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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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| |   |                                              
| | - | ---------------------------------------------
| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31,
2001

or




| |   |                                                  
| | - | -------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES AND EXCHANGE ACT OF 1934


Commission File Number 000-26881

E.piphany, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                    |  |                                                   
|--------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other jurisdiction of
	incorporation or organization)                             |  | 77-0443392(I.R.S. Employer
	Identification number)
|                                                                                                   
|1900 South Norfolk Street, Ste. 310
	San 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 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.     o

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
þ          No
o

The approximate aggregate market value of the
registrants Common Stock held by nonaffiliates on
January 31, 2002 was $517,000,000. This amount excludes
shares held by directors, executive officers, and holders of 5%
or more of the outstanding Common Stock since such persons may
be deemed to be affiliates of the registrant. This determination
of affiliate status is not necessarily a conclusive
determination for other purposes.

The number of common shares outstanding as of
January 31, 2002 was 71,184,245.

DOCUMENTS INCORPORATED BY REFERENCE:

|                                                                        |  |                     |          | 
|----------------------------------------------------------------------- |  | ------------------- | -------- | 
|                                                                        |  | Form 10-K reference
|                                                                        |  |                    
|(1) Proxy Statement for Stockholder Meeting
	scheduled for May 30, 2002 |  |                     | Part III | 



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statements, and Reports on Form 8-K                             
|SIGNATURES   
|EXHIBIT INDEX
|Exhibit 10.2 
|Exhibit 10.18
|Exhibit 10.19
|Exhibit 10.20
|Exhibit 10.21
|Exhibit 10.22
|Exhibit 10.23
|Exhibit 10.24
|Exhibit 10.25
|Exhibit 10.26
|Exhibit 10.27
|Exhibit 10.28
|Exhibit 10.29
|Exhibit 10.30
|Exhibit 10.31
|Exhibit 10.32
|Exhibit 23.1 



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PART I

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




Item 1.     Business

Overview

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

We were founded in November 1996. From our
founding through the end of 1997, we primarily engaged in
research activities, developing products and building business
infrastructure. We began shipping our first software product and
first generated revenues from software license fees,
implementation and consulting fees, and maintenance fees in
early 1998.

The E.piphany Solution

In order to increase the longevity and
profitability of customer relationships, as well as attract new
customers, many companies are seeking to improve the processes
through which they market, sell and deliver service to their
customers. To improve these processes, companies wish 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. Furthermore,
when companies understand individual customer preferences, they
are 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.

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We believe that our software is differentiated
from that of our competitors by its combination of the following
characteristics:

Integration of analytic and operational CRM
solutions.The E.piphany System
integrates analytic CRM technologies, which are used to gain
insight into customer data, with operational CRM technologies,
which improve the effectiveness of sales and service
interactions. The integration of these traditionally disparate
technologies allows companies to develop and enhance their
customer relationships. For example, a sales representative
using our operational CRM solutions will receive up-to-date
analysis of customer information and personalized
recommendations in order to better prepare for and engage in
sales interactions.

Real-time decisioning for intelligent
applications.The E.piphany System
includes capabilities for real-time decisioning which allow for
immediate analysis of data collected during customer
interactions so that optimal decisions can be made during each
interaction. For example, our decisioning capabilities can
monitor interactions during a customer support telephone call,
then prompt the customer service agent with relevant information
to optimize the customer interaction. We make extensive use of
these capabilities across all of our solutions, so that customer
intelligence can be driven across all customer interactions.

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

Web-based architecture for wide-scale
deployment and lower cost of ownership.Our software is built upon a modern,
web-based architecture that allows users to access the system
across a corporate network or the Internet using a web browser,
such as Microsoft Internet Explorer. The customer installs the
software in a central location, either on the customers
own computer servers or on those of a third-party hosted
services provider. This web-based design does not require our
software to be installed on each users computer, which
enables wide-scale deployment and reduces the costs of deploying
and maintaining software.

Integrated software suite for faster
implementation.Our software solutions
are integrated to combine all of the technologies required to
collect and analyze customer data, manage marketing campaigns
and conduct service and support interactions. As a result,
companies do not need to combine multiple vendors software
tools into a single software solution and then customize this
software solution to meet their needs.

E.piphany Products

The E.piphany System includes multiple CRM
software solutions 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.piphany System is made up of several
software modules within each of the following product families:



| |   |                     
| | - | --------------------
| |  | E.piphany Insight,  
|
| |  | E.piphany Marketing,
|
| |  | E.piphany Sales, and
|
| |  | E.piphany Service.  



| |                  
| | -----------------
| | E.piphany Insight

E.piphany Insight software solutions allow any
business user with a web browser to easily analyze customer,
supplier and operational data from across the enterprise and the
Internet. To support this capability,

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we have designed the E.piphany System to extract
and manage data from a wide variety of electronic data sources
regardless of their format. The analytical capabilities of our
software solutions range from aggregating data from disparate
software systems to the application of complex statistical
formulas to that data, known as data mining. Once our software
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 software solutions allow
employees in a companys marketing department to
collaborate on planning and designing marketing campaigns that
target each customer based on his or her specific
characteristics and preferences. Once a campaign is designed,
our software solutions can execute the campaign through direct
mail, personalized e-mail, customized web pages and other points
of customer interaction. When campaigns are executed, our
software solutions analyze response data to refine and tune
campaigns. We make use of our real-time decisioning 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 software solutions allow 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. The product provides sales
professionals access to real-time information through web
browsers, disconnected laptops, wireless phones, personal
digital assistants, and other devices. We make use of our
real-time decisioning capabilities within E.piphany Sales to
intelligently guide sales personnel through the sales process
with optimal recommendations.



| |                  
| | -----------------
| | E.piphany Service

E.piphany Service software solutions help
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 software solutions are based on a web-based architecture
that 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 solutions,
our intelligent service software solutions enable customer
contact representatives to have a single view of all of their
customers data that has been collected from multiple
sources, and make relevant offers and service recommendations
based on that information. We make use of our real-time
decisioning 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.

E.piphany Strategy

We intend to be the leading provider of CRM
software for customer analytics, marketing, sales and service.
Key elements of our strategy include:

Extend the breadth and depth of our product
offerings.We intend to continue to
invest in research and development to build new software and
extend the range of business problems that we solve for our
customers. In particular, we intend to expand our current
software offerings for analytics, marketing, sales and service
by adding new features and functions to our solutions, as well
as improving the core capabilities of our product architecture.
A key element of improving our product architecture is
developing our products on the Java platform  a set
of software development technologies that will make our software
easier to develop, configure and integrate with internally
developed and third party systems. We believe that maintaining
and

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enhancing our products is important to our
ability to expand our market share, retain existing customers
and acquire new customers.


Increase market penetration by expanding our
sales and distribution capabilities.We intend to continue to enhance the
effectiveness of our direct sales force. In addition, we have
developed contractual relationships with systems integrators,
resellers and hosted services partners that we believe will
allow us to extend our sales presence. We intend to use these
relationships to support our sales efforts and help us enhance,
and develop new, E.piphany software solutions.

Increase our international penetration by
enhancing our global presence.We
intend to continue investing in enhancing our global presence.
To achieve an improved global presence, we intend to enhance the
effectiveness and size of our direct sales and services
organizations in Asia, Australia, Europe and Latin America. We
also intend to enhance our international presence through
relationships with distributors, consulting organizations and
systems integrators that have strong existing international
presences.

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

Consulting, Maintenance and Training
Services

Although our primary strategy is to leverage our
strategic systems integration partners for implementations, 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 solutions, facilitate the implementation of our
software solutions and result in sharing best business practices
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 solutions. 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 extensive
maintenance services including telephone support, web-based
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 extensive
training programs to our customers and other companies with
which we have relationships to accelerate the implementation and
adoption of our solutions by the users within a company. Fees
for our training services are typically charged separately from
our software license, maintenance and consulting fees.

E.piphany System Technology

The E.piphany System includes numerous analytic
and operational CRM technologies and supports numerous industry
standards. The major elements of the E.piphany Systems
core technologies and standards support include:

Web-based architecture.E.piphanys browser-based, web
architecture allows information and application functionality to
be broadly shared within and outside a company. However, the
application logic 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.We
are in the process of developing our current and future product
capabilities on the Java Two, Enterprise Edition 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 legacy and third-party
systems.

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Modular architecture.The E.piphany System is comprised of
numerous software modules that can be implemented independently
or in a broad suite. For example, a company may choose to start
with one or more 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, and Service applications. A common
application infrastructure is used in every case, and the same
benefits of scalability, flexibility, and ease of deployment
apply.

Metadata-driven architecture.Our integrated metadata defines the
information that flows through the system, from source data
systems to application logic, 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.

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

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

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

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

Relationships and Alliances

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

Consulting and implementation relationships.We have system integrator
relationships with Accenture, Deloitte & Touche, KPMG
Consulting, and PricewaterhouseCoopers, among others, to
implement our products and to assist us with sales lead
generation. We have certified and trained consultants in these
organizations for the implementation and operation of our
products.

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

Technology relationships.We have formed relationships with
vendors of complementary software products. We currently have
such agreements with vendors such as BroadVision, ChannelWave,
Comergent, Crystal Decisions and Selectica. These relationships
consist of non-exclusive contractual agreements to co-market
each others products and share technical resources in
order to better integrate each others products.

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Indirect channel relationships.We have entered into reseller
agreements with vendors under which we sell software solutions
to them for resale to their customers, as well as outsourcing
and application service provider (ASP) agreements under which
they install and use our software products to provide hosted CRM
services to their customers over the Internet. We believe that
these relationships will 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,
Harte-Hanks and Interelate, among others. Under these
agreements, we sell our software solutions to these companies at
a discount from our list prices, provide marketing and training
support and provide advance notice of price increases. Many of
these companies have committed resources to training their
employees, developing co-marketing programs and incorporating
our products into their CRM marketing strategies. We provide
sales materials, training and support services to these
resellers on the implementation of our software solutions.

Customers

As of December 31, 2001 we have sold our
software products and services to more than 400 customers. Our
customers represent entities of all sizes, but our sales focus
is on large global institutions from industries such as
manufacturing, retailing, financial services, communications,
and travel and leisure. For the years ended December 31,
2001 and 2000, no customer accounted for more than 10% of our
revenues.

Research and Development

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

E.piphanys total expenses for research and
development were $41.0 million, $26.8 million and
$7.1 million for the years ended December 31, 2001,
2000, and 1999, 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 and RightPoint.

Sales, Marketing and Distribution

To date, we have marketed our products primarily
through our direct sales force. However, we have expanded our
sales channels through additional relationships with systems
integrators and 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, our brand name and our
products, as well as to attract potential customers. These
programs include our own market research, product and strategy
updates with industry analysts, public relations activities,
direct mail programs, telemarketing and telesales, seminars,
trade shows, reseller programs, speaking engagements and web
site marketing. Our marketing organization also produces
marketing materials in support of sales to prospective customers
that include brochures, data sheets, white papers, presentations
and demonstrations.

Intellectual Property and Other Proprietary
Rights

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



| |   |                
| | - | ---------------
| |  | patent laws,   
|
| |  | copyright laws,

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | trademark laws,                                        
|
| |  | trade secret laws,                                     
|
| |  | employee and third-party nondisclosure
	agreements, and
|
| |  | confidentiality procedures.                            

We hold six United States patents 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. Our
end-user licenses are designed to prohibit unauthorized use,
copying and disclosure of our software and 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
Business Objects, Chordiant, Informatica, Kana Communications,
NCR, Onyx, Oracle, PeopleSoft, Pivotal, SAP AG, Siebel Systems
and Xchange.

We compete on the basis of the following
principal factors:



| |   |                       
| | - | ----------------------
| |  | analytic capabilities,
|
| |  | cost of ownership,    
|
| |  | customer support,     
|
| |  | ease of use,          
|
| |  | 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.
However, the markets for our products are still rapidly
evolving, and we may not be able to compete successfully against
current and potential competitors.

Employees

As of December 31, 2001, we had 696
full-time employees. Of these employees, 183 were engaged in
research and development, 240 were engaged in sales and
marketing, 174 were engaged in professional services and 99 were
engaged in general administrative activities. Of these
employees, 558 were located in the United States and 138 were
located outside the United States.

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

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RISK FACTORS

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

E.piphany has a history of losses, expects
losses in the future and may not ever become
profitable.

We incurred net losses of $2.6 billion for
the year ended December 31, 2001, $768.5 million for
the year ended December 31, 2000 and $22.4 million for
the year ended December 31, 1999. We had an accumulated
deficit of $3.4 billion as of December 31, 2001, and
$804.3 million as of December 31, 2000. We expect to
continue to incur losses for the foreseeable future. These
losses will be substantial, and we may not ever become
profitable. Therefore, our operating results will be harmed if
our revenue does not keep pace with our expected increase in
expenses or is not sufficient for us to achieve profitability.
If we do achieve profitability in any period, it cannot be
certain that we will sustain or increase profitability on a
quarterly or annual basis.

Our revenues may be harmed if general economic
conditions continue to worsen.

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

The September 11, 2001 terrorist attacks in
the United States and subsequent U.S. military operations in
Afghanistan, as well as future developments occurring in
connection with these events including, without limitation,
actual or threatened future terrorist attacks against the United
States or other countries, or an escalation of U.S. military
operations in Afghanistan or elsewhere, may adversely affect our
business. Although it is difficult to predict the effect of
these potential world events, they could cause: a further
softening of U.S. and foreign economies that could cause sales
of our products and services to decline; many of our customers
and potential customers to cancel, reduce or delay their
purchases of our products and services; and the sales cycle for
our products and services to lengthen. These outcomes, and other
unforeseen outcomes of these world events, would adversely
affect our revenues, operating results and financial condition.

Variations in quarterly operating results due
to such factors as changes in demand for our products and
changes in our mix of revenues may cause our stock price to
decline.

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



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

8



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| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | customers decisions to defer orders or
	implementations, particularly large orders or implementations,
	from one quarter to the next,                                                                                                                
|
| |  | changes in demand for our software or for
	enterprise software generally,                                                                                                                                                                             
|
| |  | announcements or introductions of new products by
	our competitors,                                                                                                                                                                                   
|
| |  | software defects and other product quality
	problems,                                                                                                                                                                                                 
|
| |  | our ability to integrate acquisitions,                                                                                                                                                                                                                
|
| |  | our ability to release new, competitive U.S. and
	international 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, support and training services when our own
	capacity is constrained, and
|
| |  | our ability to hire, train and retain sufficient
	engineering, consulting, training and sales staff.                                                                                                                                                  

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

Our service revenues, which includes fees for
consulting, implementation, maintenance and training, were 43%
of our revenues for the year ended December 31, 2001, 42% of our
revenues for the year ended December 31, 2000 and 47% of
our revenues for the year ended December 31, 1999. Our
service revenues have substantially lower gross margins than
license revenues. Our cost of service revenues for the years
ended December 31, 2001, 2000 and 1999 was 97%, 101% and
102%, respectively, of our service revenues. An increase in the
percentage of total revenues represented by 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
revenues have varied significantly from quarter-to-quarter due
to our relatively early stage of development. The amount and
profitability of services can depend in large part on:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the extent to which outside consulting
	organizations provide services directly to customers,       
|
| |  | the nature of the software solution licensed,                                                       
|
| |  | the complexity of the customers information
	technology environment,                               
|
| |  | the resources allocated by customers to their
	implementation projects,                             
|
| |  | the scope of licensed rights, and                                                                   
|
| |  | the extent to which licenses expand rights to use
	previously installed E.piphany software products.

Our limited operating history and the limited
operating history of the companies we acquired makes financial
forecasting and evaluation of our business difficult.

Our limited operating history and the limited
operating history of the companies that we acquired makes it
difficult to forecast 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 neither we nor the
companies we acquired have a long history upon which to base
forecasts of future operating results, any predictions about our
future revenues and expenses may not be as accurate as they
would be if we and the other companies we acquired had longer
business histories.

9



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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 solutions 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
solutions and allow us to focus on software development and
licensing. If consulting organizations are unwilling or unable
to provide a sufficient level and quality of service directly to
our customers or if customers are unwilling to contract directly
with these consulting organizations, we may not realize these
benefits and our revenues and profitability may be harmed.

Further, to the extent that consulting
organizations do not provide consulting and implementation
services directly to our customers, we need to provide these
services to our customers. We provide these services to our
customers either directly through our internal professional
services organization or indirectly through subcontractors we
hire to perform 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.

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

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

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

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 may attempt to build capabilities into
their products that are similar to the capabilities of our
products. Some of our competitors products may be more
effective than our products at performing particular functions
or be more customized for 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. In addition,
our products must integrate with software solutions provided by
a number of our

10



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##### Table of Contents



existing or potential competitors. These
competitors could alter their products so that our products no
longer integrate with them.


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

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

If the market in which we sell our products and
services does not grow as we anticipate, our revenues will be
lower than our expectations. If the market for software that
enables companies to establish, manage, maintain and continually
improve customer relationships by collecting and analyzing data
to design and manage marketing campaigns and customize products
and services and providing timely, consistent, multichannel
customer interaction does not grow as quickly or become as large
as we anticipate, our revenues will be 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, or
|
| |  | use alternative methods to solve the same or
	similar business problems.    

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

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



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improve and introduce new customer relationship
	management software solutions,                                                                     
|
| |  | improve the effectiveness of our software,
	particularly in implementations involving very large databases
	and large numbers of simultaneous users,
|
| |  | enhance our softwares ease of
	administration,                                                                                                     
|
| |  | design software for vertical markets,                                                                                                               
|
| |  | make available international versions of our
	software,                                                                                             
|
| |  | improve our softwares ability to extract
	data from existing software systems, and                                                                 
|
| |  | adapt to rapidly changing computer operating
	system and database standards and Internet technology.                                                

We may not be successful in developing and
marketing these or other new or improved products. If we are not
successful, we may lose sales to competitors.

11



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

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

In order to operate the E.piphany System, the
system must be installed on a computer server running either the
Microsoft Windows computer operating system or the Unix computer
operating system, and a computer server running database
software from IBM, Microsoft or Oracle. We are also currently
developing products to be compliant with J2EE standards. This
capability will allow 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 the E.piphany
System through standard Internet browsers such as Microsoft
Internet Explorer. If we fail to obtain access to developer
versions of any of these software products, we may be unable to
build and enhance our products on schedule. After installation,
the E.piphany System collects and analyzes data to profile
customers characteristics and preferences. This data may
be stored in a variety of our customers existing software
systems, including systems from Oracle, PeopleSoft, Siebel
Systems, and SAP, running on a variety of computer operating
systems. If we fail to enhance our software to collect data from
new versions of these products, we may lose potential and
existing customers. If we lose customers, our revenues and
profitability may be harmed.

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

It takes us between three and nine months to
complete the majority of our sales and it can take us up to one
year or longer. It is therefore difficult to predict 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 cycle lengthens when
general economic conditions worsen and spending on information
technology declines. If our sales cycle unexpectedly lengthens
in general or for one or more large orders, it would adversely
affect the timing of our revenues. If we were to experience a
delay of several weeks on a large order, it could harm our
ability to meet our forecasts for a given quarter.

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

In order to grow our business, we must generate,
retain and strengthen relationships with third parties. To date,
we have established relationships with several companies,
including consulting organizations and system integrators that
implement our software, including Accenture, Deloitte &
Touche, KPMG Consulting and PricewaterhouseCoopers; resellers,
including Accenture, EDS, Hewlett-Packard and Harte-Hanks; and
outsourcing or application services providers that use our
software products to provide hosted services to their customers
over the Internet, including EDS, Harte-Hanks and Interelate. If
the third parties with whom we have relationships do not provide
sufficient, high-quality service or integrate and support our
software correctly, our revenues may be harmed. In addition, the
third parties with whom we have relationships may offer products
of other companies, including products that compete with our
products. We typically enter into contracts with third parties
that generally set out the nature of our relationships. However,
our contracts do not require these third parties to devote
resources to promoting, selling and supporting our products.
Therefore we 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.

If we fail to expand our direct and indirect
sales channels, we will not be able to increase
revenues.

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

We intend to derive revenues from indirect sales
channels by selling our software through value added resellers.
These resellers offer our software products to their customers
together with consulting and implementation services or
integrate our software solutions with other software. We expect
as part of our strategy to increase international sales through
the use of direct and indirect sales channels. We will be even
more dependent on indirect sales channels in the future due to
our international strategy.

If we fail to manage our recent growth, our
ability to generate new revenues and achieve profitability would
be harmed.

