been purchased and 7,649,459
shares are available for future issuance under the Purchase Plan.

## Public
Offerings

In
January 2000, E.piphany completed a follow-on 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 $356.1 million.

## Stock Option
Exchange Program

On
April 2, 2001, the Company announced a voluntary stock option exchange program
for its employees. Under the program, employees were given the opportunity to
elect to cancel outstanding stock options held by them in exchange for an equal
number of new options to be granted at a future date at the then current fair
market value. These elections needed to be made by May 1, 2001 and were required
to include all options granted during the prior six-month period. A total of 614
employees elected to participate in the exchange program. Those 614 employees
tendered a total of 5,849,237 options to purchase the Companys common
stock in return for its promise to grant new options on the grant date of
November 5, 2001. A total of 4,687,353 options were granted at the fair market
value of $6.44 per share on November 5, 2001 to those employees who had been
continuously employed by the Company from the date they tendered their original
options through November 5, 2001. The exchange program was not made available to
the Companys executive officers, directors, consultants, former employees
or any of its employees who were residents of The Netherlands, Switzerland,
Spain or Brazil or who were employed by subsidiaries located in those countries.

## Stock
Options

In
1997, E.piphany adopted the 1997 Stock Plan (the 1997 Plan) under
which incentive stock options and nonstatutory stock options were granted to
employees and consultants of E.piphany. The exercise price for incentive stock
options is at least 100% of the fair market value on the date of grant for
employees owning less than 10% of the voting power of all classes of stock and
at least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock. For nonstatutory
stock options, the exercise price is at least 110% of the fair market value on
the date of grant for employees owning more than 10% of voting power of all
classes of stock and at least 85% for employees owning less than 10% of the
voting power of all classes of stock. Options generally expire in 10 years.
Options are immediately exercisable, but shares so purchased vest over periods
determined by the Board of Directors, generally four years. Upon termination of
employment, unvested shares may be repurchased by E.piphany for the original
purchase price. The Board of Directors determined that no further options would
be granted under the 1997 Plan after the initial public offering. In addition to
the shares authorized for the 1999 Plan, the 1997 Plan options authorized but
not granted as of the IPO date were made available for grant under the 1999
Plan. Accordingly, no shares are available for grant under the 1997 Plan as of
December 31, 2002.

57

---



On
June 30, 1999, the Board of Directors approved the adoption of E.piphanys
1999 Stock Plan (the 1999 Plan). Under the 1999 Plan, incentive
stock options and nonstatutory stock options may be granted to employees and
consultants of E.piphany. The exercise price for incentive stock options is at
least 100% of the fair market value on the date of grant for employees owning
less than 10% of the voting power of all classes of stock and at least 110% of
the fair market value on the date of grant for employees owning more than 10% of
the voting power of 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 exercisable
pursuant to a vesting schedule determined by the Board of Directors, which is
typically over a period of four years. A total of 12,621,374 shares of common
stock have been reserved for issuance and 350,843 options have been exercised
under the 1999 Plan. As of December 31, 2002, 3,078,552 shares were available
for grant.

On
October 18, 2000, the Board of Directors approved the adoption of
E.piphanys 2000 Nonstatutory Stock Option Plan (the Nonstatutory
Plan). Under the Nonstatutory Plan, nonstatutory stock options may be
granted to employees and consultants of E.piphany. The exercise price for
nonstatutory stock options is at least 110% of the fair market value on the date
of grant for employees owning more than 10% of voting power of all classes of
stock and at least 85% for employees owning less than 10% of the voting power of
all classes of stock. Options generally expire in 10 years. Options are
exercisable pursuant to a vesting schedule determined by the Board of Directors.
A total of 2,250,000 shares of common stock have been reserved for issuance and
36,938 options have been exercised under the Nonstatutory Plan. As of December
31, 2002, 898,276 shares were available for grant.

Had
  compensation expense for stock option plans been determined consistent with
  SFAS No. 123, net losses would have increased by $60.7 million, $106.1 million,
  and $61.4 million for the years ended December 31, 2002, 2001 and 2000, respectively.