We have grown since our inception and will need
to continue to grow in the future. Any failure to manage this
growth could impede our ability to increase revenues and achieve
profitability. Our future expansion could be expensive and
strain our management and other resources. In order to manage
growth effectively, we must:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | hire, train and integrate new personnel,                                   
|
| |  | integrate people and technologies from acquired
	companies,                
|
| |  | continue to augment our financial and accounting
	systems,                 
|
| |  | manage our sales operations, which are located in
	several geographies, and
|
| |  | expand our facilities.                                                     

If we do not manage our growth effectively, our
business could suffer.

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

In addition to the acquisitions that we have
already completed, we may acquire or make investments in other
complementary companies, services and technologies in the
future. If we fail to successfully complete

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acquisitions and investments, they may seriously
harm our business and prospects. To successfully complete an
acquisition, we must:




| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | properly evaluate the business, personnel and
	technology of the company to be acquired,                             
|
| |  | accurately forecast the financial impact of the
	transaction, including accounting charges and transaction
	expenses,
|
| |  | integrate and retain personnel,                                                                                      
|
| |  | combine potentially different corporate cultures,                                                                    
|
| |  | effectively integrate products and 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.

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

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

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

Any litigation regarding intellectual property
rights could be costly and time-consuming and divert the
attention of our management and key personnel from our business
operations. 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 against use of our products. A successful claim of
patent or other intellectual property infringement against us
would have an immediate material adverse effect on our business
and financial condition.

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

Our success depends in large part on our
proprietary technology. We rely on a combination of 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 registration
applications may not be allowed or competitors may successfully
challenge the validity or scope of these registrations. In
addition, our patents may not provide a significant competitive
advantage. Other software providers could copy or otherwise
obtain and use our

14



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##### Table of Contents



products or technology without authorization.
They also could develop similar technology independently, which
may infringe our proprietary rights. We may not be able to
detect infringement and may lose a competitive position in the
market before we do so. In addition, competitors may design
around our technology or develop competing technologies. The
laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the United States.


In addition, one of the ways in which we charge
for our software is based on the number of users at a particular
site that will be permitted to use the software. Organizations
that have a site license for a fixed number of users for our
products could allow unauthorized use of our software by
unlicensed users. 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 any inability to
attract and retain additional personnel, could affect our
ability to successfully grow our business.

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

The market price of our common stock has
fluctuated substantially since our initial public offering in
September 1999. Consequently, potential employees may perceive
our equity incentives such as stock options as less attractive
and current employees whose options are no longer priced below
market value may choose not to remain employed by us. In that
case, our ability to attract or retain employees will be
adversely affected.

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

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

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

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

We began shipping our first products in early
1998. Our products are complex and may contain currently unknown
errors, defects or failures, particularly since they are new and
recently released. In the past we have discovered software
errors in some of our products after introduction. We may not be
able to detect and correct errors before releasing our products
commercially. If our commercial products contain errors, we may
be required to:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | expend significant resources to locate and
	correct the error,                   
|
| |  | delay introduction of new products or commercial
	shipment of products, or       
|
| |  | experience reduced sales and harm to our
	reputation from dissatisfied customers.

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

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

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



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | divert the attention of our management and key
	personnel from our business,
|
| |  | be expensive to defend, and                                                 
|
| |  | result in large damage awards.                                              

Our product liability insurance may not be
adequate to cover all of the expenses resulting from a claim. In
addition, if our customers do not find our services to be of
high quality, they may elect to use other training, consulting
and product integration firms rather than contract for our
services. If customers are dissatisfied with our services, we
may lose revenues.

We do not have substantial experience in
international markets.

We have limited experience in marketing, selling
and supporting our products and services abroad. If we are
unable to grow our international operations successfully and in
a timely manner, due to a lack of demand for our product, an
inability to penetrate new markets or any other reasons, our
business and operating results could be seriously harmed. In
addition, doing business internationally involves greater
expense and many additional risks, particularly:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | unexpected changes in regulatory requirements,
	taxes, trade laws and tariffs,
|
| |  | differing intellectual property rights,                                       
|
| |  | differing labor regulations,                                                  
|
| |  | unexpected changes in regulatory requirements,                                
|
| |  | changes in a specific countrys or
	regions political or economic conditions,

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| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | greater difficulty in establishing, staffing and
	managing foreign operations, and
|
| |  | fluctuating exchange rates.                                                       

Our international operations require a
significant amount of attention from our management and
substantial financial resources. As of December 31, 2001 we
had 138 employees located in Asia, Australia, Europe, and Latin
America.

Seasonal trends in sales of business software
may affect our quarterly revenues.

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

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 our Board of Directors or act by written
consent without a meeting. In addition, our Board of Directors
has staggered terms, which makes it difficult to remove them all
at once. The acquirer would also be required to provide advance
notice of its proposal to remove directors at an annual meeting.
The acquirer also will not be able to cumulate votes at a
meeting, which will require the acquirer to hold more shares to
gain representation on our Board of Directors than if cumulative
voting were permitted.

Our Board of Directors also has the ability to
issue preferred stock 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 118,000 square
feet of additional office space in five additional buildings in
San Mateo, California. In addition, we lease sales and support
offices near Atlanta, Boston, Chicago, Dallas, Detroit, Los
Angeles, Miami, Minneapolis, New York, Philadelphia, Phoenix,
St. Louis, Seattle, Toronto and Washington, DC that
comprise approximately 115,000 square feet. We also lease sales
and support offices outside of North America including locations
in Australia, France, Germany, Hong Kong, Japan, Melbourne, San
Paolo, Singapore, Switzerland, The Netherlands, and the United
Kingdom that total approximately 31,000 square feet.
Approximately 50% of the square footage of our U.S. and
international facilities is currently subleased or available to
be sublet to third parties.




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 be a party to
litigation and claims incident to the ordinary course of our
business. Although the results of litigation and claims cannot
be predicted with certainty, we believe

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that the final outcome of such matters will not
have a material adverse effect on our business, results of
operations, or financial condition.


On July 9, 2001, a putative securities class
action, captioned Kucera v. E.piphany, Inc., et al.,
Civil Action No. 01-CV-6158, was filed against us, several
of our officers, and three underwriters in our initial public
offering, in the United States District Court for the Southern
District of New York. The complaint alleges violations of
Section 11 of the Securities Act of 1933 against all
defendants, a violation of Section 15 of the Securities Act
against the individual defendants, and violations of
Section 12(a)(2) of the Securities Act and
Section 10(b) of the Securities Exchange Act of 1934
against the underwriters. The complaint seeks unspecified
damages on behalf of a purported class of purchasers of common
stock between September 21, 1999 and December 6, 2000.
One additional lawsuit was filed subsequently which contains
allegations substantially identical to those in the Kucera
complaint.

Various plaintiffs have filed similar actions
asserting virtually identical allegations against more than
300 other companies. The lawsuits against us have been
coordinated for pretrial purposes with these other related
lawsuits, and have been assigned the collective caption In re
Initial Public Offering Securities Litigation. The coordinated
pretrial proceedings are presently being overseen by Judge Shira
A. Scheindlin. We believe we have meritorious defenses to these
securities lawsuits and will defend ourselves vigorously.




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

None.




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
|                    |  |      |        |    
|First Quarter 2000  |  | $    | 216.58 |     |  | $ | 83.33 | 
|Second Quarter 2000 |  | $    | 89.83  |     |  | $ | 28.67 | 
|Third Quarter 2000  |  | $    | 98.13  |     |  | $ | 50.33 | 
|Fourth Quarter 2000 |  | $    | 68.25  |     |  | $ | 34.38 | 
|First Quarter 2001  |  | $    | 52.75  |     |  | $ | 10.19 | 
|Second Quarter 2001 |  | $    | 17.15  |     |  | $ | 6.69  | 
|Third Quarter 2001  |  | $    | 10.99  |     |  | $ | 3.39  | 
|Fourth Quarter 2001 |  | $    | 10.33  |     |  | $ | 3.75  | 

The last reported sale price for our common stock
on the Nasdaq Stock Markets National Market was $8.75 per
share on January 31, 2002. As of January 31, 2002, we
estimate that there were approximately 835 holders of
record of our common stock. This does not include the number of
persons whose stock is in nominee or street name
accounts through brokers.

Dividend Policy

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

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Item 6.     Selected
Financial Data

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

|                              |                                                                    |                                          |   |        |   |      |   |         |   |      |   |         |   |  |   |          |   |  |   |            |  
|----------------------------- | ------------------------------------------------------------------ | ---------------------------------------- | - | ------ | - | ---- | - | ------- | - | ---- | - | ------- | - |  | - | -------- | - |  | - | ---------- | -
|                              |                                                                    |                                         
|                              |                                                                    | Year Ended December 31, 2001            
|                              |                                                                    |                                         
|                              |                                                                    | 1997                                     |   | 1998   |   | 1999 |   | 2000    |   | 2001
|                              |                                                                    |                                          |   |        |   |      |   |         |   |     
|                              |                                                                    |                                         
|                              |                                                                    | (In thousands, except per share amounts)
|Statement of Operations Data: |                                                                    |                                          |   |        |   |      |   |         |   |      |   |         |   |  |   |          |   |  |   |           
|                              | Total revenues                                                     |                                          | $ |       |   |      | $ | 3,377   |   |      | $ | 19,182  |   |  | $ | 127,281  |   |  | $ | 125,688    |  
|                              | Cost of revenues                                                   |                                          |   |       |   |      |   | 1,400   |   |      |   | 9,349   |   |  |   | 55,305   |   |  |   | 55,204     |  
|                              | Gross profit                                                       |                                          |   |       |   |      |   | 1,977   |   |      |   | 9,833   |   |  |   | 71,976   |   |  |   | 70,484     |  
|                              | Restructuring expense                                              |                                          |   |       |   |      |   |        |   |      |   |        |   |  |   |         |   |  |   | 42,971     |  
|                              | In-process research and development charge                         |                                          |   |       |   |      |   |        |   |      |   |        |   |  |   | 47,000   |   |  |   |           |  
|                              | Amortization and write-down of goodwill and
	purchased intangibles |                                          |   |       |   |      |   |        |   |      |   |        |   |  |   | 697,106  |   |  |   | 2,497,199  |  
|                              | Loss from operations                                               |                                          |   | (3,220 | ) |      |   | (10,613 | ) |      |   | (23,473 | ) |  |   | (791,624 | ) |  |   | (2,624,449 | )
|                              | Net loss                                                           |                                          |   | (3,149 | ) |      |   | (10,330 | ) |      |   | (22,390 | ) |  |   | (768,478 | ) |  |   | (2,609,435 | )
|                              | Basic and diluted net loss per share                               |                                          | $ | (1.93  | ) |      | $ | (3.00   | ) |      | $ | (1.46   | ) |  | $ | (13.71   | ) |  | $ | (38.25     | )
|                              | Shares used in computing basic and diluted net
	loss per share     |                                          |   | 1,631  |   |      |   | 3,449   |   |      |   | 15,371  |   |  |   | 56,038   |   |  |   | 68,224     |  

|                    |                                                   |                |   |      |  |      |   |        |  |      |   |        |  |  |   |           |  |  |   |         | 
|------------------- | ------------------------------------------------- | -------------- | - | ---- |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | --------- |  |  | - | ------- | 
|                    |                                                   |               
|                    |                                                   | December 31,  
|                    |                                                   |               
|                    |                                                   | 1997           |   | 1998 |  | 1999 |   | 2000   |  | 2001
|                    |                                                   |                |   |      |  |      |   |        |  |     
|                    |                                                   |               
|                    |                                                   | (In thousands)
|Balance Sheet Data: |                                                   |                |   |      |  |      |   |        |  |      |   |        |  |  |   |           |  |  |   |        
|                    | Cash, cash equivalents and short-term investments |                | $ | 369  |  |      | $ | 13,595 |  |      | $ | 81,010 |  |  | $ | 396,973   |  |  | $ | 324,264 | 
|                    | Working capital                                   |                |   | 131  |  |      |   | 12,601 |  |      |   | 78,351 |  |  |   | 373,452   |  |  |   | 291,331 | 
|                    | Total assets                                      |                |   | 801  |  |      |   | 16,364 |  |      |   | 93,586 |  |  |   | 2,995,074 |  |  |   | 465,855 | 
|                    | Long-term obligations, net of current portion     |                |   |     |  |      |   | 333    |  |      |   | 7,824  |  |  |   | 618       |  |  |   | 23,926  | 
|                    | Total stockholders equity                        |                |   | 468  |  |      |   | 13,440 |  |      |   | 74,642 |  |  |   | 2,938,191 |  |  |   | 391,392 | 

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

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

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

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

Overview

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

We were founded in November 1996. From our
founding through the end of 1997, we primarily engaged in
research activities, developing products and building business
infrastructure. We began shipping our first software product and
first generated revenues from software license fees,
implementation and consulting fees, and maintenance fees in
early 1998. Despite our revenue growth, we have incurred
significant costs to develop our technology and products, to
recruit research and development personnel, to build a direct
sales force and a professional services organization, and to
expand our general and administrative infrastructure.

Acquisitions

On January 4, 2000, we acquired RightPoint
Software, Inc., a provider of real time marketing software
solutions that enable companies to optimize and present
marketing offers, promotions, and communications while a
customer is interacting with a web site, call center agent or
other point of customer interaction. In connection with this
transaction we acquired all of the outstanding shares of capital
stock of RightPoint in exchange for 4,614,992 shares of our
common stock. In addition, options and warrants of RightPoint
were converted into options and warrants to purchase
approximately 795,000 shares of our common stock. 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. We
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 our
operating results for the years ended December 31, 2001 and 2000.

On May 1, 2000, we acquired iLeverage
Corporation, a start-up company that develops marketing
solutions for digital marketplaces. In connection with this
transaction, we acquired all of the outstanding shares of
capital stock of iLeverage in exchange for 177,146 shares of our
common stock. In addition, options of iLeverage were converted
into options to purchase approximately 95,231 shares of our
common stock. The total purchase price was approximately
$29.0 million. We 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 our operating results for the years ended
December 31, 2001 and 2000.

On May 31, 2000, we acquired Octane
Software, Inc., a provider of next-generation multi-channel
customer interaction applications and infrastructure software
for sales, service and support. In connection with

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this transaction, we acquired all of the
outstanding shares of capital stock of Octane in exchange for
17,353,426 shares of our common stock. In addition, options and
warrants of Octane were converted into options and warrants to
purchase approximately 1,836,839 shares of our common stock. 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. We
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 our
operating results for the years ended December 31, 2001 and
2000.


On May 31, 2000, we acquired
eClass Direct, Inc., an application service provider of
permission-based e-mail marketing services. In connection with
this transaction, we acquired all of the outstanding shares of
capital stock of eClass in exchange for 1,084,031 shares of our
common stock. In addition, options of eClass were converted into
options to purchase approximately 69,575 shares of our common
stock. The total purchase price was approximately $50.3 million.
We 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 our operating results
for the years ended December 31, 2001 and 2000.

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

On April 12, 2001, we acquired Moss
Software, Inc., a provider of customer relationship management
products that enable customers to resolve sales automation
challenges and better manage sales cycles. In connection with
this transaction, we acquired all of the outstanding shares of
capital stock of Moss in exchange for 1,370,296 million
shares of our common stock. In addition, we assumed all
outstanding options to purchase Moss common stock. The total
purchase price was approximately $40.6 million. We
accounted for the acquisition under the purchase method of
accounting and the results of Moss operations subsequent
to April 12, 2001 have been included in our operating
results for the year ended December 31, 2001.

On September 30, 2001, we performed an
impairment assessment of goodwill and identifiable intangible
assets recorded in connection with our acquisitions of
RightPoint, iLeverage, Octane, eClass and Moss and our
acquisition of certain intellectual property assets of Radnet
and recorded an impairment charge as described below.

Amortization and Write-Down of Goodwill and
Purchased Intangibles

We periodically assess 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. We also periodically
assess the impairment of enterprise level goodwill in accordance
with the provisions of APB Opinion No. 17, Intangible
Assets. As part of our review of our third quarter
financial results, we performed an impairment assessment of
identifiable intangible assets and goodwill in connection with
all of our acquisitions. The impairment assessment was performed
with the assistance of independent valuation experts to
determine whether any impairment existed. The impairment
indicators included, but were not limited to, the significant
decline in our stock price, the net book value of assets which
significantly exceeded our market capitalization, and the
overall decline in industry growth rates which have negatively
impacted our revenues and forecasted revenue growth rates. The
decline in revenues and forecasted revenue growth rates
precipitated our reduction in workforce and overall
restructuring in the quarter ended September 30, 2001. As a
result, we recorded a $1.7 billion impairment charge 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 reasonably possible that the
estimates and assumptions used under our assessment may change
in the short-term resulting in the need to further write-down
our goodwill and other long-lived assets. The aggregate
amortization and write-down of goodwill and these other
intangible assets increased to $2.5 billion for the year
ended

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December 31, 2001 from $697.1 million
for the year ended December 31, 2000. The increase was
primarily due to the $1.7 billion impairment of goodwill
and intangible assets charge that was included in the results of
operations for the year ended December 31, 2001. No
indicators were present in the quarter ended December 31,
2001 warranting a further impairment of the identifiable
intangible assets and goodwill.


Beginning on January 1, 2002, our
unamortized balance of $98.1 million of goodwill and other
intangible assets will be subject to new accounting
pronouncements SFAS No. 141 and SFAS No. 142 as
described in Note 2 of Notes to Consolidated Financial
Statements. As a result, all acquired goodwill will no longer be
amortized, but will be subject to a periodic impairment
assessment. We will continue to amortize other intangible assets
of $16.2 million on a straight-line basis over their
remaining useful lives. Amortization related to these
intangibles is expected to be $10.5 million for 2002,
$5.0 million for 2003 and $0.7 million for 2004.
Please see Note 8 in the Notes to Consolidated Financial
Statements for more detailed information.

Stock Option Exchange Program

On April 2, 2001, we announced a voluntary
stock option exchange program for our 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
our common stock in return for our 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 with us from the date they tendered their
original options through November 5, 2001. The exchange
program was not made available to our executive officers,
directors, consultants, former employees or any of our employees
who were residents of The Netherlands, Switzerland, Spain or
Brazil or who were employed by our subsidiaries located in those
countries.

Restructuring and Related Activities

In the third quarter of 2001, our Board of
Directors approved a plan to restructure our worldwide
operations including a reduction in workforce and the
consolidation of our operating facilities. The restructuring
resulted in a total charge of $43.0 million to account for
these activities. Of this total charge, $5.8 million was
paid in cash and $4.8 million reflects a non-cash charge
taken during the quarters ended September 30, 2001 and
December 31, 2001. We recorded the low end of a range of
assumptions modeled for the restructuring charge, in accordance
with SFAS No. 5, Accounting for Contingencies.
Please see Note 3 in the Notes to Consolidated Financial
Statements for more detailed information.

Source of Revenues and Revenue Recognition
Policy

We generate revenues principally from licensing
our software solutions directly to customers and providing
related services including implementation, consulting, support
and training. Through December 31, 2001, 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
solutions within specified limits. The amount of the license fee
varies depending on which software solution is purchased, the
number of software solutions purchased and the scope of usage
rights. Customers can subsequently pay additional license fees
to expand the right to use previously licensed software
solutions, or to purchase additional software solutions. Each
software solution included in the E.piphany System contains the
same core technology, allowing for easy integration of
additional software solutions as they are licensed from us. Our
software solutions 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, Deloitte & Touche, KPMG Consulting and

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PricewaterhouseCoopers, or alternatively, they
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.


Fees from licenses are recognized as revenue upon
contract execution, provided that all delivery obligations have
been met, fees are fixed or determinable, collection is
probable, and vendor specific objective evidence exists to
allocate the total fee between all delivered and undelivered
elements of the arrangement. If vendor specific objective
evidence does not exist to allocate the total fee to all
delivered and undelivered elements of the arrangement, revenue
is deferred until the earlier of the time at which (1) such
evidence does exist for the undelivered elements, or
(2) all elements are delivered. Fees from license
agreements that include the right to receive unspecified future
products are recognized over the term of the arrangement or, if
not specified, the estimated economic life of the product. When
we receive license fees from resellers, we recognize 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
shipment, provided that (1) the above criteria have been
met, (2) payment of the license fees is not dependent upon
the performance of the consulting and implementation services,
and (3) the services are not essential to the functionality
of the software. For arrangements that dont meet the above
criteria, both the product license revenues and services
revenues are recognized in accordance with the provisions of
Statement of Position (SOP) 81-1, Accounting
for Performance of Construction Type and Certain Production Type
Contracts. When reliable estimates are available for the
costs and efforts necessary to complete the implementation
services, we account for the arrangements under the percentage
of completion contract method pursuant to SOP 81-1. When such
estimates are not available, the completed contract method is
utilized. To date, when we have been primarily responsible for
the implementation of the software, services have been
considered essential to the functionality of the software
products and therefore have been recognized pursuant to
SOP 81-1. Prior to 2001, E.piphany was primarily
responsible for the implementation services for the majority of
its license arrangements. In 2001, third-party consulting
organizations were primarily responsible for the implementation
services for the majority of E.piphanys license
arrangements and therefore less license revenue was recognized
pursuant to SOP 81-1.

Maintenance agreements generally call for us to
provide technical support and software updates to customers.
Revenue from technical support and software updates is
recognized ratably over the term of the maintenance agreement
and is included in services revenue in the accompanying
consolidated statements of operations. We also provide
consulting, implementation and training services to our
customers separately from our sales of product licenses. Revenue
from such services, when not sold in conjunction with product
licenses, is generally recognized as the services are performed.

Cost of Revenues and Operating
Expenses

Our cost of license revenues primarily consist of
license fees due to third parties for integrated technology. Our
cost of services revenues include salaries and related expenses
for our implementation, consulting, support and training
organizations, costs of subcontracting to consulting
organizations to provide consulting services to customers and an
allocation of facilities, communications and depreciation
expenses. Our operating expenses are classified into three
general categories: sales and marketing, research and
development, and general and administrative. We classify all
charges to these operating expense categories based on the
nature of the expenditures. We allocate the costs for overhead
and facilities to each of the functional areas that use the
overhead and facilities services based on their headcount. These
allocated charges include facility rent for corporate offices,
communication charges and depreciation expenses for office
furniture and equipment.

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

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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

The discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect our
reported assets, liabilities, revenues and expenses, and our
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, intangible assets,
income taxes, and restructuring. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. This forms
the basis of judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting
policies and the related judgments and estimates affect the
preparation of our consolidated financial statements.

Where our internal services organization is
providing services that are essential to the functionality of
the software, we recognize revenue and profit as implementation
services are performed on software license arrangements, using
the percentage of completion method, which relies on estimates
of total expected contract revenue and costs. We follow this
method since reasonably dependable estimates of the revenue and
costs applicable to various stages of a contract can be made.
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.

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. 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 which would result in an additional general and
administrative expense in the period such determination was made.

We recorded an impairment charge in the quarter
ended September 30, 2001 in order to write down the value
of our goodwill and other intangible assets. We will continue to
evaluate our goodwill value on a periodic basis. In the event
that in the future, it is determined that the goodwill value has
been impaired, an adjustment to goodwill will be made resulting
in a charge for the write-down in the period in which the
determination was made.

We record a valuation allowance to reduce our
deferred tax assets to an amount that is more likely than not to
be realized. While we have considered future taxable income in
assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize our deferred
tax assets in the future in excess of its net recorded amount,
an adjustment to the deferred tax asset would be made,
increasing income in the period in which such determination was
made.

We took a restructuring charge in the quarter
ended September 30, 2001 that resulted in an accrual to be
used to offset future rent expense, net of sublease income, that
is related to abandoned properties. We took a further related
charge in the quarter ended December 31, 2001 in order to
adjust our initial accrual, on the basis of revised estimates.
We have worked with external real estate experts in each of the
markets where the properties are located to determine what the
best estimate of the accrual should be. However, if the real
estate market continues to worsen and we are not able to
sublease the properties as expected, additional adjustments to
the accrual may be required, which would result in additional
restructuring costs in the period in which such determination is
made. Likewise, if the real estate market strengthens, and we
are able to sublease the properties earlier or at more favorable
rates than projected, adjustments to the accrual may be required
that would increase net income in the period in which such
determination is made.

24



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Results of Operations

The following table sets forth statement of
operations data for the three years ended December 31, 2001
(in thousands, except per share amounts):

|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |            |            |           | 
|-------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------ | ------------------------ | ------- | ------- | ------ | ------- | -------- | -------- | ------- | ------- | ---------- | ---------- | --------- | 
|                                                               |                                                                    |                         
|                                                               |                                                                    | Years Ended December 31,
|                                                               |                                                                    |                         
|                                                               |                                                                    | 1999                     |                          | 2000    |         | 2001  
|                                                               |                                                                    |                          |                          |         |         |       
|Revenues:                                                      |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               | Product license                                                    |                          | $                        | 10,161  |         |        | $       | 73,493   |          |         | $       | 71,116     |           
|                                                               | Services                                                           |                          |                          | 9,021   |         |        |         | 53,788   |          |         |         | 54,572     |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    |                          | 19,182                   |         |         |        | 127,281 |          |          |         | 125,688 |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|Cost of revenues:                                              |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               | Product license                                                    |                          |                          | 158     |         |        |         | 1,209    |          |         |         | 2,016      |           
|                                                               | Services                                                           |                          |                          | 9,191   |         |        |         | 54,096   |          |         |         | 53,188     |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    |                          | 9,349                    |         |         |        | 55,305  |          |          |         | 55,204  |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    | Gross profit             |                          |         | 9,833   |        |         |          | 71,976   |         |         |            | 70,484     |          
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|Operating expenses:                                            |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               | Research and development                                           |                          |                          | 7,074   |         |        |         | 26,792   |          |         |         | 40,992     |           
|                                                               | Sales and marketing                                                |                          |                          | 18,727  |         |        |         | 67,678   |          |         |         | 87,953     |           
|                                                               | General and administrative                                         |                          |                          | 4,576   |         |        |         | 21,510   |          |         |         | 24,257     |           
|                                                               | Restructuring costs                                                |                          |                          |        |         |        |         |         |          |         |         | 42,971     |           
|                                                               | In-process research and development charge                         |                          |                          |        |         |        |         | 47,000   |          |         |         |           |           
|                                                               | Amortization and write-down of goodwill and
	purchased intangibles |                          |                          |        |         |        |         | 697,106  |          |         |         | 2,497,199  |           
|                                                               | Stock-based compensation                                           |                          |                          | 2,929   |         |        |         | 3,514    |          |         |         | 1,561      |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    |                          | Total operating expenses |         |         | 33,306 |         |          |          | 863,600 |         |            |            | 2,694,933 | 
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               | Loss from operations                                               |                          |                          | (23,473 | )       |        |         | (791,624 | )        |         |         | (2,624,449 | )         
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|Other income (expense):                                        |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               | Interest income                                                    |                          |                          | 1,722   |         |        |         | 23,684   |          |         |         | 15,149     |           
|                                                               | Interest expense                                                   |                          |                          | (639    | )       |        |         | (538     | )        |         |         | (135       | )         
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    |                          | Total other income       |         |         | 1,083  |         |          |          | 23,146  |         |            |            | 15,014    | 
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|                                                               |                                                                    | Net loss                 |                          | $       | (22,390 | )      |         | $        | (768,478 | )       |         | $          | (2,609,435 | )        
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|Basic and diluted net loss per share                           |                                                                    | $                        | (1.46                    | )       |         | $      | (13.71  | )        |          | $       | (38.25  | )         
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           
|Shares used in computing basic and diluted net
	loss per share |                                                                    |                          | 15,371                   |         |         |        | 56,038  |          |          |         | 68,224  |           
|                                                               |                                                                    |                          |                          |         |         |        |         |          |          |         |         |           



| |                                        
| | ---------------------------------------
| | Years Ended December 31, 2001 and
	2000



| |         
| | --------
| | Revenues

Total revenues decreased to $125.7 million
for the year ended December 31, 2001, from
$127.3 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 2001, domestic revenue declined by $25.1 million or
21%. This decrease was offset in part by an increase in

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international revenues of $23.5 million or
228%. This rapid growth in international revenues reflected the
early stage of development of our international operations and
we do not expect international revenues to increase at the same
rate in the future. Maintaining revenues at the level of the
fourth quarter of 2001 would result in lower annual revenues for
2002 as compared to 2001.


Product license revenues decreased to
$71.1 million, or 57% of total revenue, for the year ended
December 31, 2001 from $73.5 million, or 58% 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 the 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
$54.6 million, or 43% of total revenues, for the year ended
December 31, 2001 from $53.8 million, or 42% 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 decrease in product license revenues 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.

The relative amount of services revenues as
compared to license revenues has varied depending on the extent
to which third party consulting organizations are engaged
directly by customers to provide professional services, the
nature of the solution that has been 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 relative to product license
revenues. This is especially true when we are required to
subcontract with consulting organizations to supplement our
internal professional services organization. To the extent that
services revenues become a greater percentage of our total
revenues and services margins do not increase, our overall gross
margins will decline.



| |                 
| | ----------------
| | Cost of Revenues

Total cost of revenues was effectively unchanged
at $55.2 million for the year ended December 31, 2001
as compared to $55.3 million for the year ended
December 31, 2000. Cost of product license revenues
consists primarily of license fees paid to third parties under
technology license arrangements and have not been significant to
date. Cost of services revenues consists primarily of the costs
of consulting, maintenance and training services.

Cost of services revenues decreased to
$53.2 million, or 97% of services revenues, for the year
ended December 31, 2001 from $54.1 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 the result of a
significant reduction in the number of internal professional
services employees due to the change in our 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. 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.

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| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and Development

Research and development expenses consist
primarily of personnel and related costs associated with our
product development efforts. Research and development expenses
increased to $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 33% for the year
ended December 31, 2001 from 21% 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 was offset by the restructuring of our operations that
occurred in the third quarter of 2001, which resulted in a
reduction in the number of employees and a restructuring charge
that reduced operating expenses in the third and fourth quarters
of 2001. We believe that investments in product development are
essential to our future success. We anticipate that research and
development expenses will increase over the long term.



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of
trade shows, seminars, promotional materials and other sales and
marketing programs. Sales and marketing expenses increased to
$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 70% for the year ended
December 31, 2001 from 53% for the year ended
December 31, 2000. The increase in sales and marketing
expenses in absolute dollars was primarily attributable to an
increase in the number of sales and marketing employees 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 was
offset by the restructuring of our operations that occurred in
the third quarter of 2001, which resulted in a reduction in the
number of employees and in a restructuring charge that reduced
operating expenses in the third and fourth quarters of 2001.
Maintaining sales and marketing expenses at the level of the
fourth quarter would result in lower annual expenses for 2002 as
compared to 2001. We anticipate, however, that these expenses
may increase over the long-term.



| |                           
| | --------------------------
| | 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 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 17% 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 was offset by the restructuring of our operations that
occurred in the third quarter of 2001, which resulted in a
reduction in the number of employees and a restructuring charge
that reduced operating expenses in the third and fourth
quarters. Maintaining general and administrative expenses at the
level of the fourth quarter would result in lower annual
expenses for 2002 as compared to 2001, however we anticipate
that these expenses may increase over the long-term.



| |                                            
| | -------------------------------------------
| | 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

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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.


There was no in-process research and development
charge incurred during the year ended December 31, 2001.
Please see Note 8 in the 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 accounted for under the purchase
method of accounting. Accordingly, we recorded goodwill and
other intangible assets representing the excess of the purchase
price paid over the fair value of net assets acquired. The
aggregate amortization and write-down of goodwill and other
intangible assets was $2.5 billion and $697.1 million for
the years ended December 31, 2001 and 2000, respectively.
The increase was due to the $1.7 billion impairment of
goodwill and intangible assets charge that was included in the
results of operations for the year ended December 31, 2001.

Beginning on January 1, 2002, our
unamortized balance of $98.1 million of goodwill and other
intangible assets will be subject to the new accounting
pronouncements SFAS No. 141 and SFAS No. 142 as
described in Note 2 of Notes to Consolidated Financial
Statements. As a result acquired goodwill will no longer be
amortized, but will be subject to a periodic impairment
assessment. The Company will continue to amortize other
intangible assets of $16.2 million on a straight-line basis
over their remaining useful lives. Amortization related to these
intangibles is expected to be $10.5 million for 2002,
$5.0 million for 2003 and $0.7 million for 2004.



| |                         
| | ------------------------
| | 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. In connection with the
grant of certain stock options to employees during the years
ended December 31, 2001, 2000 and 1999, we recorded
deferred compensation of approximately $1.4 million, $0,
and $2.8 million, respectively. As of December 31,
2001, deferred compensation remaining to be amortized totaled
$0.9 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. Total stock-based compensation was
$1.6 million and $3.5 million for the years ended
December 31, 2001 and 2000, respectively. Based on our
deferred compensation balance as of December 31, 2001, we
expect amortization of approximately $0.6 million,
$0.1 million, $0.1 million and $50,000 for the years
ended December 31, 2002, 2003, 2004 and 2005, respectively. See
Note 5 of Notes to Consolidated Financial Statements for further
discussion regarding the accounting treatment for stock-based
compensation.



| |                     
| | --------------------
| | Interest Income, Net

Interest income, net of interest expense,
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 lower average
cash and investment balances and a decrease in the average rate
of return on our investments.



| |                           
| | --------------------------
| | Provision for Income Taxes

From inception through December 31, 2001, we
incurred net losses for federal and state tax purposes and have
not recognized any tax provision or benefit. As of
December 31, 2001, we had $161.6 and $137.3 million of
federal and state net operating loss carryforwards,
respectively, to offset future taxable income. The federal net
operating loss carryforwards begin to expire on varying dates
beginning in 2012 through 2021 and the state

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##### Table of Contents



operating loss carryforwards begin to expire on
various dates through 2006. Certain future changes in our share
ownership, as defined in the Tax Reform Act of 1986 and similar
state provisions, may restrict the utilization of carryforwards.
Given our limited operating history, our losses incurred to date
and the difficulty in accurately forecasting our future results,
management does not believe that the realization of the related
deferred income tax asset meets the criteria required by
generally accepted accounting principles. Therefore, we have
recorded a 100% valuation allowance against the deferred income
tax asset. See Note 6 of Notes to Consolidated Financial
Statements for the components of the deferred income tax asset.




| |                                        
| | ---------------------------------------
| | Years Ended December 31, 2000 and
	1999



| |         
| | --------
| | Revenues

Total revenues increased to $127.3 million
for the year ended December 31, 2000, from
$19.2 million for the year ended December 31, 1999.
This rapid growth in revenues reflected our relatively early
stage of development in 1999.

Product license revenues increased to
$73.5 million, or 58% of total revenue, for the year ended
December 31, 2000 from $10.2 million, or 53% of total
revenue, for the year ended December 31, 1999. The increase
in product license revenues was due to an increase in the number
and average size of licenses sold, the growth of our direct
sales force, and the introduction and shipment of new products.

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



| |                 
| | ----------------
| | Cost of Revenues

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



| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and Development

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



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist primarily of
employee salaries, benefits and commissions, and the costs of
trade shows, seminars, promotional materials and other sales and
marketing programs. Sales and marketing expenses increased to
$67.7 million for the year ended December 31, 2000
from $18.7 million for the year ended December 31, 1999.
Sales and marketing expenses as a percentage of total revenues
decreased

29



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##### Table of Contents



from 98% for the year ended December 31,
1999 to 53% for the year ended December 31, 2000. The
increase in sales and marketing expenses in absolute dollars was
primarily attributable to an increase in the number of sales and
marketing employees from internal growth and acquisitions.




| |                           
| | --------------------------
| | 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 increased to $21.5 million for
the year ended December 31, 2000 from $4.6 million for
the year ended December 31, 1999. The increase in general and
administrative expenses in absolute dollars was primarily
attributable to an increase in the number of executive, finance,
legal and administrative employees from our internal growth and
acquisitions, which were necessary to support our expanding
operations. General and administrative expenses as a percentage
of total revenues decreased from 24% for the year ended
December 31, 1999 to 17% for the year ended
December 31, 2000.



| |                                            
| | -------------------------------------------
| | In-Process Research and Development
	Charge

In connection with the acquisition of RightPoint
and Octane, we recorded a charge of $47.0 million in the
year ended December 31, 2000. Please see Note 8 in the
Notes to Consolidated Financial Statements for more detailed
information.



| |                                                                   
| | ------------------------------------------------------------------
| | Amortization and Write-Down of Goodwill and
	Purchased Intangibles

Our acquisitions of Octane, eClass, iLeverage and
RightPoint were accounted for under the purchase method of
accounting. Accordingly, we recorded goodwill and other
intangible assets representing the excess of the purchase price
paid over the fair value of net assets acquired. The
amortization of goodwill and other intangible assets was
697.1 million in fiscal 2000. There was no write-down of
goodwill or other intangible assets in 2000. There were no
acquisitions that closed prior to fiscal 2000.



| |                         
| | ------------------------
| | Stock-Based Compensation

Stock-based compensation consists of amortization
of deferred compensation in connection with stock option grants
and sales of stock to employees at exercise or sales prices
below the deemed fair market value of our common stock and
compensation related to equity instruments issued to
non-employees for services rendered. We have recorded aggregate
deferred compensation of $5.8 million related to
stock-based compensation to employees. This amount is being
amortized over the respective vesting periods of these equity
instruments in a manner consistent with Financial Accounting
Standards Board Interpretation No. 28. Total stock-based
compensation was $3.5 million and $2.9 million for the
years ended December 31, 2000 and 1999, respectively. See
Note 5 of Notes to Consolidated Financial Statements for further
discussion regarding the accounting treatment for stock-based
compensation.



| |                     
| | --------------------
| | Interest Income, Net

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



| |                           
| | --------------------------
| | Provision for Income Taxes

From inception through December 31, 2000, we
incurred net losses for federal and state tax purposes and have
not recognized any tax provision or benefit.

30



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##### Table of Contents



Liquidity and Capital Resources

Net cash used in operating activities totaled
$69.7 million, $19.0 million and $17.8 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. Cash used in operating activities for each period
resulted principally from net losses in those periods, net of
non-cash charges for amortization and write-down of goodwill and
purchased intangibles, in-process research and development, and
stock-based compensation. Cash used in operating activities for
the year ended December 31, 2001 also resulted from 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 resulted from an increase in accounts receivable, which was
partially offset by an increase in deferred revenue. Cash used
in operating activities for the year ended December 31,
1999 also resulted from an increase in accounts receivable and
prepaid expenses and other assets, however, this was more than
offset by an increase in accrued liabilities and deferred
revenue.

Net cash used in investing activities totaled
$54.5 million, $74.2 million and $25.9 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. Cash used in investing activities for the year
ended December 31, 2001 resulted from the purchases of
investments, net of sales of investments, and the purchase of
property and equipment. Cash used in investing activities for
the year ended December 31, 2000 resulted from the purchase
of investments, the direct costs of our acquisitions, and the
purchase of property and equipment, which was partially offset
by cash acquired in acquisitions. Cash used in investing
activities for the year ended December 31, 1999 resulted from
the purchase of investments and the purchase of property and
equipment.

Net cash provided by financing activities totaled
$7.6 million, $355.1 million and $88.2 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
Cash provided by financing activities for the year ended
December 31, 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
resulted from the receipt of proceeds from our secondary
offering completed during the first quarter of 2000. Cash
provided by financing activities for the year ended
December 31, 1999 resulted from the proceeds from our
initial public offering, borrowings against a line of credit and
issuances of convertible preferred and common stock.

As of December 31, 2001, our principal
sources of liquidity consisted of $202.9 million of cash
and cash equivalents, and $121.3 million in short-term
investments. We believe that our current cash and cash
equivalents and short-term investments will be sufficient to
meet our anticipated liquidity needs for working capital and
capital expenditures for at least 12 months. If we require
additional capital resources to grow our business internally or
to acquire complementary technologies and businesses at any time
in the future, we may seek to sell additional equity or debt
securities or secure 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 June 1998, the FASB issued Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), which provides a
comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As amended,
this statement is effective for fiscal years beginning after
June 15, 2000. We applied the new rules prospectively to
transactions beginning in the first quarter of 2001. The
adoption did not have a material effect on our financial
position or results of operations.

In March 2000, the FASB issued Financial
Standards Board Interpretation (FIN) No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25.
FIN No. 44 addresses the application of APB No. 25 to
clarify, among other issues (1) the definition of
employee for purposes of applying APB No. 25,
(2) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (3) the accounting consequences
of various modifications to the terms of a previously fixed
stock option or award, and (4) the accounting for an
exchange of stock compensation awards in a business combination.
FIN No. 44 is effective July 1, 2000, but certain
conclusions cover specific events

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that occurred after either December 15, 1998
or January 12, 2000, but before the effective date of
July 1, 2000. The effects of applying the interpretation
have been recognized on a prospective basis from July 1,
2000. The adoption did not have a material effect on our
financial position or results of operations.