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 2002, 2001 and 2000:

|                            | 2002 |  | 2001 |           | 2000 | 
|--------------------------- | ---- |  | ---- | --------- | ---- | 
|Risk-free interest rate     |      |  |      | 2.63      | %    | 
|Expected life of the option |      |  |      | 4.5 years |      | 
|Dividend yield              |      |  |      | %        |      | 
|Volatility                  |      |  |      | 80        | %    | 

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

|                                        | Year EndedDecember 31,2002 |  | Year EndedDecember 31,2001 |        | Year EndedDecember 31,2000 |  
|--------------------------------------- | -------------------------- |  | -------------------------- | ------ | -------------------------- | -
|
|Outstanding at beginning of period      |                            |  |                            | 13,263 |                            | $
|Granted                                 |                            |  |                            | 3,749  |                            | $
|Exercised                               |                            |  |                            | (667   | )                          | $
|Canceled                                |                            |  |                            | (3,342 | )                          | $
|                                        |                            |  |                            |        |                            |  
|Outstanding at end of period            |                            |  |                            | 13,003 |                            | $
|                                        |                            |  |                            |        |                            |  
|Vested and exercisable at end of period |                            |  |                            | 6,413  |                            | $
|                                        |                            |  |                            |        |                            |  
|Weighted average fair value per share   |                            |  | $                          | 8.75   |                            |  
|                                        |                            |  |                            |        |                            |  

| | Options Outstanding |  | Options Vested andExercisable |       
| | ------------------- |  | ----------------------------- | ------
|
| | $0.01 - $ 3.35      |  |                               | 824   
| | $3.37 - $3.50       |  |                               | 1,471 
| | $3.52 - $5.33       |  |                               | 1,227 
| | $5.53 - $6.44       |  |                               | 3,672 
| | $6.50 - $7.33       |  |                               | 1,497 
| | $7.45 - $9.01       |  |                               | 261   
| | $9.02 - $9.86       |  |                               | 1,639 
| | $9.90 - $14.10      |  |                               | 1,503 
| | $14.44 - $121.29    |  |                               | 908   
| | $162.33 - $162.33   |  |                               | 1     
| |                     |  |                               |       
| | $0.01 - $162.33     |  |                               | 13,003

58

---



## 9. Income
Taxes

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

|                                           | December 31, | 
|------------------------------------------ | ------------ | 
|
|Net operating loss carryforwards           |              | 
|Restructuring charge                       |              | 
|Accruals and reserves                      |              | 
|Plant and equipment depreciation           |              | 
|Startup and organization costs             |              | 
|Research and development credits           |              | 
|Capitalized research and development costs |              | 
|                                           |              | 
|Total deferred tax assets                  |              | 
|Valuation allowance                        |              | 
|                                           |              | 
|Net deferred tax assets                    |              | 
|                                           |              | 

From
inception through December 31, 2002, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. Due to
uncertainties regarding realization of the assets based on the limited operating
history of E.piphany, the lack of profitability to date, and the uncertainty of
future profitability, E.piphany has recorded a valuation allowance equal to the
total deferred tax assets of $135 million, and, therefore, has no net deferred
tax assets.

Included
in the deferred tax assets of $135 million is $98.8 million, which is equal to
the tax-effected amount of net operating loss carryforwards. As of December 31,
2002, E.piphany had net operating loss carryforwards of approximately $226.4
million and $106.7 million for federal and state tax purposes, respectively. The
federal net operating loss and other credit carryforwards begin expiring, if not
utilized, on various dates beginning in 2012. The state net operating loss and
other carryforwards will expire, if not utilized, on various dates through 2012.
In addition, E.piphany has net operating losses in certain foreign jurisdictions
of approximately $45.5 million, which expire in various years. Approximately
$18.6 million of the deferred tax asset relates to employee stock option
deductions and, accordingly, will be credited directly to stockholders
equity when realized and will not be available to reduce the provision for
income taxes in future years.

The
deferred tax assets of $135 million at December 31, 2002 include approximately
$25.0 million related to the acquisitions of RightPoint, Octane, eClass,
iLeverage and Moss (including the tax effected amounts of net operating losses
of $66.7 million and $38.8 million, federal and state respectively) which when
realized, will be used to reduce the amount of any remaining goodwill that was
originally recorded at the date of the acquisitions.

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

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

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

59

---



The
Companys pretax loss from operations for the years ended December 31,
2002, 2001 and 2000 consisted of the following components (in thousands):

|                  | Years Ended December 31, | 
|----------------- | ------------------------ | 
|
|Domestic          |                          | 
|Foreign           |                          | 
|                  |                          | 
|Total pretax loss |                          | 
|                  |                          | 

## 10. Related Party
Transactions

In
  connection with the employment of our chief executive officer, Roger Siboni,
  in 1998, the Company agreed to extend to Mr. Siboni credit in the form of two
  personal loans.

First,
  in July 1998, the Company loaned $640,000 to Mr. Siboni, in order to purchase
  2,400,000 shares of common stock at $0.26 2/3 per share. This loan is due on
  July 1, 2008 and accrues interest at 5.88% per annum. As of December 31, 2002,
  the outstanding principal balance of this loan was $377,000 and accrued interest
  was $6,000. As of December 31, 2001, the outstanding principal balance of this
  loan was $446,000 and accrued interest was $129,000. This loan is secured by
  1,245,661 shares of E.piphany common stock. Mr. Siboni has indicated, and the
  Company expects, that this loan will be repaid by August 31, 2004.

Second,
  Mr. Siboni was offered a loan of $250,000 per year for a period beginning August
  1, 1998 and ending July 31, 2000, drawable on a monthly basis. This loan accrued
  interest at 5.6% per annum. As of December 31, 2002, the loan had been repaid
  in full. As of December 31, 2001, the outstanding balance including accrued
  interest was $160,000.

In
  addition, Mr. Siboni was extended a loan in the aggregate sum of $173,000 for
  the payment of taxes arising from bonus payments made to him during the years
  1999 and 2000. This loan bears interest at 5.6% per annum. As of December 31,
  2002 and 2001, the outstanding balance including accrued interest was $43,000
  and $197,000, respectively. Subsequent to December 31, 2002, this loan was repaid
  in full.

Mr.
Siboni is currently a member of the board of directors of two of
E.piphanys customers. Total revenues to E.piphany from these customers
were $0.2 million, $0.4 million and $0.9 million for the years ended December
31, 2002, 2001, and 2000, respectively. E.piphany had accounts receivable
balances from these customers totaling $0.1 million and $0 for the years ended
December 31, 2002 and 2001, respectively.

In
addition, four of E.piphanys customers have board members or executive
officers that are also on E.piphanys board of directors. Total revenues to
E.piphany from these customers were $1.0 million, $3.1 million and $0.4 million
for the years ended December 31, 2002, 2001, and 2000 respectively. E.piphany
had accounts receivable balances from these customers totaling $0.3 million and
$0.5 million for the years ended December 31, 2002 and 2001, respectively.

## 11. 401(k) Plan

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

60

---



## 12. Valuation and Qualifying
Accounts

The
following table presents annual information related to the allowance for
doubtful accounts for the three years ended December 31, 2002 (in thousands):

| | Balance atBeginning ofPeriod |  | Charged toExpenses |       | Charged toAllowance forDoubtfulAccounts |   | Balance atEnd ofPeriod | 
| | ---------------------------- |  | ------------------ | ----- | --------------------------------------- | - | ---------------------- | 
|
| | 2002                         |  | $                  | 4,332 |                                         | $ | 403                    | 
| | 2001                         |  | $                  | 4,750 |                                         | $ | 2,700                  | 
| | 2000                         |  | $                  | 300   |                                         | $ | 4,450                  | 