In June 2001, the FASB approved for issuance SFAS
No. 141 Business Combinations and No. 142
Goodwill and Other Intangible Assets. Major
provisions of these Statements are as follows: (1) all
business combinations initiated after June 30, 2001 must
use the purchase method of accounting; the pooling of interest
method of accounting is prohibited except for transactions
initiated before July 1, 2001, (2) intangible assets
acquired in a business combination must be recorded separately
from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be
sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or
liability, (3) goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment
periodically using a fair value approach, except in certain
circumstances, and whenever there is an impairment indicator;
other intangible assets will continue to be valued and amortized
over their estimated lives, (4) in-process research and
development will continue to be written off immediately,
(5) all acquired goodwill must be assigned to reporting
units for purposes of impairment testing and segment reporting,
and (6) effective January 1, 2002, existing goodwill
will no longer be subject to amortization.

Amortization and write-down of goodwill for the
year ended December 31, 2001 was $2.5 billion, which
includes a $1.7 billion impairment of goodwill and
intangible assets charge. Beginning on January 1, 2002, our
unamortized balance of $98.1 million of goodwill and other
intangible assets will be subject to the new accounting
pronouncements SFAS No. 141 and SFAS No. 142. As a
result, acquired goodwill will no longer be amortized, but will
continue to be subject to a periodic impairment assessment. We
will continue to amortize other intangible assets of
$16.2 million on a straight-line basis over their remaining
useful lives. Amortization related to these intangibles is
expected to be $10.5 million for 2002, $5.0 million
for 2003 and $0.7 million for 2004.

In November 2001, the Emerging Issues Task Force
(EITF) reached consensus on EITF No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendors Products. EITF No. 01-9 addresses the
accounting for consideration given by a vendor to a customer and
is a codification of EITF No. 00-14, Accounting for Certain
Sales Incentives, EITF No. 00-22 Accounting for
Points and Certain Other Time-Based or Volume-Based
Sales Incentives Offers and Offers for Free Products or Services
to be Delivered in the Future and EITF No. 00-25, Vendor
Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products. We do not believe that
upon adoption it will have a significant impact on our financial
statements.

In November 2001, the staff of the FASB reached
consensus on Topic No. D-103, on the topic of Income Statement
Characterization of Reimbursements Received for Out of Pocket
Expenses Incurred. This topic 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 FASB staff concluded that
reimbursements received for out of pocket expenses incurred
should be characterized as revenue in the income statement.
Historically, we have recorded reimbursements as a reduction of
services cost of revenue. This announcement will be applied in
financial reporting periods beginning after December 15,
2001, and comparative financial statements for prior periods
will be reclassified to comply with the guidance in this
announcement. We believe the adoption of this pronouncement will
not result in a material increase in our services revenue and
services cost of revenue.




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.

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Foreign Currency Exchange Rate Risk

The majority of our operations are based in the
United States and, accordingly, the majority of our transactions
are denominated in U.S. Dollars. However, we do have
foreign-based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect
to fluctuations in the relative value of currencies. Currently,
we have 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.
Therefore, the impact to our financial statements has 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 relate primarily to our investment portfolio. We
do not use derivative financial instruments in 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.

As of December 31, 2001, we had cash and
cash equivalents of $202.9 million that consist of cash and
highly liquid short-term investments having 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 0.5% would cause a
corresponding decrease in our annual interest income by
approximately $1.0 million.

As of December 31, 2001, we had short-term
investments of $121.3 million that consist of taxable fixed
income securities having maturity dates of no more than one
year. Declines of interest rates over time would reduce our
interest income from our short-term investments. Based upon our
balance of short-term investments, a decrease in interest rates
of 0.5% would cause a corresponding decrease in our annual
interest income by approximately $0.6 million. As of
December 31, 2001, we did not have any short-term or
long-term debt outstanding.

The following summarizes the Companys
short-term investments and the weighted average yields, as of
December 31, 2001 (in thousands, except interest rates):

|                            |  |          |         |  
|--------------------------- |  | -------- | ------- | -
|                            |  | Expected
|                            |  | Maturity
|                            |  | Date    
|                            |  |         
|                            |  | 2002    
|                            |  |         
|Commercial paper            |  | $        | 8,449   |  
|Weighted average yield      |  |          | 2.8     | %
|Corporate bonds             |  | $        | 36,506  |  
|Weighted average yield      |  |          | 2.9     | %
|Government notes/bonds      |  | $        | 76,369  |  
|Weighted average yield      |  |          | 2.6     | %
|                            |  |          |         |  
|Total investment securities |  | $        | 121,324 |  
|                            |  |          |         |  

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Item 8.     Financial
Statements and Supplementary Data

E.PIPHANY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                        |  |      |    | 
|----------------------------------------------------------------------- |  | ---- | -- | 
|                                                                        |  | Page
|                                                                        |  |     
|Report of Independent Public Accountants                                |  |      | 35 | 
|Consolidated Balance Sheets                                             |  |      | 36 | 
|Consolidated Statements of Operations                                   |  |      | 37 | 
|Consolidated Statements of Stockholders
	Equity and Comprehensive Loss |  |      | 38 | 
|Consolidated Statements of Cash Flows                                   |  |      | 40 | 
|Notes to Consolidated Financial Statements                              |  |      | 41 | 

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REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

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

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

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

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



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

San Jose, California

January 21, 2002


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E.PIPHANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |            |   |         | 
|--------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------- | --------- | - | --------- | ------- | ---------- | - | ------- | 
|                                        |                                                                                                 |                                                                                       
|                                        |                                                                                                 | December 31,                                                                          
|                                        |                                                                                                 |                                                                                       
|                                        |                                                                                                 | 2000                                                                                   |                            | 2001     
|                                        |                                                                                                 |                                                                                        |                            |          
|                                        |                                                                                                 |                                                                                       
|                                        |                                                                                                 | (In thousands,                                                                        
|                                        |                                                                                                 | except per share amounts)                                                             
|ASSETS                                 
|Current assets:                         |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        | Cash and cash equivalents                                                                       |                                                                                        | $                          | 319,634   |   |           | $       | 202,940    |  
|                                        | Short-term investments                                                                          |                                                                                        |                            | 77,339    |   |           |         | 121,324    |  
|                                        | Accounts receivable, net of allowance for
	doubtful accounts of $4,750 and $4,332, respectively |                                                                                        |                            | 27,592    |   |           |         | 13,703     |  
|                                        | Prepaid expenses and other current assets                                                       |                                                                                        |                            | 5,152     |   |           |         | 3,866      |  
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 |                                                                                        | Total current assets       |           |   | 429,717   |         |            |   | 341,833 | 
|Property and equipment, net             |                                                                                                 |                                                                                        | 21,789                     |           |   |           | 22,320  |           
|Goodwill and purchased intangibles, net |                                                                                                 |                                                                                        | 2,541,245                  |           |   |           | 98,113  |           
|Other assets                            |                                                                                                 |                                                                                        | 2,323                      |           |   |           | 3,589   |           
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 | $                                                                                      | 2,995,074                  |           |   | $         | 465,855 |           
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|LIABILITIES AND STOCKHOLDERS
	EQUITY  
|Current liabilities:                    |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        | Current portion of capital lease obligations                                                    |                                                                                        | $                          | 658       |   |           | $       | 498        |  
|                                        | Accounts payable                                                                                |                                                                                        |                            | 2,191     |   |           |         | 2,537      |  
|                                        | Accrued compensation                                                                            |                                                                                        |                            | 12,715    |   |           |         | 11,873     |  
|                                        | Accrued other                                                                                   |                                                                                        |                            | 17,289    |   |           |         | 11,260     |  
|                                        | Current portion of restructuring costs                                                          |                                                                                        |                            |          |   |           |         | 8,954      |  
|                                        | Deferred revenue                                                                                |                                                                                        |                            | 23,412    |   |           |         | 15,380     |  
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 |                                                                                        | Total current liabilities  |           |   | 56,265    |         |            |   | 50,502  | 
|                                        | Restructuring costs, net of current portion                                                     |                                                                                        |                            |          |   |           |         | 23,454     |  
|                                        | Capital lease obligations, net of current portion                                               |                                                                                        |                            | 618       |   |           |         | 156        |  
|                                        | Other long-term liabilities                                                                     |                                                                                        |                            |          |   |           |         | 316        |  
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 |                                                                                        | Total liabilities          |           |   | 56,883    |         |            |   | 74,428  | 
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|Commitments and contingencies (Note 3)  |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|Minority interest                       |                                                                                                 |                                                                                        |                           |           |   |           | 35      |           
|Stockholders equity:                   |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        | Convertible preferred stock, $0.0001 par value;                                                 |                                                                                        |                            |           |   |           |         |            |  
|                                        |                                                                                                 | Authorized  25,000 shares as of
	December 31, 2001;                                   |                            |           |   |           |         |            |   |        
|                                        |                                                                                                 | Outstanding  no shares as of
	December 31, 2000 and 2001, respectively                |                            |           |  |           |         |            |  |        
|                                        | Common stock, $0.0001 par value;                                                                |                                                                                        |                            |           |   |           |         |            |  
|                                        |                                                                                                 | Authorized  500,000 shares as of
	December 31, 2001;                                  |                            |           |   |           |         |            |   |        
|                                        |                                                                                                 | Outstanding  68,444 and 70,972 shares
	as of December 31, 2000 and 2001, respectively |                            |           | 6 |           |         |            | 7 |        
|                                        | Additional paid-in capital                                                                      |                                                                                        |                            | 3,746,759 |   |           |         | 3,807,410  |  
|                                        | Stockholders notes receivable                                                                  |                                                                                        |                            | (2,668    | ) |           |         | (778       | )
|                                        | Accumulated other comprehensive loss                                                            |                                                                                        |                            | (550      | ) |           |         | (564       | )
|                                        | Deferred compensation                                                                           |                                                                                        |                            | (1,009    | ) |           |         | (901       | )
|                                        | Accumulated deficit                                                                             |                                                                                        |                            | (804,347  | ) |           |         | (3,413,782 | )
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 |                                                                                        | Total stockholders equity |           |   | 2,938,191 |         |            |   | 391,392 | 
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           
|                                        |                                                                                                 | $                                                                                      | 2,995,074                  |           |   | $         | 465,855 |           
|                                        |                                                                                                 |                                                                                        |                            |           |   |           |         |           

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

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E.PIPHANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |           |            |           | 
|-------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------- | ------------------------ | ------ | ------- | ------ | ------- | ------- | -------- | ------- | ------- | --------- | ---------- | --------- | 
|                                                               |                                                                    |                                         
|                                                               |                                                                    | Years Ended December 31,                
|                                                               |                                                                    |                                         
|                                                               |                                                                    | 1999                                     |                          | 2000   |         | 2001  
|                                                               |                                                                    |                                          |                          |        |         |       
|                                                               |                                                                    |                                         
|                                                               |                                                                    | (In thousands, except per share amounts)
|Revenues:                                                      |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               | Product license                                                    |                                          | $                        | 10,161 |         |        | $       | 73,493  |          |         | $       | 71,116    |           
|                                                               | Services                                                           |                                          |                          | 9,021  |         |        |         | 53,788  |          |         |         | 54,572    |           
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    |                                          | 19,182                   |        |         |        | 127,281 |         |          |         | 125,688 |          
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|Cost of revenues:                                              |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               | Product license                                                    |                                          |                          | 158    |         |        |         | 1,209   |          |         |         | 2,016     |           
|                                                               | Services                                                           |                                          |                          | 9,191  |         |        |         | 54,096  |          |         |         | 53,188    |           
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    |                                          | 9,349                    |        |         |        | 55,305  |         |          |         | 55,204  |          
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    | Gross profit                             |                          |        | 9,833   |        |         |         | 71,976   |         |         |           | 70,484     |          
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|Operating expenses:                                            |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               | Research and development                                           |                                          |                          | 7,074  |         |        |         | 26,792  |          |         |         | 40,992    |           
|                                                               | Sales and marketing                                                |                                          |                          | 18,727 |         |        |         | 67,678  |          |         |         | 87,953    |           
|                                                               | General and administrative                                         |                                          |                          | 4,576  |         |        |         | 21,510  |          |         |         | 24,257    |           
|                                                               | Restructuring costs                                                |                                          |                          |       |         |        |         |        |          |         |         | 42,971    |           
|                                                               | In-process research and development charge                         |                                          |                          |       |         |        |         | 47,000  |          |         |         |          |           
|                                                               | Amortization and write-down of goodwill and
	purchased intangibles |                                          |                          |       |         |        |         | 697,106 |          |         |         | 2,497,199 |           
|                                                               | Stock-based compensation                                           |                                          |                          | 2,929  |         |        |         | 3,514   |          |         |         | 1,561     |           
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    |                                          | Total operating expenses |        |         | 33,306 |         |         |          | 863,600 |         |           |            | 2,694,933 | 
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    | Loss from operations                     |                          |        | (23,473 | )      |         |         | (791,624 | )       |         |           | (2,624,449 | )        
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|Other income (expense):                                        |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               | Interest income                                                    |                                          |                          | 1,722  |         |        |         | 23,684  |          |         |         | 15,149    |           
|                                                               | Interest expense                                                   |                                          |                          | (639   | )       |        |         | (538    | )        |         |         | (135      | )         
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    |                                          | Total other income       |        |         | 1,083  |         |         |          | 23,146  |         |           |            | 15,014    | 
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|                                                               |                                                                    | Net loss                                 |                          | $      | (22,390 | )      |         | $       | (768,478 | )       |         | $         | (2,609,435 | )        
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|Basic and diluted net loss per share                           |                                                                    | $                                        | (1.46                    | )      |         | $      | (13.71  | )       |          | $       | (38.25  | )        
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          
|Shares used in computing basic and diluted net
	loss per share |                                                                    |                                          | 15,371                   |        |         |        | 56,038  |         |          |         | 68,224  |          
|                                                               |                                                                    |                                          |                          |        |         |        |         |         |          |         |         |          

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

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E.PIPHANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS

|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |   |          |          |  
|-------------------------- | ------------------------------------------------------------ | --------------------------------------- | ------------------------ | ------- | - | ---------- | - | ------ | - | ------------- | ------ | ------------- | - | ---------- | - | ----------- | - | ------------- | ------- | ------------- | - | ------ | --- | ---- | - | - | ---- | ------ | - | - | --- | - | ---- | - | ------ | ------ | - | - | ------- | - | -------- | - | ------ | --------- | -------- | - |  | - | -------- | -------- | -
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |              
|                           |                                                              | Convertible                             |                          | Common  |   |            |   |        |   |               |        | Accumulated   |   |            |   |             |   |               |         |              
|                           |                                                              | Preferred Stock                         |                          | Stock   |   | Additional |   |        |   | Stockholders |        | Other         |   |            |   |             |   | Total         |         |              
|                           |                                                              |                                         |                          |         |   | Paid-in    |   |        |   | Notes         |        | Comprehensive |   | Deferred   |   | Accumulated |   | Stockholders |         | Comprehensive
|                           |                                                              | Shares                                  |                          | Amount  |   | Shares     |   | Amount |   | Capital       |        | Warrants      |   | Receivable |   | Loss        |   | Compensation  |         | Deficit       |   | Equity |     | Loss
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |     
|                           |                                                              |                                        
|                           |                                                              | (In thousands)                         
|Balance, December 31, 1998 |                                                              |                                         | 15,935                   |         |   | $          | 3 |        |   |               | 13,370 |               |   | $          | 2 |             |   | $             | 30,030  |               |   | $      |    |      |   | $ | (640 | )      |   | $ |    |   |      | $ | (2,476 | )      |   | $ | (13,479 | ) |          | $ | 13,440 |           |          |   |  |  
|                           | Exercise of common stock options                             |                                         |                          |        |   |            |   |       |   |               |        | 2,283         |   |            |   |            |   |               |         | 2,579         |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 2,579     |          |   |  |   |         
|                           | Issuance of stock options in exchange for services           |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 388           |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 388       |          |   |  |   |         
|                           | Issuance of Series D preferred stock, net                    |                                         |                          | 1,405   |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 5,970         |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 5,970     |          |   |  |   |         
|                           | Issuance of warrants                                         |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         |              |   |        |     | 532  |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 532       |          |   |  |   |         
|                           | Repurchase of stock                                          |                                         |                          |        |   |            |   |       |   |               |        | (258          | ) |            |   |            |   |               |         | (10           | ) |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | (10       | )        |   |  |   |         
|                           | Issuance of stock related to leases and debt
	financing      |                                         |                          |        |   |            |   |       |   |               |        | 9             |   |            |   |            |   |               |         | 100           |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 100       |          |   |  |   |         
|                           | Issuance of common stock in initial public
	offering, net    |                                         |                          |        |   |            |   |       |   |               |        | 7,159         |   |            |   |            |   |               |         | 69,598        |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 69,598    |          |   |  |   |         
|                           | Conversion of preferred stock                                |                                         |                          | (17,340 | ) |            |   | (3     | ) |               |        | 17,340        |   |            |   | 3           |   |               |         |              |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        |          |          |   |  |   |         
|                           | Exercise of warrants                                         |                                         |                          |        |   |            |   |       |   |               |        | 672           |   |            |   |            |   |               |         | 2,315         |   |        |     | (389 | ) |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 1,926     |          |   |  |   |         
|                           | Acceleration of common stock option vesting                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 47            |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 47        |          |   |  |   |         
|                           | Deferred stock compensation                                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 2,619         |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        | (2,619 | ) |   |         |  |          |   |        |          |          |   |  |   |         
|                           | Amortization of deferred stock compensation                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         |              |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        | 2,493  |   |   |         |  |          |   |        | 2,493     |          |   |  |   |         
|                           | Comprehensive loss:                                          |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |   |         
|                           |                                                              | Unrealized loss on investments          |                          |         |  |            |   |        |  |               |        |               |  |            |   |             |  |               |         |               |  |        |     |      |  |   |      |        |  |   |     |   | (31  | ) |        |        |  |   |         |   |         |   |        |           | (31      | ) |  | $ | (31      | )       
|                           |                                                              | Net loss                                |                          |         |  |            |   |        |  |               |        |               |  |            |   |             |  |               |         |               |  |        |     |      |  |   |      |        |  |   |     |   |     |   |        |        |  |   |         |   | (22,390  | ) |        |           | (22,390  | ) |  |   | (22,390  | )       
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |  
|                           |                                                              |                                         | Total comprehensive loss |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |   | $        | (22,421  | )
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |  
|Balance, December 31, 1999 |                                                              |                                         |                         |         |   |            |  |        |   |               | 40,575 |               |   |            | 5 |             |   |               | 113,636 |               |   |        | 143 |      |   |   | (640 | )      |   |   | (31 | ) |      |   | (2,602 | )      |   |   | (35,869 | ) |          |   | 74,642 |           |          |   |  |  
|                           | Exercise of common stock options                             |                                         |                          |        |   |            |   |       |   |               |        | 1,174         |   |            |   |            |   |               |         | 3,415         |   |        |     |     |   |   |      | (2,364 | ) |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 1,051     |          |   |  |   |         
|                           | Issuance of common stock under employee stock
	purchase plan |                                         |                          |        |   |            |   |       |   |               |        | 433           |   |            |   |            |   |               |         | 4,711         |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 4,711     |          |   |  |   |         
|                           | Issuance of stock in connection with Acquisitions            |                                         |                          |        |   |            |   |       |   |               |        | 23,230        |   |            |   | 1           |   |               |         | 3,267,498     |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 3,267,499 |          |   |  |   |         
|                           | Repurchase of stock                                          |                                         |                          |        |   |            |   |       |   |               |        | (258          | ) |            |   |            |   |               |         | (279          | ) |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | (279      | )        |   |  |   |         
|                           | Issuance of common stock in public offering, net             |                                         |                          |        |   |            |   |       |   |               |        | 3,147         |   |            |   |            |   |               |         | 356,109       |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 356,109   |          |   |  |   |         
|                           | Payments received on notes receivable                        |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         |              |   |        |     |     |   |   |      | 336    |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 336       |          |   |  |   |         
|                           | Exercise of warrants                                         |                                         |                          |        |   |            |   |       |   |               |        | 143           |   |            |   |            |   |               |         | 184           |   |        |     | (143 | ) |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 41        |          |   |  |   |         
|                           | Short swing profits remitted by insider                      |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 193           |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 193       |          |   |  |   |         
|                           | Acceleration of common stock option vesting                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 776           |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        |       |   |   |         |  |          |   |        | 776       |          |   |  |   |         
|                           | Deferred stock compensation                                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         | 516           |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        | 105    |   |   |         |  |          |   |        | 621       |          |   |  |   |         
|                           | Amortization of deferred stock compensation                  |                                         |                          |        |   |            |   |       |   |               |        |              |   |            |   |            |   |               |         |              |   |        |     |     |   |   |      |       |   |   |     |  |      |   |        | 1,488  |   |   |         |  |          |   |        | 1,488     |          |   |  |   |         
|                           | Comprehensive loss:                                          |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |   |         
|                           |                                                              | Foreign currency translation adjustment |                          |         |  |            |   |        |  |               |        |               |  |            |   |             |  |               |         |               |  |        |     |      |  |   |      |        |  |   |     |   | (449 | ) |        |        |  |   |         |   |         |   |        |           | (449     | ) |  | $ | (449     | )       
|                           |                                                              | Unrealized loss on investments          |                          |         |  |            |   |        |  |               |        |               |  |            |   |             |  |               |         |               |  |        |     |      |  |   |      |        |  |   |     |   | (70  | ) |        |        |  |   |         |   |         |   |        |           | (70      | ) |  |   | (70      | )       
|                           |                                                              | Net loss                                |                          |         |  |            |   |        |  |               |        |               |  |            |   |             |  |               |         |               |  |        |     |      |  |   |      |        |  |   |     |   |     |   |        |        |  |   |         |   | (768,478 | ) |        |           | (768,478 | ) |  |   | (768,478 | )       
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |  
|                           |                                                              |                                         | Total comprehensive loss |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |   | $        | (768,997 | )
|                           |                                                              |                                         |                          |         |   |            |   |        |   |               |        |               |   |            |   |             |   |               |         |               |   |        |     |      |   |   |      |        |   |   |     |   |      |   |        |        |   |   |         |   |          |   |        |           |          |   |  |  

38



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##### Table of Contents



E.PIPHANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE
LOSS  (Continued)

|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |   |            |            |  
|-------------------------- | ------------------------------------------------------------ | --------------------------------------- | ------------------------ | ------ | - | ---------- | - | ------ | - | ------------- | ------ | ------------- | - | ---------- | - | ----------- | - | ------------- | --------- | ------------- | - | ------ | - | ---- | - | - | ------ | ----- | - | - | ---- | - | --- | - | ------ | ------ | - | - | ---------- | - | ---------- | - | --------- | ------ | ---------- | - |  | - | ---------- | ---------- | -
|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |              
|                           |                                                              | Convertible                             |                          | Common |   |            |   |        |   |               |        | Accumulated   |   |            |   |             |   |               |           |              
|                           |                                                              | Preferred Stock                         |                          | Stock  |   | Additional |   |        |   | Stockholders |        | Other         |   |            |   |             |   | Total         |           |              
|                           |                                                              |                                         |                          |        |   | Paid-in    |   |        |   | Notes         |        | Comprehensive |   | Deferred   |   | Accumulated |   | Stockholders |           | Comprehensive
|                           |                                                              | Shares                                  |                          | Amount |   | Shares     |   | Amount |   | Capital       |        | Warrants      |   | Receivable |   | Loss        |   | Compensation  |           | Deficit       |   | Equity |   | Loss
|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |     
|                           |                                                              |                                        
|                           |                                                              | (In thousands)                         
|Balance, December 31, 2000 |                                                              |                                         |                         |        |   |            |  |        |   |               | 68,444 |               |   |            | 6 |             |   |               | 3,746,759 |               |   |        |  |      |   |   | (2,668 | )     |   |   | (550 | ) |     |   | (1,009 | )      |   |   | (804,347   | ) |            |   | 2,938,191 |        |            |   |  |  
|                           | Exercise of common stock options                             |                                         |                          |       |   |            |   |       |   |               |        | 690           |   |            |   |            |   |               |           | 2,819         |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | 2,819  |            |   |  |   |           
|                           | Issuance of common stock under employee stock
	purchase plan |                                         |                          |       |   |            |   |       |   |               |        | 896           |   |            |   |            |   |               |           | 5,679         |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | 5,679  |            |   |  |   |           
|                           | Issuance of stock in connection with Acquisitions            |                                         |                          |       |   |            |   |       |   |               |        | 1,608         |   |            |   | 1           |   |               |           | 50,957        |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | 50,958 |            |   |  |   |           
|                           | Repurchase of stock                                          |                                         |                          |       |   |            |   |       |   |               |        | (666          | ) |            |   |            |   |               |           | (469          | ) |        |   |     |   |   |        |      |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | (469   | )          |   |  |   |           
|                           | Payments received on notes receivable                        |                                         |                          |       |   |            |   |       |   |               |        |              |   |            |   |            |   |               |           |              |   |        |   |     |   |   |        | 1,890 |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | 1,890  |            |   |  |   |           
|                           | Acceleration of common stock option vesting                  |                                         |                          |       |   |            |   |       |   |               |        |              |   |            |   |            |   |               |           | 452           |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        |       |   |   |            |  |            |   |           | 452    |            |   |  |   |           
|                           | Deferred stock compensation                                  |                                         |                          |       |   |            |   |       |   |               |        |              |   |            |   |            |   |               |           | 1,213         |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        | (1,213 | ) |   |            |  |            |   |           |       |            |   |  |   |           
|                           | Amortization of deferred stock compensation                  |                                         |                          |       |   |            |   |       |   |               |        |              |   |            |   |            |   |               |           |              |   |        |   |     |   |   |        |      |   |   |      |  |     |   |        | 1,321  |   |   |            |  |            |   |           | 1,321  |            |   |  |   |           
|                           | Comprehensive loss:                                          |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |   |           
|                           |                                                              | Foreign currency translation adjustment |                          |        |  |            |   |        |  |               |        |               |  |            |   |             |  |               |           |               |  |        |   |      |  |   |        |       |  |   |      |   | (97 | ) |        |        |  |   |            |   |           |   |           |        | (97        | ) |  | $ | (97        | )         
|                           |                                                              | Unrealized gain on investments          |                          |        |  |            |   |        |  |               |        |               |  |            |   |             |  |               |           |               |  |        |   |      |  |   |        |       |  |   |      |   | 83  |   |        |        |  |   |            |   |           |   |           |        | 83         |   |  |   | 83         |           
|                           |                                                              | Net loss                                |                          |        |  |            |   |        |  |               |        |               |  |            |   |             |  |               |           |               |  |        |   |      |  |   |        |       |  |   |      |   |    |   |        |        |  |   |            |   | (2,609,435 | ) |           |        | (2,609,435 | ) |  |   | (2,609,435 | )         
|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |  
|                           |                                                              |                                         | Total comprehensive loss |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |   | $          | (2,609,449 | )
|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |  
|Balance, December 31, 2001 |                                                              |                                         |                         |        |   | $          |  |        |   |               | 70,972 |               |   | $          | 7 |             |   | $             | 3,807,410 |               |   | $      |   |      |   | $ | (778   | )     |   | $ | (564 | ) |     | $ | (901   | )      |   | $ | (3,413,782 | ) |            | $ | 391,392   |        |            |   |  |  
|                           |                                                              |                                         |                          |        |   |            |   |        |   |               |        |               |   |            |   |             |   |               |           |               |   |        |   |      |   |   |        |       |   |   |      |   |     |   |        |        |   |   |            |   |            |   |           |        |            |   |  |  

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

39



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##### Table of Contents



E.PIPHANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |          |           |        |         |  
|-------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ----- | ------ | -------- | ------- | ------- | ------- | ---------- | -------- | --------- | ------ | ------- | -
|                                                               |                                                                              |                                                                             
|                                                               |                                                                              | Years Ended December 31,                                                    
|                                                               |                                                                              |                                                                             
|                                                               |                                                                              | 1999                                                                         |                                   | 2000                                      |       | 2001  
|                                                               |                                                                              |                                                                              |                                   |                                           |       |       
|                                                               |                                                                              |                                                                             
|                                                               |                                                                              | (In thousands)                                                              
|Cash flows from operating activities:                          |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Net loss                                                       |                                                                              | $                                                                            | (22,390                           | )                                         |       | $      | (768,478 | )       |         | $       | (2,609,435 | )       
|                                                               | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                              |                                   |                                           |       |        |          |         |         |         |            |          |          
|                                                               |                                                                              | Depreciation                                                                 |                                   |                                           | 908   |        |          |         | 2,894   |         |            |          | 6,954     |       
|                                                               |                                                                              | Provision for doubtful accounts                                              |                                   |                                           | 270   |        |          |         | 4,450   |         |            |          | 2,700     |       
|                                                               |                                                                              | Amortization and write-down of goodwill and
	purchased intangibles           |                                   |                                           |      |        |          |         | 697,106 |         |            |          | 2,497,199 |       
|                                                               |                                                                              | In-process research and development charge                                   |                                   |                                           |      |        |          |         | 47,000  |         |            |          |          |       
|                                                               |                                                                              | Stock-based compensation                                                     |                                   |                                           | 2,929 |        |          |         | 3,514   |         |            |          | 1,561     |       
|                                                               |                                                                              | Noncash interest expense                                                     |                                   |                                           | 86    |        |          |         |        |         |            |          |          |       
|                                                               |                                                                              | Noncash restructuring costs                                                  |                                   |                                           |      |        |          |         |        |         |            |          | 4,809     |       
|                                                               |                                                                              | Changes in operating assets and liabilities, net
	of effect of acquisitions: |                                   |                                           |       |        |          |         |         |         |            |          |           |       
|                                                               |                                                                              |                                                                              | Accounts receivable               |                                           |       | (4,529 | )        |         |         | (22,575 | )          |          |           | 11,188 |        
|                                                               |                                                                              |                                                                              | Prepaid expenses and other assets |                                           |       | (2,628 | )        |         |         | (2,733  | )          |          |           | 95     |        
|                                                               |                                                                              |                                                                              | Accounts payable                  |                                           |       | (365   | )        |         |         | 674     |            |          |           | 346    |        
|                                                               |                                                                              |                                                                              | Accrued liabilities               |                                           |       | 4,668  |          |         |         | 1,572   |            |          |           | (9,133 | )      
|                                                               |                                                                              |                                                                              | Restructuring costs               |                                           |       |       |          |         |         |        |            |          |           | 32,408 |        
|                                                               |                                                                              |                                                                              | Deferred revenue                  |                                           |       | 3,262  |          |         |         | 17,611  |            |          |           | (8,384 | )      
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               |                                                                              |                                                                              |                                   | Net cash used in operating activities     |       |        | (17,789  | )       |         |         | (18,965    | )        |           |        | (69,692 | )
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Cash flows from investing activities:                          |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               | Purchases of property and equipment                                          |                                                                              |                                   | (2,952                                    | )     |        |          | (15,503 | )       |         |            | (11,877  | )        
|                                                               | Cash acquired in acquisitions                                                |                                                                              |                                   |                                          |       |        |          | 24,282  |         |         |            | 208      |          
|                                                               | Acquisition related costs and changes in accruals                            |                                                                              |                                   |                                          |       |        |          | (28,471 | )       |         |            | 1,108    |          
|                                                               | Proceeds from the sales of investments                                       |                                                                              |                                   |                                          |       |        |          | 42,509  |         |         |            | 254,823  |          
|                                                               | Purchases of investments                                                     |                                                                              |                                   | (22,957                                   | )     |        |          | (96,992 | )       |         |            | (298,725 | )        
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               |                                                                              |                                                                              |                                   | Net cash used in investing activities     |       |        | (25,909  | )       |         |         | (74,175    | )        |           |        | (54,463 | )
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Cash flows from financing activities:                          |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               | Borrowings on line of credit                                                 |                                                                              |                                   | 8,000                                     |       |        |          |        |         |         |            |         |          
|                                                               | Repayments on line of credit                                                 |                                                                              |                                   | (181                                      | )     |        |          | (8,319  | )       |         |            |         |          
|                                                               | Repayments of notes payable                                                  |                                                                              |                                   |                                          |       |        |          |        |         |         |            | (1,772   | )        
|                                                               | Principal payments on capital lease obligations                              |                                                                              |                                   | (81                                       | )     |        |          | (587    | )       |         |            | (763     | )        
|                                                               | Proceeds from public offerings of common stock,
	net                         |                                                                              |                                   | 69,598                                    |       |        |          | 356,109 |         |         |            |         |          
|                                                               | Repayments on notes receivable                                               |                                                                              |                                   |                                          |       |        |          | 336     |         |         |            | 1,890    |          
|                                                               | Proceeds from exercise of warrant                                            |                                                                              |                                   | 2,250                                     |       |        |          | 41      |         |         |            |         |          
|                                                               | Net proceeds from issuance of convertible
	preferred stock                   |                                                                              |                                   | 5,970                                     |       |        |          |        |         |         |            |         |          
|                                                               | Subsidiary stock offering                                                    |                                                                              |                                   |                                          |       |        |          |        |         |         |            | 35       |          
|                                                               | Issuance of common stock                                                     |                                                                              |                                   | 2,631                                     |       |        |          | 7,559   |         |         |            | 8,168    |          
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               |                                                                              |                                                                              |                                   | Net cash provided by financing activities |       |        | 88,187   |         |         |         | 355,139    |          |           |        | 7,558   |  
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Effect of foreign exchange rates on cash and cash
	equivalents |                                                                              |                                                                              |                                  |                                           |       |        | (449     | )       |         |         | (97        | )       
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Net increase (decrease) in cash and cash
	equivalents          |                                                                              |                                                                              | 44,489                            |                                           |       |        | 261,550  |         |         |         | (116,694   | )       
|Cash and cash equivalents at beginning of year                 |                                                                              |                                                                              | 13,595                            |                                           |       |        | 58,084   |         |         |         | 319,634    |         
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Cash and cash equivalents at end of year                       |                                                                              | $                                                                            | 58,084                            |                                           |       | $      | 319,634  |         |         | $       | 202,940    |         
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Supplemental cash flow information:                            |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               | Cash paid for interest                                                       |                                                                              | $                                 | 487                                       |       |        | $        | 478     |         |         | $          | 135      |          
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|Noncash transactions:                                          |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         
|                                                               | Equipment acquired under capital lease                                       |                                                                              | $                                 | 716                                       |       |        | $        |        |         |         | $          |         |          
|                                                               |                                                                              |                                                                              |                                   |                                           |       |        |          |         |         |         |            |         

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

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E.PIPHANY, INC. AND SUBSIDIARIES

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 web-based
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



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements included
the accounts of E.piphany, Inc. and its subsidiaries. As of
December 31, 2001, the Company had one subsidiary, Nihon
E.piphany, K.K., as to which it maintained less than 100%
ownership. All intercompany accounts and transactions have been
eliminated in consolidation.



| |                             
| | ----------------------------
| | Foreign Currency Translation

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



| |                                                         
| | --------------------------------------------------------
| | Use of Estimates in Preparation of
	Financial Statements

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect 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 could differ from those estimates.



| |                                                                    
| | -------------------------------------------------------------------
| | Impairment of Long-Lived Assets and
	Identifiable Intangible Assets

The Company evaluates long-lived assets and
certain identifiable intangibles for impairment 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.



| |                         
| | ------------------------
| | Statements of Cash Flows

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

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Short-Term Investments

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



| |                                          
| | -----------------------------------------
| | 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. This generally results from
license revenue being deferred until all requirements under SOP
97-2, Software Revenue Recognition, and SOP 81-1,
Accounting for Performance of Construction Type and
Certain Production Type Contracts are met, professional
services revenue being deferred until services are rendered, and
amounts paid in advance for maintenance contracts. Deferred
license revenue is recognized upon delivery of our product, as
services are rendered, or as other requirements requiring
deferral under SOP 97-2 and SOP 81-1 are satisfied.
Deferred services revenue is recognized as services are rendered
and deferred maintenance revenue is recognized ratably over the
term of the maintenance agreement.



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

The carrying value of the Companys
financial instruments, including cash and cash equivalents,
investments, and accounts receivable approximates fair market
value. Financial instruments that subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, investments and trade accounts receivable.
Management believes the financial risks associated with these
financial instruments are minimal. The Company maintains its
cash and cash equivalents and investments with high quality
financial institutions. The Companys customer base
consists of businesses in Asia, Australia, Europe, Latin America
and the United States. 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.

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

|           |  |              |    |      |  |      |   |  |  |  |   | 
|---------- |  | ------------ | -- | ---- |  | ---- | - |  |  |  | - | 
|           |  |             
|           |  | Years Ended 
|           |  | December 31,
|           |  |             
|           |  | 1999         |    | 2000 |  | 2001
|           |  |              |    |      |  |     
|Customer A |  |              | 11 | %    |  |      |  |  |  |  |  | 

No individual customer account receivable balance
accounted for more than 10% of our total accounts receivable as
of December 31, 2000 or 2001.

42



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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Investments

Cash equivalents consist of securities with
remaining maturities of 90 days or less at the date of purchase.
Cash, cash equivalents and short-term investments consisted of
the following as of December 31, 2000 and 2001 (in
thousands):

|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |         | 
|-------------------------- | -------------------------------- | ---- | ------- | ---------- |  | ---- | ---- | ------ | - | - | -- | -- |  | - | ------- | ------- | 
|                           |                                  |      |         |            |  |     
|                           |                                  |      |         | Unrealized |  |     
|                           |                                  |      |         |            |  |     
|                           |                                  | Cost |         | Loss       |  | Gain |      | Market
|                           |                                  |      |         |            |  |      |      |       
|December 31, 2000:         |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|Cash and cash equivalents: |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           | Cash                             |      | $       | 8,426      |  |      | $    |       |   |   | $  |   |  |   | $       | 8,426   | 
|                           | Certificates of deposit          |      |         | 570        |  |      |      |       |   |   |    |   |  |   |         | 570     | 
|                           | Money market funds               |      |         | 79,472     |  |      |      |       |   |   |    |   |  |   |         | 79,472  | 
|                           | Commercial paper                 |      |         | 26,274     |  |      |      |       |   |   |    |   |  |   |         | 26,274  | 
|                           | Short-term municipal notes/bonds |      |         | 182,986    |  |      |      |       |   |   |    |   |  |   |         | 182,986 | 
|                           | Government notes/bonds           |      |         | 21,906     |  |      |      |       |   |   |    |   |  |   |         | 21,906  | 
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           |                                  | $    | 319,634 |            |  | $    |     |        |   | $ |   |    |  | $ | 319,634 |        
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|Short-term investments:    |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           | Certificates of deposit          |      | $       | 1,191      |  |      | $    |       |   |   | $  |   |  |   | $       | 1,191   | 
|                           | Commercial paper                 |      |         | 38,493     |  |      |      | (101   | ) |   |    |   |  |   |         | 38,392  | 
|                           | Corporate bonds                  |      |         | 23,118     |  |      |      |       |   |   |    |   |  |   |         | 23,118  | 
|                           | Government notes/bonds           |      |         | 14,638     |  |      |      |       |   |   |    |   |  |   |         | 14,638  | 
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           |                                  | $    | 77,440  |            |  | $    | (101 | )      |   | $ |   |    |  | $ | 77,339  |        
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|December 31, 2001:         |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|Cash and cash equivalents: |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           | Cash                             |      | $       | 15,967     |  |      | $    |       |   |   | $  |   |  |   | $       | 15,967  | 
|                           | Certificates of deposit          |      |         | 445        |  |      |      |       |   |   |    |   |  |   |         | 445     | 
|                           | Money market funds               |      |         | 52,786     |  |      |      |       |   |   |    |   |  |   |         | 52,786  | 
|                           | Commercial paper                 |      |         |           |  |      |      |       |   |   |    |   |  |   |         |        | 
|                           | Short-term municipal notes/bonds |      |         | 100,167    |  |      |      |       |   |   |    |   |  |   |         | 100,167 | 
|                           | Government notes/bonds           |      |         | 33,575     |  |      |      |       |   |   |    |   |  |   |         | 33,575  | 
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           |                                  | $    | 202,940 |            |  | $    |     |        |   | $ |   |    |  | $ | 202,940 |        
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|Short-term investments:    |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           | Commercial paper                 |      | $       | 8,454      |  |      | $    | (5     | ) |   | $  |   |  |   | $       | 8,449   | 
|                           | Corporate bonds                  |      |         | 36,481     |  |      |      |       |   |   |    | 25 |  |   |         | 36,506  | 
|                           | Government notes/bonds           |      |         | 76,407     |  |      |      | (38    | ) |   |    |   |  |   |         | 76,369  | 
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        
|                           |                                  | $    | 121,342 |            |  | $    | (43  | )      |   | $ | 25 |    |  | $ | 121,324 |        
|                           |                                  |      |         |            |  |      |      |        |   |   |    |    |  |   |         |        



| |                       
| | ----------------------
| | Property and Equipment

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

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                |  |              |        |      |  |   |         |  
|------------------------------- |  | ------------ | ------ | ---- |  | - | ------- | -
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2000         |        | 2001
|                                |  |              |        |     
|Computer software and equipment |  | $            | 21,444 |      |  | $ | 27,496  |  
|Furniture and fixtures          |  |              | 4,180  |      |  |   | 4,228   |  
|Leasehold improvements          |  |              | 3,762  |      |  |   | 7,596   |  
|                                |  |              |        |      |  |   |         |  
|                                |  |              | 29,386 |      |  |   | 39,320  |  
|Less: Accumulated depreciation  |  |              | (7,597 | )    |  |   | (17,000 | )
|                                |  |              |        |      |  |   |         |  
|                                |  | $            | 21,789 |      |  | $ | 22,320  |  
|                                |  |              |        |      |  |   |         |  

Included in property and equipment are assets
acquired under capital leases with original cost of
approximately $2.6 million as of December 31, 2001.
Accumulated amortization on the leased assets is approximately
$2.2 million as of December 31, 2001.