## 13. Subsequent Event (Unaudited)

On February 28, 2003, a purported securities class action lawsuit entitled Liu
v. Credit Suisse First Boston et al., Civil Action Number 03-20459, was filed in
the United States District Court for the Southern District of Florida. Among the
166 parties named as defendants are Credit Suisse First Boston and its
personnel, issuers that completed IPOs underwritten by Credit Suisse First
Boston, and certain directors and officers of these issuers, including E.piphany
and two of its current officers. The complaint alleges that the defendants
violated federal and state laws by, among other things, publishing false and
misleading information regarding the issuers' projected financial performance
and revenue potential and by incorrectly pricing issuers IPOs. The complaint
relates generally to the ongoing IPO-related litigation currently pending in the
United States District Court for the Southern District of New York. The Company anticipates that this action will be transferred to the United States District
Court for the Southern District of New York and coordinated with existing
IPO-related litigation, discussed above. The Company believes that it has meritorious
defenses to the claims against it and intends to defend the action vigorously.

## 14. Selected Quarterly Financial Data
(Unaudited)

The
following table presents selected quarterly information for 2002 and 2001 (in
thousands, except share data):

|                               | FirstQuarter |  | SecondQuarter |          | ThirdQuarter |   | FourthQuarter |  
|------------------------------ | ------------ |  | ------------- | -------- | ------------ | - | ------------- | -
|2002:                          |              |  |               |          |              |   |               |  
|Revenues                       |              |  | $             | 22,146   |              | $ | 19,398        |  
|Gross profit                   |              |  |               | 13,736   |              |   | 11,044        |  
|Net loss                       |              |  |               | (17,016  | )            |   | (26,290       | )
|Basic and diluted net loss per |              | 
|share                          |              |  | $             | (0.24    | )            | $ | (0.37         | )
|2001:                          |              | 
|Revenues                       |              |  | $             | 39,097   |              | $ | 32,134        |  
|Gross profit                   |              |  |               | 15,826   |              |   | 16,740        |  
|Net loss                       |              |  | $             | (295,395 | )            | $ | (294,044      | )
|Basic and diluted net loss per |              | 
|share                          |              |  | $             | (4.48    | )            | $ | (4.30         | )

The
following table reflects the impact of the adoption of EITF 01-14 on the
Companys quarterly revenues for 2001 (in thousands):

|                                   | FirstQuarter |  | SecondQuarter |        | ThirdQuarter |  | FourthQuarter |  | Total |       
|---------------------------------- | ------------ |  | ------------- | ------ | ------------ |  | ------------- |  | ----- | ------
|2001:                              |              |  |               |        |              |  |               |  |       |       
|Revenues (as originally presented) |              |  |               | 38,077 |              |  | 31,098        |  |       | 28,506
|Impact of EITF 01-14               |              |  |               | 1,020  |              |  | 1,036         |  |       | 683   
|                                   |              |  |               |        |              |  |               |  |       |       
|Revenues (as currently presented)  |              |  |               | 39,097 |              |  | 32,134        |  |       | 29,189
|                                   |              |  |               |        |              |  |               |  |       |       

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

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

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

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

61

---



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

# PART III

## Item 10. Directors and Executive
Officers of the Registrant

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

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

## Item 11. Executive
Compensation

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

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

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

## Item 13. Certain Relationships and
Related Transactions

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

## Item 14. Controls and
Procedures

Under the supervision and
with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, within 90 days of the filing date of this report (the Evaluation Date). Based on this
evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the material information required to
be included in our Securities and Exchange Commission (SEC) reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms related to E.piphany,
including our consolidated subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.

In
addition, there were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and, therefore, there were no corrective
actions taken.

62

---



# PART IV

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

(a)(1) Financial Statements.

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

(a)(2) Financial Statement Schedules.

See
Item 15 (d) below.