Future minimum lease payments on capital leases
are as follows as of December 31, 2001 (in thousands):

|                                               |  |   |      |  
|---------------------------------------------- |  | - | ---- | -
|Years Ending December 31,                      |  |  
|                                               |  |  
|2002                                           |  | $ | 553  |  
|2003                                           |  |   | 154  |  
|                                               |  |   |      |  
|Total minimum lease payments                   |  |   | 707  |  
|Less: Imputed interest (12.0%)                 |  |   | (53  | )
|                                               |  |   |      |  
|Present value of payments under capital leases |  |   | 654  |  
|Less: Current portion                          |  |   | (498 | )
|                                               |  |   |      |  
|Long-term capital lease obligations            |  | $ | 156  |  
|                                               |  |   |      |  



| |                                    
| | -----------------------------------
| | Goodwill and Purchased
	Intangibles

Goodwill and purchased intangible assets are as
follows (in thousands):

|                               |                                                                |              |           |      |  |   |            |            |  
|------------------------------ | -------------------------------------------------------------- | ------------ | --------- | ---- |  | - | ---------- | ---------- | -
|                               |                                                                |             
|                               |                                                                | December 31,
|                               |                                                                |             
|                               |                                                                | 2000         |           | 2001
|                               |                                                                |              |           |     
|Goodwill                       |                                                                | $            | 3,110,858 |      |  | $ | 3,146,800  |           
|Assembled workforce            |                                                                |              | 9,293     |      |  |   | 9,293      |           
|Customer list                  |                                                                |              | 11,800    |      |  |   | 11,800     |           
|Developed technology           |                                                                |              | 106,400   |      |  |   | 124,525    |           
|                               |                                                                |              |           |      |  |   |            |           
|                               |                                                                |              | 3,238,351 |      |  |   | 3,292,418  |           
|Less: Accumulated amortization |                                                                |              | (697,106  | )    |  |   | (1,533,119 | )         
|                               | Write-down of goodwill and purchased intangibles
	(see Note 8) |              |           |     |  |   |            | (1,661,186 | )
|                               |                                                                |              |           |      |  |   |            |           
|                               |                                                                | $            | 2,541,245 |      |  | $ | 98,113     |           
|                               |                                                                |              |           |      |  |   |            |           

The amortization and write-down of goodwill and
other intangible assets was $697.1 million and
$2.5 billion for the years ended December 31, 2000 and
2001, respectively. There were no goodwill and purchased
intangible assets as of December 31, 1999.

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                           
| | --------------------------
| | Software Development Costs

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



| |                    
| | -------------------
| | Accrued Liabilities

Accrued compensation consists of the following
(in thousands):

|                      |  |              |        |      |  |   |        | 
|--------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2000         |        | 2001
|                      |  |              |        |     
|Vacation              |  | $            | 3,328  |      |  | $ | 3,132  | 
|Commissions and bonus |  |              | 6,316  |      |  |   | 5,413  | 
|ESPP                  |  |              | 1,845  |      |  |   | 1,217  | 
|Other                 |  |              | 1,226  |      |  |   | 2,111  | 
|                      |  |              |        |      |  |   |        | 
|                      |  | $            | 12,715 |      |  | $ | 11,873 | 
|                      |  |              |        |      |  |   |        | 

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

|                                      |  |              |        |      |  |   |        | 
|------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                      |  |             
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2000         |        | 2001
|                                      |  |              |        |     
|Third-party cost of services revenues |  | $            | 2,786  |      |  | $ | 574    | 
|Professional services                 |  |              | 2,889  |      |  |   | 1,793  | 
|Sales tax                             |  |              | 1,345  |      |  |   | 720    | 
|Royalties                             |  |              | 1,050  |      |  |   | 439    | 
|Marketing expenses                    |  |              | 1,882  |      |  |   | 1,554  | 
|Other                                 |  |              | 7,337  |      |  |   | 6,180  | 
|                                      |  |              |        |      |  |   |        | 
|                                      |  | $            | 17,289 |      |  | $ | 11,260 | 
|                                      |  |              |        |      |  |   |        | 



| |                         
| | ------------------------
| | Stock-Based Compensation

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, in October 1995. This accounting
standard permits the use of either a fair value based method of
accounting or the method defined in Accounting Principles Board
Opinion 25 (APB 25), Accounting for Stock
Issued to Employees, to account for stock-based
compensation arrangements. Companies that elect to employ the
method prescribed by APB 25 are required to disclose the pro
forma net income (loss) that would have resulted from the
use of the fair value based method. E.piphany has elected to
continue to account for its stock-based compensation
arrangements under the provisions of APB 25, and accordingly,
has included in Note 5 the pro forma disclosures required under
SFAS No. 123.



| |             
| | ------------
| | 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

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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:

Licenses.Fees from
licenses are recognized as revenue upon contract execution,
provided all delivery obligations have been met, fees are fixed
or determinable, collection is probable, and vendor specific
objective evidence exists to allocate the total fee between all
delivered and undelivered elements of the arrangement. If vendor
specific objective evidence does not exist to allocate the total
fee to all delivered and undelivered elements of the
arrangement, revenue is deferred until the earlier of the time
at which (1) such evidence does exist for the undelivered
elements, or (2) all elements are delivered. Fees from
license agreements that include the right to receive unspecified
future products are recognized over the term of the arrangement
or, if not specified, the estimated economic life of the
product. When we receive license fees from resellers, we
recognize 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
shipment, provided that (1) the above criteria have been
met, (2) payment of the license fees is not dependent upon
the performance of the consulting and implementation services,
and (3) the services are not essential to the functionality
of the software. For arrangements that dont meet the above
criteria, both the product license revenues and services
revenues are recognized in accordance with the provisions of
Statement of Position (SOP) 81-1, Accounting
for Performance of Construction Type and Certain Production Type
Contracts. When reliable estimates are available for the
costs and efforts necessary to complete the implementation
services, we account for the arrangements under the percentage
of completion contract method pursuant to SOP 81-1. When such
estimates are not available, the completed contract method is
utilized. To date, when E.piphany has been primarily responsible
for the implementation of the software, services have been
considered essential to the functionality of the software
products and therefore have been recognized pursuant to
SOP 81-1. Prior to 2001, E.piphany was primarily
responsible for the implementation services for the majority of
its license arrangements. In 2001, third-party consulting
organizations were primarily responsible for the implementation
services for the majority of E.piphanys license
arrangements and therefore less license revenues was recognized
pursuant to SOP 81-1.

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

Consulting, Implementation and Training
Services.E.piphany provides
consulting, implementation and training services to its
customers. Revenue from such services is generally recognized as
the services are performed.

As of December 31, 2000 and 2001,
$3.3 million and $1.7 million, respectively, of
accounts receivable was unbilled and recognized as revenue due
to services performed in advance of billings.

The American Institute of Certified Public
Accountants (AICPA) issued Statement Of Position
(SOP) 97-2, Software Revenue
Recognition, in October 1997. The Company believes it is
in compliance with this standard. E.piphany adopted SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition,

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with Respect to Certain Transactions, on
January 1, 2000 and had no material impact on the
Companys financial position or results of operations.

In December 1999, the Securities and Exchange
Commission (SEC) staff issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), which explains how the
SEC staff believes existing revenue recognition rules should be
applied or analogized to transactions not addressed by existing
rules. The Company adopted the provisions of SAB 101 in its
fourth fiscal quarter of 2000. The adoption of SAB 101 did not
have a material impact on the Companys financial position
or results of operations.



| |                  
| | -----------------
| | Advertising Costs

The Company expenses all advertising costs as
they are incurred, which totaled $0.8 million,
$1.7 million, and $3.9 million during the years ended
December 31, 1999, 2000, and 2001, respectively.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

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



| |                                                     
| | ----------------------------------------------------
| | 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,
|                                                                                       |                                                      |                         
|                                                                                       |                                                      | 1999                     |         | 2000   |   | 2001
|                                                                                       |                                                      |                          |         |        |   |     
|Net loss                                                                               |                                                      | $                        | (22,390 | )      |   | $    | (768,478 | )      |   | $ | (2,609,435 | )     
|                                                                                       |                                                      |                          |         |        |   |      |          |        |   |   |            |       
|Basic and diluted:                                                                     |                                                      |                          |         |        |   |      |          |        |   |   |            |       
|                                                                                       | Weighted average shares of common stock
	outstanding |                          |         | 21,324 |   |      |          | 59,848 |   |   |            | 70,068 |  
|Less: Weighted average shares subject to
	repurchase                                   |                                                      |                          | (5,953  | )      |   |      | (3,810   | )      |   |   | (1,844     | )     
|                                                                                       |                                                      |                          |         |        |   |      |          |        |   |   |            |       
|Weighted average shares used in computing basic
	and diluted net loss per common share |                                                      |                          | 15,371  |        |   |      | 56,038   |        |   |   | 68,224     |       
|                                                                                       |                                                      |                          |         |        |   |      |          |        |   |   |            |       
|                                                                                       | Basic and diluted net loss per common share          |                          | $       | (1.46  | ) |      | $        | (13.71 | ) |   | $          | (38.25 | )
|                                                                                       |                                                      |                          |         |        |   |      |          |        |   |   |            |       

E.piphany has excluded all convertible preferred
stock, warrants for convertible preferred stock, outstanding
stock options, and shares subject to repurchase from the
calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The
total number of shares excluded from the calculations of diluted
net loss per share were approximately 24,384,000, 11,750,000,
and 11,494,000 for the years ended December 31, 1999, 2000
and 2001, respectively. See Note 5 for further information
on these securities.

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##### Table of Contents



E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Segment Reporting

SFAS No. 131 Disclosures About
Segments of an Enterprise and Related Information requires
a new basis of determining reportable business segments (i.e.,
the management approach). This approach requires that business
segment information used by the chief operating decision maker
to assess performance and manage company resources be the source
for segment information disclosure. On this basis, E.piphany is
organized and operates as one business segment, which manages
the design, development, marketing, and sale of software
solutions 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,
|          |                |                         
|          |                | 1999                     |   | 2000   |        | 2001
|          |                |                          |   |        |        |     
|Revenues: |                |                          |   |        |        |      |   |         |         |  |   |       
|          | United States  |                          | $ | 19,182 |        |      | $ | 116,982 |         |  | $ | 91,889 |        
|          | United Kingdom |                          |   |       |        |      |   | 8,981   |         |  |   | 23,886 |        
|          | Rest of World  |                          |   |       |        |      |   | 1,318   |         |  |   | 9,913  |        
|          |                |                          |   |        |        |      |   |         |         |  |   |       
|          |                | Total                    |   | $      | 19,182 |      |   | $       | 127,281 |  |   | $      | 125,688 | 
|          |                |                          |   |        |        |      |   |         |         |  |   |       



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, which provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and
hedging activities. As amended, this statement is effective for
fiscal years beginning after June 15, 2000. E.piphany
applied the new rules prospectively to transactions beginning in
the first quarter of 2001. The adoption did not have a material
effect on its financial position or results of operations.

In March 2000, the FASB issued Financial
Standards Board Interpretation (FIN) No. 44,
Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25.
FIN No. 44 addresses the application of APB No. 25 to
clarify, among other issues (1) the definition of
employee for purposes of applying APB No. 25,
(2) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (3) the accounting consequences
of various modifications to the terms of a previously fixed
stock option or award, and (4) the accounting for an
exchange of stock compensation awards in a business combination.
FIN No. 44 is effective July 1, 2000, but certain
conclusions cover specific events that occurred after either
December 15, 1998 or January 12, 2000, but before the
effective date of July 1, 2000. The effects of applying the
interpretation have been recognized on a prospective basis from
July 1, 2000. The adoption did not have a material effect
on its financial position or results of operations.

In June 2001, the FASB approved for issuance SFAS
No. 141 Business Combinations and No. 142
Goodwill and Other Intangible Assets. Major
provisions of these Statements are as follows: (1) all
business combinations initiated after June 30, 2001 must
use the purchase method of accounting; the pooling of interest
method of accounting is prohibited except for transactions
initiated before July 1, 2001, (2) intangible assets
acquired in a business combination must be recorded separately
from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be
sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or
liability, (3) goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment
periodically using a fair value approach, except in certain
circumstances, and whenever there is an impairment indicator;
other intangible assets will continue to be valued and amortized
over their estimated lives, (4) in-process research and
development will continue to be written off immediately,
(5) all acquired goodwill must be assigned to

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reporting units for purposes of impairment
testing and segment reporting, and (6) effective
January 1, 2002, existing goodwill will no longer be
subject to amortization.

Amortization and write-down of goodwill for the
year ended December 31, 2001 was $2.5 billion, which
includes a $1.7 billion impairment of goodwill and
intangible assets charge. Beginning on January 1, 2002, our
unamortized balance of $98.1 million of goodwill and other
intangible assets will be subject to the new accounting
pronouncements SFAS No. 141 and SFAS No. 142. As a
result, acquired goodwill will no longer be amortized, but will
continue to be subject to a periodic impairment assessment. The
Company will continue to amortize other intangible assets of
$16.2 million on a straight-line basis over their remaining
useful lives. Amortization related to these intangibles is
expected to be $10.5 million for 2002, $5.0 million
for 2003 and $0.7 million for 2004.

In November 2001, the Emerging Issues Task Force
(EITF) reached consensus on EITF No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendors Products. EITF No. 01-9 addresses the
accounting for consideration given by a vendor to a customer and
is a codification of EITF No. 00-14, Accounting for Certain
Sales Incentives, EITF No. 00-22 Accounting for
Points and Certain Other Time-Based or Volume-Based
Sales Incentives Offers and Offers for Free Products or Services
to be Delivered in the Future and EITF No. 00-25, Vendor
Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products. The Company does not
believe that upon adoption it will have a significant impact on
our financial statements.

In November 2001, the staff of the FASB reached
consensus on Topic No. D-103, on the topic of Income
Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred. This topic 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 FASB staff concluded that
reimbursements received for out of pocket expenses incurred
should be characterized as revenue in the income statement. This
announcement will be applied in financial reporting periods
beginning after December 15, 2001, and comparative
financial statements for prior periods will be reclassified to
comply with the guidance in this announcement. Historically, the
Company has recorded reimbursements as a reduction of services
cost of revenue. The Company believes the adoption of this
pronouncement will not result in a material increase in the
Companys services revenue and services cost of revenue.

3.     Commitments
and Contingencies

E.piphany leases certain equipment and its
facilities under operating lease agreements. The leases expire
at various dates through 2013. Future minimum lease payments
under these leases as of December 31, 2001 were as follows
(in thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2002                     |  | $ | 14,921 | 
|2003                     |  |   | 13,803 | 
|2004                     |  |   | 11,248 | 
|2005                     |  |   | 8,859  | 
|2006                     |  |   | 6,356  | 
|2007 and thereafter      |  |   | 36,604 | 
|                         |  |   |        | 
|                         |  | $ | 91,791 | 
|                         |  |   |        | 

Total gross rent expense was approximately
$1.2 million, $7.0 million and $14.1 million for
the years ended December 31, 1999, 2000 and 2001,
respectively. For the year ended December 31, 2001,
approximately $3.8 million of the gross rent expense was
recorded as part of the restructuring charge. For the year

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ended December 31, 2001 the Company also
received sublease income of approximately $1.0 million of
which approximately $0.4 million reduced its rent expense
and approximately $0.6 million reduced its restructuring
charge.



| |                  
| | -----------------
| | Legal Proceedings

As of the date hereof, there is no material
litigation pending against us other than as disclosed in the
paragraphs below. From time to time, we may be a party to
litigation and 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.

On July 9, 2001, a putative securities class
action, captioned Kucera v. E.piphany, Inc., et al.,
Civil Action No. 01-CV-6158, was filed against us, several
of our officers, and three underwriters in our initial public
offering, in the United States District Court for the Southern
District of New York. The complaint alleges violations of
Section 11 of the Securities Act of 1933 against all
defendants, a violation of Section 15 of the Securities Act
against the individual defendants, and violations of
Section 12(a)(2) of the Securities Act and
Section 10(b) of the Securities Exchange Act of 1934
against the underwriters. The complaint seeks unspecified
damages on behalf of a purported class of purchasers of common
stock between September 21, 1999 and December 6, 2000.
One additional lawsuit was filed subsequently which contains
allegations substantially identical to those in the Kucera
complaint.

Various plaintiffs have filed similar actions
asserting virtually identical allegations against more than
300 other companies. The lawsuits against us have been
coordinated for pretrial purposes with these other related
lawsuits, and have been assigned the collective caption In re
Initial Public Offering Securities Litigation. The coordinated
pretrial proceedings are presently being overseen by Judge
Shira A. Scheindlin. We believe we have meritorious
defenses to these securities lawsuits and will defend ourselves
vigorously.



| |                    
| | -------------------
| | Restructuring Costs

In the quarter ended September 30, 2001, the
Company initiated a plan to restructure its worldwide
operations, by among other things, reducing its workforce and
consolidating its operating facilities. This plan was executed
during the quarters ended September 30, 2001 and
December 31, 2001. Over the two quarters, the restructuring
resulted in a total charge of $43.0 million to account for
these activities. Of this total charge, $5.8 million was
paid in cash and $4.8 million reflects a non-cash charge
taken during the quarters ended September 30, 2001 and
December 31, 2001. We recorded the low end of a range of
assumptions modeled for the restructuring charge, in accordance
with SFAS No. 5, Accounting for Contingencies.
Adjustments to the restructuring reserves will be made in future
periods, if necessary, based upon the then current actual events
and circumstances.

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table describes restructuring
charges taken through December 31, 2001 (in thousands):

|                                    |                                             |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        |        |  
|----------------------------------- | ------------------------------------------- | ------------ | - | ------- |  | -------- | ------ | -------- |  | ------------ | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                    |                                             | Accrued      |   |         |  |          |        |          |  | Accrued     
|                                    |                                             | Balance at   |   |         |  |          |        |          |  | Balance at  
|                                    |                                             | December 31, |   | Total   |  | Cash     |        | Non Cash |  | December 31,
|                                    |                                             | 2000         |   | Charges |  | Payments |        | Activity |  | 2001        
|                                    |                                             |              |   |         |  |          |        |          |  |             
|Severance and related charges       |                                             | $            |  |         |  | $        | 2,592  |          |  | $            | (2,109 | )      |   | $ | (425   | )      |   | $ | 58     |       
|Write-off of property and equipment |                                             |              |  |         |  |          | 4,384  |          |  |              |       |        |   |   | (4,384 | )      |   |   |       |       
|Lease termination costs             |                                             |              |  |         |  |          | 35,995 |          |  |              | (3,645 | )      |   |   |       |        |   |   | 32,350 |       
|                                    |                                             |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        |       
|                                    | Total                                       |              | $ |        |  |          | $      | 42,971   |  |              | $      | (5,754 | ) |   | $      | (4,809 | ) |   |        | 32,408 |  
|                                    |                                             |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        |       
|                                    | Less: current portion                       |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        | (8,954 | )
|                                    |                                             |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        |       
|                                    | Restructuring costs, net of current portion |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   | $      | 23,454 |  
|                                    |                                             |              |   |         |  |          |        |          |  |              |        |        |   |   |        |        |   |   |        |       

Severance and related charges primarily consisted
of involuntary termination benefits and payroll taxes. As of
December 31, 2001, the remaining accrued balance of
approximately $0.1 million consisted primarily of severance
costs that are expected to result in cash payments during the
quarter ending March 31, 2002. Lease termination costs of
$36.0 million are based on estimated exit costs associated
with the abandonment of certain leased facilities in Atlanta,
Boston, Chicago, New York, and San Mateo for the remaining lease
terms. These lease termination costs reflect remaining lease
liabilities and brokerage fees stated at actual cost reduced by
estimated sublease income. The estimated costs of abandoning
these leased facilities, including estimated costs to sublease,
were based on market information trend analyses provided by a
commercial real estate brokerage firm retained by the Company.
Actual future cash requirements may differ materially from the
accrual balance at December 31, 2001. As of
December 31, 2001, $32.3 million of lease termination
costs, net of anticipated sublease income, remains accrued and
is expected to be utilized by fiscal 2013.



| |                  
| | -----------------
| | Letters of Credit

In February 2001, the Company entered into four
secured letters of credit totaling $5.2 million with a
bank. These letters of credit, which expired in February 2002
were renewed for an additional one year term, which expire in
February 2003. In July 2001, the Company entered into a secured
letter of credit totaling $0.5 million with a bank, which
expires in July 2002. In October 2001, the Company entered into
a $0.4 million secured letter of credit with a bank, which
expires in October 2002. In November 2001, the Company entered
into a $3.3 million secured letter of credit with a bank,
which expires in November 2002. These letters of credit
collateralize the Companys obligations to third-parties
for lease payments and are secured by cash, cash equivalents and
short-term investments.