(a)(3) Exhibits.

|Number |  | Exhibit Title
|------ |  | -------------

|3.1* |  | Restated
Certificate of Incorporation of the Registrant.
|---- |  | --------------------------------------------------------

|3.2 |  | Certificate
of Amendment to the Restated Certificate of Incorporation of the Registrant dated
December 18, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|3.3** |  | Amended
and 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, as amended on September 28, 2001.
|------- |  | ------------------------------------------------------------------------------------

|10.3** |  | 1999
Employee Stock Purchase Plan and form of agreements thereunder, as amended on October 15,
2001.
|------ |  | ----------------------------------------------------------------------------------------------------

|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* |  | Restricted
Stock Purchase Agreement, Promissory Note, Stock Pledge Agreement and Joint Escrow
Instructions  dated July 1, 1998 between Roger S. Siboni and the Registrant.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7* |  | Promissory
Note dated August 15, 1998 between Roger S. Siboni and the Registrant.
|----- |  | ---------------------------------------------------------------------------------

|10.8**** |  | RightPoint
Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan.
|-------- |  | ---------------------------------------------------------------------------------

|10.9***** |  | 2000
Nonstatutory Stock Option Plan and form of agreements thereunder.
|--------- |  | ----------------------------------------------------------------------

|10.10****** |  | Octane
Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.
|----------- |  | ------------------------------------------------------------------------------

|10.11****** |  | Octane
Software, Inc. Nonstatutory Stock Option Plan and form of agreement thereunder.
|----------- |  | --------------------------------------------------------------------------------------

|10.12****** |  | Octane
Software, Inc. 2000 Pennsylvania Plan and form of agreements thereunder.
|----------- |  | -------------------------------------------------------------------------------

|10.13******* |  | iLeverage
corporation 1997 Stock Plan and form of agreements thereunder.
|------------ |  | ------------------------------------------------------------------------

|10.14******** |  | eClass
Direct, Inc. 1998 Stock Option Plan and form of agreements thereunder.
|------------- |  | -----------------------------------------------------------------------------

|10.15********* |  | Moss
Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.
|-------------- |  | ----------------------------------------------------------------------------

|10.16********* |  | Moss
Software, Inc. 2001 Stock Option Plan and form of agreement thereunder.
|-------------- |  | ----------------------------------------------------------------------------

|10.17*** |  | Change
of Control Severance Agreement dated January 25, 2002 between Roger S. Siboni and the
Registrant
|-------- |  | -------------------------------------------------------------------------------------------------------

|10.18*** |  | Severance
Agreement dated February 15, 2002 between Karen Richardson and the Registrant
|-------- |  | ---------------------------------------------------------------------------------------

|10.19*** |  | Form
Change of Control Agreement dated February 15, 2002  between the Registrant and each of
Phillip Fernandez  and Kevin Yeaman.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Notice
of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the
Registrant and Karen  Richardson.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Notice
of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the
Registrant and Roger  Siboni.
|----- |  | ------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Ernst & Young LLP, Independent Auditors.
|---- |  | ---------------------------------------------------

|23.2 |  | Statement
Regarding Consent of Arthur Andersen LLP.
|---- |  | ---------------------------------------------------

|24.1 |  | Power
of Attorney (see page 64).
|---- |  | --------------------------------

|99.1 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as
adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

---



---

|* |  | 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 Quarterly Report on Form 10-Q  for the quarter
ended September 30, 2002 (Registration No. 000-27183) filed with  the Securities and
Exchange Commission on November 13, 2002.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

|********* |  | Incorporated by
reference to the Registrants Registration Statement on Form S-8 (Registration No.
333-59602) filed with the Securities  and Exchange Commission on April 26, 2001.
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)
Reports on Form 8-K.

No
reports on Form 8-K were made during the last quarter of the fiscal year ended
December 31, 2002.

(c)
Exhibits.

See
Item 15(a)(3) above.

(d)
Financial Statement Schedules.

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

64

---



# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Mateo, State of
California, on the 26th day of March 2003.

| |  | E.PIPHANY, INC.
By: /s/ ROGER S. SIBONI

Roger S. SiboniPresident and Chief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------------

KNOW
ALL PERSONS BY THESE PRESENT, 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, may
do or cause to be done by virtue hereof.