4.     Preferred
Stock

During 1997 through 1999, E.piphany issued
17,340,000 shares of preferred stock. These shares were
converted to shares of common stock upon the closing of
E.piphanys initial public offering (IPO) on
September 21, 1999. Upon the closing of the IPO, E.piphany
authorized 5,000,000 shares of undesignated preferred stock for
future issuance. 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.

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     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 purchased 2,400,000 shares of common stock under a
restricted stock purchase agreement in exchange for a promissory
note (see Note 7). Pursuant to the stock purchase
agreement, E.piphany has the right to repurchase the common
stock at the original purchase price upon the occurrence of
certain events. The repurchase right expires over a 48-month
period. As of December 31, 2001, 250,000 shares of common
stock were subject to repurchase by E.piphany.

In addition, certain employees have early
exercised stock options that are not fully vested. All early
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 would have vested. As of December 31, 2001,
363,430 shares of common stock were subject to repurchase under
stock options agreements with these employees.

As of December 31, 2001, E.piphany had
reserved the following shares of authorized but unissued common
stock:

|                                                                                 |                       |  |           |            | 
|-------------------------------------------------------------------------------- | --------------------- |  | --------- | ---------- | 
|Stock options outstanding under the 1997 stock
	option plan                      |                       |  | 2,493,744 |           
|Stock options outstanding under the 1999 stock
	option plan                      |                       |  | 8,197,842 |           
|Stock options outstanding under the 2000
	nonstatutory stock option plan         |                       |  | 1,639,360 |           
|Stock options outstanding under plans assumed
	through acquisition               |                       |  | 931,768   |           
|Stock options available for grant under the 1999
	stock option plan              |                       |  | 1,496,444 |           
|Stock options available for grant under the 2000
	nonstatutory stock option plan |                       |  | 604,015   |           
|Stock reserved for issuance under the 1999
	employee stock purchase plan         |                       |  | 6,032,152 |           
|Warrants assumed through acquisition                                             |                       |  | 5,366     |           
|                                                                                 |                       |  |           |           
|                                                                                 | Total shares reserved |  |           | 21,400,691 | 
|                                                                                 |                       |  |           |           



| |         
| | --------
| | Warrants

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

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



| |                         
| | ------------------------
| | Stock-Based Compensation

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. In connection with the
grant of certain stock options to employees during the years
ended December 31, 1999, 2000 and 2001, we recorded
deferred compensation of approximately $2.8 million, $0,
and $1.4 million, respectively. As of December 31,
2001, deferred compensation remaining to be amortized totaled
$0.9 million. This amount is being amortized over the
respective vesting periods of these equity

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 1999,
2000 and 2001, E.piphany recorded stock-based compensation of
$0.4 million, $2.0 million, and $50,000, 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
7,360,591 shares of common stock have been reserved for issuance
under the Purchase Plan as of December 31, 2001. 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, 2001, 1,328,439 shares had been
purchased and 6,032,152 shares are available for future issuance
under the Purchase Plan.



| |                        
| | -----------------------
| | Initial Public Offering

On September 21, 1999, E.piphany completed
an initial public offering of 7,158,750 shares of its common
stock at a price of $10.66 per share and received net proceeds
of approximately $69.6 million.



| |                   
| | ------------------
| | Secondary Offering

In January 2000, E.piphany completed a public
offering (the Offering) of 5,550,000 shares of
common stock. E.piphany sold 2,990,796 shares of common stock
and the selling stockholders sold 2,559,204 shares of common
stock. In addition, the underwriters exercised their option to
purchase 627,750 shares, of which 156,513 were from E.piphany
and 471,237 were from selling stockholders, to cover
over-allotments of shares. The net proceeds to the Company from
the Offering totaled $356.1 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 its 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 may be granted to employees and
consultants of E.piphany. The exercise price

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001.

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 a vesting
schedule determined by the Board of Directors, which is
typically over a period of four years. A total of 9,782,510
shares of common stock have been reserved for issuance and
88,224 options have been exercised under the 1999 Plan. As of
December 31, 2001, 1,496,444 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 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 6,625 options have
been exercised under the Nonstatutory Plan. As of
December 31, 2001, 604,015 shares were available for grant.

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



|                               |  |                          |         |      |  |      |          |   |  |   |            |  
|------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                               |  |                         
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 1999                     |         | 2000 |  | 2001
|                               |  |                          |         |      |  |     
|Net loss as reported           |  | $                        | (22,390 | )    |  | $    | (768,478 | ) |  | $ | (2,609,435 | )
|Net loss pro forma             |  | $                        | (24,956 | )    |  | $    | (825,942 | ) |  | $ | (2,710,855 | )
|Net loss per share as reported |  | $                        | (1.46   | )    |  | $    | (13.71   | ) |  | $ | (38.25     | )
|Net loss per share pro forma   |  | $                        | (1.62   | )    |  | $    | (14.74   | ) |  | $ | (39.73     | )

54



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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 1999, 2000, and 2001:

|                            |  |      |           |      |  |      |           |   |  |  |           |  
|--------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                            |  | 1999 |           | 2000 |  | 2001
|                            |  |      |           |      |  |     
|Risk-free interest rate     |  |      | 6.07      | %    |  |      | 5.77      | % |  |  | 4.39      | %
|Expected life of the option |  |      | 4.5 years |      |  |      | 4.5 years |   |  |  | 4.5 years |  
|Dividend yield              |  |      |          | %    |  |      |          | % |  |  |          | %
|Volatility                  |  |      | 85        | %    |  |      | 149       | % |  |  | 130       | %

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

|                                        |  |              |        |              |  |              |      |          |  |        |        |          |  |   |       |  |  |   |        |   |  |   |       | 
|--------------------------------------- |  | ------------ | ------ | ------------ |  | ------------ | ---- | -------- |  | ------ | ------ | -------- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                        |  |              |        |              |  |             
|                                        |  | Year Ended   |        | Year Ended   |  | Year Ended  
|                                        |  | December 31, |        | December 31, |  | December 31,
|                                        |  | 1999         |        | 2000         |  | 2001        
|                                        |  |              |        |              |  |             
|                                        |  |              |        | Weighted     |  |              |      | Weighted |  |        |        | Weighted
|                                        |  |              |        | Average      |  |              |      | Average  |  |        |        | Average 
|                                        |  |              |        | Exercise     |  |              |      | Exercise |  |        |        | Exercise
|                                        |  | Shares       |        | Price        |  | Shares       |      | Price    |  | Shares |        | Price   
|                                        |  |              |        |              |  |              |      |          |  |        |        |         
|Outstanding at beginning of period      |  |              | 2,491  |              |  | $            | 0.38 |          |  |        | 4,754  |          |  | $ | 8.95  |  |  |   | 11,079 |   |  | $ | 38.10 | 
|Granted                                 |  |              | 5,188  |              |  | $            | 8.81 |          |  |        | 8,431  |          |  | $ | 49.89 |  |  |   | 11,677 |   |  | $ | 11.93 | 
|Exercised                               |  |              | (2,283 | )            |  | $            | 1.13 |          |  |        | (1,174 | )        |  | $ | 3.03  |  |  |   | (690   | ) |  | $ | 5.08  | 
|Canceled                                |  |              | (642   | )            |  | $            | 2.35 |          |  |        | (932   | )        |  | $ | 40.10 |  |  |   | (8,803 | ) |  | $ | 49.20 | 
|                                        |  |              |        |              |  |              |      |          |  |        |        |          |  |   |       |  |  |   |        |   |  |   |       | 
|Outstanding at end of period            |  |              | 4,754  |              |  | $            | 8.95 |          |  |        | 11,079 |          |  | $ | 38.10 |  |  |   | 13,263 |   |  | $ | 9.41  | 
|                                        |  |              |        |              |  |              |      |          |  |        |        |          |  |   |       |  |  |   |        |   |  |   |       | 
|Vested and exercisable at end of period |  |              | 347    |              |  | $            | 2.58 |          |  |        | 1,278  |          |  | $ | 14.74 |  |  |   | 3,856  |   |  | $ | 10.12 | 
|                                        |  |              |        |              |  |              |      |          |  |        |        |          |  |   |       |  |  |   |        |   |  |   |       | 
|Weighted average fair value per share   |  | $            | 8.95   |              |  |              |      |          |  | $      | 38.10  |          |  |   |       |  |  | $ | 9.41   |   |  |   |       | 
|                                        |  |              |        |              |  |              |      |          |  |        |        |          |  |   |       |  |  |   |        |   |  |   |       | 

|                         |                  |                     |  |                                |        |                |  |        |      |                |  |   |        |  |  |  |       |  |  |   |        | 
|------------------------ | ---------------- | ------------------- |  | ------------------------------ | ------ | -------------- |  | ------ | ---- | -------------- |  | - | ------ |  |  |  | ----- |  |  | - | ------ | 
|                         |                  |                     |  |                                |        |               
|                         |                  | Options Outstanding |  |                               
|                         |                  |                     |  | Options Vested and Exercisable
|                         |                  |                     |  | Weighted                       |        |                |  |       
|                         |                  |                     |  | Average                        |        | Weighted       |  |        |      | Weighted      
|December 31, 2001        |                  |                     |  | Remaining                      |        | Average        |  |        |      | Average       
|Range of Exercise Prices |                  | Number              |  | Years                          |        | Exercise Price |  | Number |      | Exercise Price
|                         |                  |                     |  |                                |        |                |  |        |      |               
|$                        | 0.01 - $  0.01   |                     |  |                                | 2      |                |  |        | 6.38 |                |  | $ | 0.01   |  |  |  | 2     |  |  | $ | 0.01   | 
|$                        | 0.08 - $  0.67   |                     |  |                                | 309    |                |  |        | 6.54 |                |  | $ | 0.43   |  |  |  | 186   |  |  | $ | 0.42   | 
|$                        | 1.05 - $  1.80   |                     |  |                                | 487    |                |  |        | 7.35 |                |  | $ | 1.68   |  |  |  | 249   |  |  | $ | 1.67   | 
|$                        | 1.97 - $  4.27   |                     |  |                                | 1,148  |                |  |        | 7.74 |                |  | $ | 3.56   |  |  |  | 581   |  |  | $ | 3.70   | 
|$                        | 4.76 - $  7.33   |                     |  |                                | 7,499  |                |  |        | 9.54 |                |  | $ | 6.59   |  |  |  | 2,087 |  |  | $ | 6.65   | 
|$                        | 7.45 - $ 13.50   |                     |  |                                | 2,470  |                |  |        | 9.26 |                |  | $ | 10.08  |  |  |  | 221   |  |  | $ | 10.42  | 
|$                        | 13.67 - $ 31.88  |                     |  |                                | 877    |                |  |        | 8.43 |                |  | $ | 25.73  |  |  |  | 296   |  |  | $ | 26.29  | 
|$                        | 32.75 - $ 43.67  |                     |  |                                | 352    |                |  |        | 8.74 |                |  | $ | 37.71  |  |  |  | 152   |  |  | $ | 38.31  | 
|$                        | 51.70 - $ 69.42  |                     |  |                                | 78     |                |  |        | 8.42 |                |  | $ | 61.82  |  |  |  | 53    |  |  | $ | 62.44  | 
|$                        | 106.60 - $162.33 |                     |  |                                | 41     |                |  |        | 8.01 |                |  | $ | 116.48 |  |  |  | 29    |  |  | $ | 113.95 | 
|                         |                  |                     |  |                                |        |                |  |        |      |                |  |   |        |  |  |  |       |  |  |   |        | 
|$                        | 0.01 - $162.33   |                     |  |                                | 13,263 |                |  |        | 9.08 |                |  | $ | 9.41   |  |  |  | 3,856 |  |  | $ | 10.12  | 
|                         |                  |                     |  |                                |        |                |  |        |      |                |  |   |        |  |  |  |       |  |  |   |        | 

6.     Income
Taxes

E.piphany accounts for income taxes pursuant to
SFAS No. 109, Accounting for Income Taxes. A
valuation allowance has been recorded for the total deferred tax
assets of E.piphany as a result of uncertainties regarding the
realization of the assets based on the limited operating history
of E.piphany, the lack of

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

profitability to date, and the uncertainty of
future profitability. The components of net deferred tax assets
are as follows (in thousands):

|                                 |  |              |         |      |  |   |          |  
|-------------------------------- |  | ------------ | ------- | ---- |  | - | -------- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2000         |         | 2001
|                                 |  |              |         |     
|Net operating loss carryforwards |  | $            | 40,190  |      |  | $ | 73,730   |  
|Restructuring charge             |  |              |        |      |  |   | 17,188   |  
|Accruals and reserves            |  |              | 4,876   |      |  |   | 6,268    |  
|Plant and equipment              |  |              | 135     |      |  |   | 901      |  
|Startup and organization costs   |  |              | 108     |      |  |   | 298      |  
|Research and development credits |  |              | 1,667   |      |  |   | 7,738    |  
|                                 |  |              |         |      |  |   |          |  
|Total deferred tax assets        |  |              | 46,976  |      |  |   | 106,123  |  
|Valuation allowance              |  |              | (46,976 | )    |  |   | (106,123 | )
|                                 |  |              |         |      |  |   |          |  
|Net deferred tax assets          |  | $            |        |      |  | $ |         |  
|                                 |  |              |         |      |  |   |          |  

As of December 31, 2001, E.piphany had net
operating loss carryforwards of approximately
$161.6 million and $137.3 million for federal and
state tax purposes, respectively. The tax-effected amount of
these operating loss carryforwards as of December 31, 2001
is $73.7 million. The federal net operating loss and other
credit carryforwards expire on various dates beginning on 2012
through 2021. The state net operating loss carryforwards will
expire on various dates through 2006. The deferred tax assets at
December 31, 2001 also include approximately
$24.8 million related to the acquisitions of RightPoint,
Octane, eClass, iLeverage and Moss (including net operating
losses of $66.7 million and $38.8 million, federal and
state respectively) and when realized, will be used to reduce
the amount of any remaining goodwill that was originally
recorded at the date of the acquisitions. In addition,
approximately $17.6 million of the deferred tax asset
relates to employee stock option deductions and accordingly will
be credited directly to stockholders equity and will not
be available to reduce the provision for income taxes in future
years.

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

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

|                                            |  |                          |       |      |  |      |         |  |  |  |         | 
|------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                            |  |                         
|                                            |  | Years Ended December 31,
|                                            |  |                         
|                                            |  | 1999                     |       | 2000 |  | 2001
|                                            |  |                          |       |      |  |     
|Federal statutory rate                      |  |                          | (34.0 | )%   |  |      | (34.0)% |  |  |  | (34.0)% | 
|State taxes, net of federal benefit         |  |                          | (6.0  | )%   |  |      | (6.0)%  |  |  |  | (6.0)%  | 
|Amortization of stock compensation          |  |                          | 4.45  | %    |  |      | 0.18%   |  |  |  |        | 
|Amortization of goodwill and in-process R&D |  |                          |      |      |  |      | 38.73%  |  |  |  | 38.03%  | 
|Net operating loss not benefited and other  |  |                          | 35.55 | %    |  |      | 1.09%   |  |  |  | 1.97%   | 
|                                            |  |                          |       |      |  |      |         |  |  |  |         | 
|                                            |  |                          |      | %    |  |      | %      |  |  |  | %      | 
|                                            |  |                          |       |      |  |      |         |  |  |  |         | 

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys pretax income (loss) from
operations for the years ended December 31, 1999, 2001 and
2001 consisted of the following components (in thousands):

|         |                   |                          |         |         |   |      |          |          |   |   |            |            |  
|-------- | ----------------- | ------------------------ | ------- | ------- | - | ---- | -------- | -------- | - | - | ---------- | ---------- | -
|         |                   |                         
|         |                   | Years Ended December 31,
|         |                   |                         
|         |                   | 1999                     |         | 2000    |   | 2001
|         |                   |                          |         |         |   |     
|Domestic |                   | $                        | (22,390 | )       |   | $    | (758,925 | )        |   | $ | (2,578,834 | )         
|Foreign  |                   |                          |        |         |   |      | (9,553   | )        |   |   | (30,601    | )         
|         |                   |                          |         |         |   |      |          |          |   |   |            |           
|         | Total pretax loss |                          | $       | (22,390 | ) |      | $        | (768,478 | ) |   | $          | (2,609,435 | )
|         |                   |                          |         |         |   |      |          |          |   |   |            |           

7.     Related Party
Transactions

The chief executive officer of E.piphany 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 bears interest at 5.6% per annum
compounded monthly. Amounts drawn on this loan as of
January 1, 2000 were paid in full upon the officers
first sale of E.piphany stock. The chief executive officer then
continued to receive monthly payments from this loan through
July 31, 2000, which are still outstanding. As of
December 31, 2001, the outstanding balance including
accrued interest was in the sum of $160,000. As the repayment of
this amount was contingent on future stock sales, this amount
was expensed as paid. Advances under the loan were charged to
compensation expense in the period in which the amounts were
loaned to the officer, and thus, $250,000, $146,000 and $0 are
included in general and administrative expense in the
accompanying statements of operations for the years ended
December 31, 1999, 2000 and 2001, respectively. General and
administrative expense was then reduced by the amount of
$250,000 in the operating results for the year ended
December 31, 2000 when that amount was repaid. The chief
executive officer was also 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 compounded monthly. As of
December 31, 2001, the outstanding balance including
accrued interest was in the sum of $197,000. In 1998, the chief
executive officer was also given a loan to purchase 2,400,000
shares of common stock at $0.27 per share. This loan is
collateralized by the underlying shares of E.piphany. This loan
is due on July 1, 2008 and accrues interest at 5.88% per
annum. As of December 31, 2001, the outstanding balance
including accrued interest on this loan was $575,000.

The chief executive officer of E.piphany is
currently a member of the Board of Directors of four of
E.piphanys customers. Total revenues to E.piphany from
these customers were $0.6 million, $0.9 million and
$0.4 million for the years ended December 31, 1999,
2000 and 2001, respectively. E.piphany had accounts receivable
balances from these customers totaling $0.2 million and $0
for the years ended December 31, 2000 and 2001,
respectively.

In addition, four of E.piphanys customers
have board members that are also on E.piphanys Board of
Directors. Total revenues to E.piphany from these customers were
$0.7 million, $0.4 million and $3.1 million for
the years ended December 31, 1999, 2000 and 2001,
respectively. E.piphany had accounts receivable balances from
these customers totaling $0.5 million and $0.5 million
for the years ended December 31, 2000 and 2001,
respectively.

8.     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

57



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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreement, stockholders of RightPoint received
approximately 0.1185 shares of E.piphany common stock for each
share of RightPoint common stock they owned at the time the
merger was consummated. In connection with this transaction,
E.piphany acquired all of the outstanding shares of capital
stock of RightPoint in exchange for 4,614,992 shares of
E.piphanys common stock. In addition, options and warrants
of RightPoint were converted into options and warrants to
purchase approximately 795,000 shares of E.piphanys common
stock. E.piphany accounted for the acquisition under the
purchase method of accounting and the results of
RightPoints operations subsequent to January 4, 2000
have been included in E.piphanys operating results for the
year ended December 31, 2000 and 2001. 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.

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

|                                                                     |                     |   |         |         | 
|-------------------------------------------------------------------- | ------------------- | - | ------- | ------- | 
|Cash, receivables and other current assets                           |                     | $ | 3,076   |        
|Property, plant and equipment and other
	noncurrent assets           |                     |   | 817     |        
|Note receivable from stockholder                                     |                     |   | 1,185   |        
|Goodwill and purchased intangibles, including
	in-process technology |                     |   | 501,318 |        
|Current liabilities assumed                                          |                     |   | (9,633  | )      
|                                                                     |                     |   |         |        
|                                                                     | Net assets acquired |   | $       | 496,763 | 
|                                                                     |                     |   |         |        



| |                          
| | -------------------------
| | 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 for the year ended
December 31, 2000 and 2001.