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

|Signature                                    |  | Title                                                                       |  | Date          
|-------------------------------------------- |  | --------------------------------------------------------------------------- |  | --------------
|                                            
|                                            
|/s/ ROGER S. SIBONIRoger S. Siboni           |  | President, Chief Executive Officerand Director(Principal Executive Officer) |  | March 27, 2003
|                                            
|                                            
|/s/ KEVIN J. YEAMANKevin J. Yeaman           |  | Chief Financial Officer(Principal Financial andAccounting Officer)          |  | March 27, 2003
|                                            
|                                            
|/s/ PAUL M. HAZENPaul M. Hazen               |  | Director                                                                    |  | March 27, 2003
|                                            
|                                            
|/s/ ROBERT L. JOSSRobert L. Joss             |  | Director                                                                    |  | March 27, 2003
|                                            
|                                            
|/s/ SAM H. LEESam H. Lee                     |  | Director                                                                    |  | March 27, 2003
|                                            
|                                            
|/s/ DOUGLAS J. MACKENZIEDouglas J. Mackenzie |  | Director                                                                    |  | March 27, 2003
|                                            
|                                            
|/s/ JENNY J. MINGJenny J. Ming               |  | Director                                                                    |  | March 27, 2003

65

---



# CERTIFICATIONS

I, Roger S. Siboni, certify that:

1.
I have reviewed this annual report on Form 10-K of E.piphany, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4.
The registrants  other certifying officer and I are responsible for establishing
and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and  15d-14) for the registrant and have:

| | (a)
designed such  disclosure controls and procedures to ensure that material information
relating  to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this  annual
report is being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
evaluated the  effectiveness of the registrants  disclosure  controls and procedures as
of a date within 90  days prior to the filing date of this annual report (the
"Evaluation Date"); and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)
presented in this annual report our  conclusions  about the  effectiveness  of the
disclosure  controls and  procedures based on our evaluation as of the Evaluation Date;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.
The registrants  other certifying officer and I have disclosed, based on our most
recent  evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent  functions):

| | (a)
all significant  deficiencies in the design or operation of internal  controls which
could adversely  affect the registrants  ability to record, process, summarize and
report financial data and have  identified for the registrants auditors any
material weaknesses in  internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
any fraud, whether or not material,  that involves management or other employees who have
a significant role  in the registrants internal controls; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

6.
The registrants  other certifying officer and I have indicated in this annual
report whether  there were significant changes in internal controls or in other factors
that  could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

|Date: March 27, 2003 |  | /s/ Roger S. Siboni

Roger S. Siboni
Chief Executive Officer
|-------------------- |  | --------------------------------------------------------------------------

66

---



I, Kevin J. Yeaman, certify that:

1.
I have reviewed this annual report on Form 10-K of E.piphany, Inc.;

2.
Based on my knowledge,  this annual report does not contain any untrue statement of a
material fact or  omit to state a material fact necessary to make the statements made, in
light of  the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3.
Based on my knowledge,  the financial statements, and other financial information
included in this  annual report, fairly present in all material respects the financial
condition,  results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;

4.
The registrants  other certifying officer and I are responsible for establishing
and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and  15d-14) for the registrant and have:

| | (a)
designed  such  disclosure  controls  and  procedures  to ensure that  material
information  relating to the registrant, including its  consolidated subsidiaries, is
made known to us by others within those entities,  particularly during the period in
which this annual report is being prepared;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
evaluated the  effectiveness of the registrants  disclosure  controls and procedures as
of a date within 90  days prior to the filing date of this annual report (the
"Evaluation Date"); and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)
presented in this annual report our  conclusions  about the  effectiveness  of the
disclosure  controls and  procedures based on our evaluation as of the Evaluation Date;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.
The registrants  other certifying officer and I have disclosed, based on our most
recent  evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent  functions):

| | (a)
all significant  deficiencies in the design or operation of internal  controls which
could adversely  affect the registrants  ability to record, process, summarize and
report financial data and have  identified for the registrants auditors any
material weaknesses in  internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

6.
The registrants  other certifying officer and I have indicated in this annual
report whether  there were significant changes in internal controls or in other factors
that  could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

|Date: March 27, 2003 |  | /s/ Kevin J. Yeaman

Kevin J. Yeaman
Chief Financial Officer
|-------------------- |  | --------------------------------------------------------------------------

67

---



# EXHIBIT INDEX

|Number |  | Exhibit
Title
|------ |  | -------------

|3.1* |  | Restated
Certificate of Incorporation of the Registrant.
|---- |  | --------------------------------------------------------

|3.2 |  | Certificate
of Amendment to the Restated Certificate of Incorporation of the Registrant dated
December 18, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|3.3** |  | Amended
and 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, as amended on September 28, 2001.
|------- |  | ------------------------------------------------------------------------------------

|10.3** |  | 1999
Employee Stock Purchase Plan and form of agreements thereunder, as amended on October 15,
2002.
|------ |  | ----------------------------------------------------------------------------------------------------

|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* |  | Restricted
Stock Purchase Agreement, Promissory Note, Stock Pledge Agreement and Joint Escrow
Instructions  dated July 1, 1998 between Roger S. Siboni and the Registrant.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7* |  | Promissory
Note dated August 15, 1998 between Roger S. Siboni and the Registrant.
|----- |  | ---------------------------------------------------------------------------------

|10.8**** |  | RightPoint
Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan.
|-------- |  | ---------------------------------------------------------------------------------

|10.9***** |  | 2000
Nonstatutory Stock Option Plan and form of agreements thereunder.
|--------- |  | ----------------------------------------------------------------------

|10.10****** |  | Octane
Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.
|----------- |  | ------------------------------------------------------------------------------

|10.11****** |  | Octane
Software, Inc. Nonstatutory Stock Option Plan and form of agreement thereunder.
|----------- |  | --------------------------------------------------------------------------------------

|10.12****** |  | Octane
Software, Inc. 2000 Pennsylvania Plan and form of agreements thereunder.
|----------- |  | -------------------------------------------------------------------------------

|10.13******* |  | iLeverage
corporation 1997 Stock Plan and form of agreements thereunder.
|------------ |  | ------------------------------------------------------------------------

|10.14******** |  | eClass
Direct, Inc. 1998 Stock Option Plan and form of agreements thereunder.
|------------- |  | -----------------------------------------------------------------------------

|10.15********* |  | Moss
Software, Inc. 1997 Stock Option Plan and form of agreement thereunder.
|-------------- |  | ----------------------------------------------------------------------------

|10.16********* |  | Moss
Software, Inc. 2001 Stock Option Plan and form of agreement thereunder.
|-------------- |  | ----------------------------------------------------------------------------

|10.17*** |  | Change
of Control Severance Agreement dated January 25, 2002 between Roger S. Siboni and the
Registrant
|-------- |  | -------------------------------------------------------------------------------------------------------

|10.18*** |  | Severance
Agreement dated February 15, 2002 between Karen Richardson and the Registrant
|-------- |  | ---------------------------------------------------------------------------------------

|10.19*** |  | Form
Change of Control Agreement dated February 15, 2002  between the Registrant and each of
Phillip Fernandez  and Kevin Yeaman.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Notice
of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the
Registrant and Karen  Richardson.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Notice
of Stock Option Grant and Stock Option Agreement dated January 25, 2002 between the
Registrant and Roger  Siboni.
|----- |  | ------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Ernst & Young LLP, Independent Auditors.
|---- |  | ---------------------------------------------------

|23.2 |  | Statement
Regarding Consent of Arthur Andersen LLP.
|---- |  | ---------------------------------------------------

|24.1 |  | Power
of Attorney (see page 64).
|---- |  | --------------------------------

|99.1 |  | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as
adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|* |  | 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  Quarterly  Report on Form 10-Q for the quarter
ended  September 30, 2002  (Registration  No.  000-27183)  filed with the Securities and
Exchange  Commission on  November 13, 2002.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

---



|**** |  | Incorporated
by reference to the  Registrants  Registration  Statement  on Form S-8
(Registration  No.  333-94317) filed with the Securities and Exchange Commission on
January 10, 2000.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

|********* |  | Incorporated
by reference to the Registrants Registration Statement on Form S-8 (Registration
No. 333-59602)  filed with the Securities and Exchange Commission on April 26, 2001.
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------