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

|                                           |                     |   |        |        | 
|------------------------------------------ | ------------------- | - | ------ | ------ | 
|Cash, receivables and other current assets |                     | $ | 285    |       
|Goodwill and purchased intangibles         |                     |   | 29,143 |       
|Current liabilities assumed                |                     |   | (391   | )     
|                                           |                     |   |        |       
|                                           | Net assets acquired |   | $      | 29,037 | 
|                                           |                     |   |        |       

58



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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | The eClass Acquisition

On May 31, 2000, E.piphany acquired
eClass Direct, Inc. (eClass) in a merger
transaction. eClass was an application service provider of
permission-based e-mail marketing services. Under the terms of
the merger agreement, stockholders of eClass received
approximately 0.1411 shares of E.piphany common stock for each
share of eClass common stock. In connection with this
transaction, E.piphany acquired all of the outstanding shares of
capital stock of eClass in exchange for 1,084,031 shares of
E.piphanys common stock. In addition, options of eClass
were converted into options to purchase approximately 69,575
shares of E.piphanys common stock. E.piphany accounted for
the acquisition under the purchase method of accounting and the
results of eClass operations subsequent to May 31,
2000 have been included in E.piphanys operating results
for the year ended December 31, 2000 and 2001. The total
purchase price was approximately $50.3 million.

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

|                                           |                     |   |        |        | 
|------------------------------------------ | ------------------- | - | ------ | ------ | 
|Cash, receivables and other current assets |                     | $ | 1,571  |       
|Property, plant and equipment              |                     |   | 250    |       
|Goodwill and purchased intangibles         |                     |   | 48,620 |       
|Current liabilities assumed                |                     |   | (127   | )     
|                                           |                     |   |        |       
|                                           | Net assets acquired |   | $      | 50,314 | 
|                                           |                     |   |        |       



| |                       
| | ----------------------
| | 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 for the year ended
December 31, 2000 and 2001. 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.

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                     |                     |   |           |           | 
|-------------------------------------------------------------------- | ------------------- | - | --------- | --------- | 
|Cash, receivables and other current assets                           |                     | $ | 24,828    |          
|Property, plant and equipment and other
	noncurrent assets           |                     |   | 4,518     |          
|Note receivable from stockholder                                     |                     |   | 1,179     |          
|Goodwill and purchased intangibles, including
	in-process technology |                     |   | 2,705,946 |          
|Current liabilities assumed                                          |                     |   | (26,078   | )        
|                                                                     |                     |   |           |          
|                                                                     | Net assets acquired |   | $         | 2,710,393 | 
|                                                                     |                     |   |           |          



| |                                                                   
| | ------------------------------------------------------------------
| | 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 for the year ended December 31, 2001. 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.

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

|                                           |                     |   |        |        | 
|------------------------------------------ | ------------------- | - | ------ | ------ | 
|Cash, receivables and other current assets |                     | $ | 384    |       
|Deferred compensation                      |                     |   | 976    |       
|Goodwill and purchased intangibles         |                     |   | 45,548 |       
|Current liabilities assumed                |                     |   | (6,280 | )     
|                                           |                     |   |        |       
|                                           | Net assets acquired |   | $      | 40,628 | 
|                                           |                     |   |        |       

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 years
ended December 31, 1999 and 2000. Net loss also includes
$2.9 million and $3.5 million of stock based
compensation for the years ended December 31, 1999

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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and 2000, respectively. This information may not
necessarily be indicative of the future combined results of
operations of E.piphany (in thousands, except per share amounts).

|                         |  |              |            |      |  |   |            |  
|------------------------ |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                         |  |             
|                         |  | Year Ended  
|                         |  | December 31,
|                         |  |             
|                         |  | 1999         |            | 2000
|                         |  |              |            |     
|Revenues                 |  | $            | 29,484     |      |  | $ | 135,169    |  
|Net loss                 |  | $            | (1,127,287 | )    |  | $ | (1,137,549 | )
|Basic net loss per share |  | $            | (122.31    | )    |  | $ | (17.85     | )



| |           
| | ----------
| | Impairment

The Company periodically assesses 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 assesses the impairment of enterprise level
goodwill in accordance with the provisions of APB Opinion
No. 17, Intangible Assets. As part of its
review of its third quarter financial results, the Company
performed an impairment assessment of identifiable intangible
assets and goodwill in connection with all of its acquisitions.
The impairment assessment was performed with the assistance of
independent valuation experts to determine whether any
impairment existed. The impairment indicators included, but were
not limited to, 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, which precipitated the Companys reduction in
workforce and overall restructuring in the quarter ended
September 30, 2001. 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 current estimated fair market value. Fair market
value was determined based on discounted future cash flows for
the acquisitions that had separately identifiable cash flows. It
is reasonably possible that the estimates and assumptions used
under our assessment may change in the short-term resulting in
the need to further write-down our goodwill and other long-lived
assets.

Beginning on January 1, 2002, our
unamortized balance of $98.1 million of goodwill and other
intangible assets will be subject to the new accounting
pronouncements SFAS No. 141 and SFAS No. 142 as
described in Note 2 of Notes to Consolidated Financial
Statements. As a result, acquired goodwill will no longer be
amortized, but will continue to be subject to a periodic
impairment assessment. The Company will continue to amortize
other intangible assets of $16.2 million on a straight-line
basis over their remaining useful lives. Amortization related to
these intangibles is expected to be $10.5 million for 2002,
$5.0 million for 2003 and $0.7 million for 2004.

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

|           |  |           |           |              |  |            |            |               |  |   |            |   |  |   |        | 
|---------- |  | --------- | --------- | ------------ |  | ---------- | ---------- | ------------- |  | - | ---------- | - |  | - | ------ | 
|           |  |           |           |              |  |            |            | Balance as of
|           |  | Beginning |           | Accumulated  |  | Impairment |            | December 31, 
|           |  | Balance   |           | Amortization |  | Charge     |            | 2001         
|           |  |           |           |              |  |            |            |              
|RightPoint |  | $         | 479,642   |              |  | $          | (283,842   | )             |  | $ | (179,596   | ) |  | $ | 16,204 | 
|iLeverage  |  |           | 29,143    |              |  |            | (13,762    | )             |  |   | (15,381    | ) |  |   |       | 
|eClass     |  |           | 48,347    |              |  |            | (21,882    | )             |  |   | (24,657    | ) |  |   | 1,808  | 
|Octane     |  |           | 2,679,413 |              |  |            | (1,201,154 | )             |  |   | (1,421,433 | ) |  |   | 56,826 | 
|Radnet     |  |           | 10,325    |              |  |            | (2,399     | )             |  |   | (7,050     | ) |  |   | 876    | 
|Moss       |  |           | 45,548    |              |  |            | (10,080    | )             |  |   | (13,069    | ) |  |   | 22,399 | 
|           |  |           |           |              |  |            |            |               |  |   |            |   |  |   |        | 
|           |  | $         | 3,292,418 |              |  | $          | (1,533,119 | )             |  | $ | (1,661,186 | ) |  | $ | 98,113 | 
|           |  |           |           |              |  |            |            |               |  |   |            |   |  |   |        | 

61



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E.PIPHANY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     401(k)
Plan

In January 1999, E.piphany adopted a 401(k) plan
(the 401(k)). Participation in the 401(k) is
available to all employees. Employees are eligible to
participate in the 401(k) at any time beginning with their first
day of employment. Each participant may elect to contribute an
amount up to 15% of his or her annual base salary plus
commission and bonus, but not to exceed the statutory limit as
prescribed by the Internal Revenue Code. The Company may make
discretionary contributions to the 401(k). To date, no
contributions have been made by the Company.



|    |                                  
|--- | ---------------------------------
|10. | Valuation and Qualifying Accounts

The following table presents annual information
related to the allowance for doubtful accounts for the three
years ended December 31, 2001 (in thousands):

|                                |                                          |              |  |            |       |               |  |            |       |  |  |   |        |   |  |   |       | 
|------------------------------- | ---------------------------------------- | ------------ |  | ---------- | ----- | ------------- |  | ---------- | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                |                                          |              |  |            |       | Charged to    |  |           
|                                |                                          | Balance at   |  | Charged to |       | Allowance for |  | Balance at
|                                |                                          | Beginning of |  | Costs and  |       | Doubtful      |  | End of    
|                                |                                          | Period       |  | Expenses   |       | Account       |  | Period    
|                                |                                          |              |  |            |       |               |  |           
|Allowance for doubtful accounts |                                          |              |  |            |       |               |  |            |       |  |  |   |        |   |  |  
|                                | Years ended December 31, (in thousands): |              |  |            |       |               |  |            |       |  |  |   |        |   |  |   |      
|                                |                                          | 1999         |  | $          | 30    |               |  | $          | 270   |  |  | $ |       |   |  | $ | 300   | 
|                                |                                          | 2000         |  | $          | 300   |               |  | $          | 4,450 |  |  | $ |       |   |  | $ | 4,750 | 
|                                |                                          | 2001         |  | $          | 4,750 |               |  | $          | 2,700 |  |  | $ | (3,118 | ) |  | $ | 4,332 | 

11.     Selected
Quarterly Financial Data (Unaudited)

The following table presents selected quarterly
information for 2000 and 2001 (in thousands, except share data):

|                                     |  |         |          |         |  |         |          |         |  |   |            |   |  |   |          |  
|------------------------------------ |  | ------- | -------- | ------- |  | ------- | -------- | ------- |  | - | ---------- | - |  | - | -------- | -
|                                     |  | First   |          | Second  |  | Third   |          | Fourth 
|                                     |  | Quarter |          | Quarter |  | Quarter |          | Quarter
|                                     |  |         |          |         |  |         |          |        
|2000:                                |  |         |          |         |  |         |          |         |  |   |            |   |  |   |          |  
|Revenues                             |  | $       | 14,415   |         |  | $       | 24,519   |         |  | $ | 39,140     |   |  | $ | 49,207   |  
|Gross profit                         |  |         | 8,286    |         |  |         | 14,828   |         |  |   | 21,491     |   |  |   | 27,371   |  
|Net loss                             |  |         | (66,968  | )       |  |         | (147,556 | )       |  |   | (277,269   | ) |  |   | (276,685 | )
|Basic and diluted net loss per share |  | $       | (1.57    | )       |  | $       | (2.87    | )       |  | $ | (4.35      | ) |  | $ | (4.26    | )
|2001:                                |  |         |          |         |  |         |          |         |  |   |            |   |  |   |          |  
|Revenues                             |  | $       | 38,077   |         |  | $       | 31,098   |         |  | $ | 28,506     |   |  | $ | 28,007   |  
|Gross profit                         |  |         | 15,826   |         |  |         | 16,740   |         |  |   | 18,713     |   |  |   | 19,205   |  
|Net loss                             |  | $       | (295,395 | )       |  | $       | (294,044 | )       |  | $ | (1,983,153 | ) |  | $ | (36,843  | )
|Basic and diluted net loss per share |  | $       | (4.48    | )       |  | $       | (4.30    | )       |  | $ | (28.68     | ) |  | $ | (0.53    | )

12.     Minority
Interest in Subsidiary

In April 2001, E.piphany established a
consolidated subsidiary in Japan, Nihon E.piphany K.K., issuing
a total of 280 shares of common stock. E.piphany holds
196 shares, or 70% of the subsidiarys total capital
stock, and three local employees of the subsidiary hold
84 shares, or 30% of the subsidiarys total capital
stock, each holder having purchased shares for cash
consideration at par value of approximately $416.67 per share.
Nihon E.piphany K.K. markets, sells and supports the
E.piphanys products in Japan. As of December 31,
2001, a minority interest of approximately $35,000 was shown on
E.piphanys Consolidated Balance Sheet in order to reflect
the original investment in Nihon E.piphany K.K. made by the
minority investors.

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

None.




PART III




Item 10.     Directors
and Officers of the Registrant

The information concerning our directors required
by this Item is incorporated by reference to the information
under the heading Proposal No. 1  Election
of Directors in E.piphanys Proxy Statement.

The information concerning our executive officers
required by this Item is incorporated by reference to the
information under the heading Other
Information  Executive Officers in
E.piphanys Proxy Statement.




Item 11.     Executive
Compensation

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




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

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




PART IV




Item 14.     Exhibits,
Financial Statements, and Reports on Form 8-K

(a)(1) Financial Statements.

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

(a)(2) Financial Statement Schedules.

See Item 14 (d) below.

(a)(3) Exhibits.

|       |  |                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                    
|       |  |                                                                                                  
|3.1*   |  | Restated Certificate of Incorporation of the
	Registrant.                                        
|3.2*   |  | Restated Bylaws of the Registrant.                                                               
|10.1*  |  | Form of Indemnification Agreement between the
	Registrant and each of its directors and officers.
|10.2   |  | 1999 Stock Plan and form of agreements
	thereunder, as amended on September 28, 2001.            
|10.3*  |  | 1999 Employee Stock Purchase Plan and form of
	agreements thereunder.                            
|10.4*  |  | 1997 Stock Plan and form of agreements thereunder.                                               
|10.5*  |  | Fourth Amended and Restated Investors
	Rights Agreement dated June 16, 1999.                    

63



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|             |  |                                                                                                                                                                             
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number       |  | Exhibit Title                                                                                                                                                               
|             |  |                                                                                                                                                                             
|10.6*        |  | Form of Amended and Restated Common Stock
	Purchase Agreement dated March 18, 1997 between the
	Registrant and four stockholders.                                           
|10.7*        |  | Restricted Stock Purchase Agreement, Promissory
	Note, Stock Pledge Agreement and Joint Escrow Instructions dated
	July 1, 1998 between Roger S. Siboni and the
	Registrant.
|10.8*        |  | Promissory Note dated August 15, 1998
	between Roger S. Siboni and the Registrant.                                                                                          
|10.9**       |  | RightPoint Software, Inc. (formerly Datamind
	Corporation) 1996 Stock Option Plan.                                                                                          
|10.10***     |  | 2000 Nonstatutory Stock Option Plan and form of
	agreements thereunder.                                                                                                     
|10.11****    |  | Octane Software, Inc. 1997 Stock Option Plan and
	form of agreement thereunder.                                                                                             
|10.12****    |  | Octane Software, Inc. Nonstatutory Stock Option
	Plan and form of agreement thereunder.                                                                                     
|10.13****    |  | Octane Software, Inc. 2000 Pennsylvania Plan and
	form of agreements thereunder.                                                                                            
|10.14*****   |  | iLeverage corporation 1997 Stock Plan and form of
	agreements thereunder.                                                                                                   
|10.15******  |  | eClass Direct, Inc. 1998 Stock Option Plan
	and form of agreements thereunder.                                                                                              
|10.16******* |  | Moss Software, Inc. 1997 Stock Option Plan and
	form of agreement thereunder.                                                                                               
|10.17******* |  | Moss Software, Inc. 2001 Stock Option Plan and
	form of agreement thereunder.                                                                                               
|10.18        |  | Change of Control Severance Agreement dated
	January 25, 2002 between Roger S. Siboni and the Registrant                                                                    
|10.19        |  | Severance Agreement dated February 15, 2002
	between Karen Richardson and the Registrant                                                                                    
|10.20        |  | Form Change of Control Agreement between the
	Registrant and each of Phillip Fernandez, Jeffrey Pulver, Roy
	Camblin, and Kevin Yeaman.                                     
|10.21        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Karen Richardson.                                                 
|10.22        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Phillip Fernandez.                                                
|10.23        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Kevin Yeaman.                                                     
|10.24        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Roy Camblin.                                                      
|10.25        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Jeffrey Pulver.                                                   
|10.26        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	William Walsh.                                                    
|10.27        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Karen Richardson.                                              
|10.28        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Phillip Fernandez.                                             
|10.29        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Kevin Yeaman.                                                  
|10.30        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Roy Camblin.                                                   
|10.31        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Jeffrey Pulver.                                                
|10.32        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and William Walsh.                                                 
|23.1         |  | Consent of Arthur Andersen LLP, Independent
	Public Accountants.                                                                                                            
|24.1         |  | Power of Attorney (see page 66).                                                                                                                                            

64



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##### Table of Contents





---

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

None.

(c) Exhibits.

See Item 14(a)(3) above.

(d) Financial Statement Schedules.

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

65



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities 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 6th day of March, 2002.



| |                
| | ---------------
| | E.PIPHANY, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ ROGER S. SIBONI

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

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

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

|                                             |  |                                                                                 |  |               |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------- |  | 
|                                             |  |                                                                                 |  |              
|Signature                                    |  | Title                                                                           |  | Date         
|                                             |  |                                                                                 |  |              
|                                            
|/s/ ROGER S. SIBONIRoger S. Siboni           |  | President, Chief Executive Officer
	and Director
	(Principal Executive Officer) |  | March 6, 2002
|                                            
|/s/ KEVIN J. YEAMANKevin J. Yeaman           |  | Chief Financial Officer
	(Principal Financial and
	Accounting Officer)          |  | March 6, 2002
|                                            
|/s/ PAUL M. HAZENPaul M. Hazen               |  | Director                                                                        |  | March 6, 2002
|                                            
|/s/ ROBERT L. JOSSRobert L. Joss             |  | Director                                                                        |  | March 6, 2002
|                                            
|/s/ SAM H. LEESam H. Lee                     |  | Director                                                                        |  | March 6, 2002
|                                            
|/s/ DOUGLAS J. MACKENZIEDouglas J. Mackenzie |  | Director                                                                        |  | March 6, 2002
|                                            
|/s/ JENNY J. MINGJenny J. Ming               |  | Director                                                                        |  | March 6, 2002

66



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##### Table of Contents






EXHIBIT INDEX

|             |  |                                                                                                                                                                             
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number       |  | Exhibit Title                                                                                                                                                               
|             |  |                                                                                                                                                                             
|3.1*         |  | Restated Certificate of Incorporation of the
	Registrant.                                                                                                                   
|3.2*         |  | Restated Bylaws of the Registrant.                                                                                                                                          
|10.1*        |  | Form of Indemnification Agreement between the
	Registrant and each of its directors and officers.                                                                           
|10.2         |  | 1999 Stock Plan and form of agreements
	thereunder, as amended on September 28, 2001.                                                                                       
|10.3*        |  | 1999 Employee Stock Purchase Plan and form of
	agreements thereunder.                                                                                                       
|10.4*        |  | 1997 Stock Plan and form of agreements thereunder.                                                                                                                          
|10.5*        |  | Fourth Amended and Restated Investors
	Rights Agreement dated June 16, 1999.                                                                                               
|10.6*        |  | Form of Amended and Restated Common Stock
	Purchase Agreement dated March 18, 1997 between the
	Registrant and four stockholders.                                           
|10.7*        |  | Restricted Stock Purchase Agreement, Promissory
	Note, Stock Pledge Agreement and Joint Escrow Instructions dated
	July 1, 1998 between Roger S. Siboni and the
	Registrant.
|10.8*        |  | Promissory Note dated August 15, 1998
	between Roger S. Siboni and the Registrant.                                                                                          
|10.9**       |  | RightPoint Software, Inc. (formerly Datamind
	Corporation) 1996 Stock Option Plan.                                                                                          
|10.10***     |  | 2000 Nonstatutory Stock Option Plan and form of
	agreements thereunder.                                                                                                     
|10.11****    |  | Octane Software, Inc. 1997 Stock Option Plan and
	form of agreement thereunder.                                                                                             
|10.12****    |  | Octane Software, Inc. Nonstatutory Stock Option
	Plan and form of agreement thereunder.                                                                                     
|10.13****    |  | Octane Software, Inc. 2000 Pennsylvania Plan and
	form of agreements thereunder.                                                                                            
|10.14*****   |  | iLeverage corporation 1997 Stock Plan and form of
	agreements thereunder.                                                                                                   
|10.15******  |  | eClass Direct, Inc. 1998 Stock Option Plan
	and form of agreements thereunder.                                                                                              
|10.16******* |  | Moss Software, Inc. 1997 Stock Option Plan and
	form of agreement thereunder.                                                                                               
|10.17******* |  | Moss Software, Inc. 2001 Stock Option Plan and
	form of agreement thereunder.                                                                                               
|10.18        |  | Change of Control Severance Agreement dated
	January 25, 2002 between Roger S. Siboni and the
	Registrant                                                                   
|10.19        |  | Severance Agreement dated February 15, 2002
	between Karen Richardson and the Registrant                                                                                    
|10.20        |  | Form Change of Control Agreement between the
	Registrant and each of Phillip Fernandez, Jeffrey Pulver, Roy
	Camblin, and Kevin Yeaman.                                     
|10.21        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Karen Richardson.                                                 
|10.22        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Phillip Fernandez.                                                
|10.23        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Kevin Yeaman.                                                     
|10.24        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Roy Camblin.                                                      
|10.25        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	Jeffrey Pulver.                                                   
|10.26        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated April 17, 2001 between the Registrant and
	William Walsh.                                                    
|10.27        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Karen Richardson.                                              
|10.28        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Phillip Fernandez.                                             
|10.29        |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Kevin Yeaman.                                                  



---



##### Table of Contents



|       |  |                                                                                                                             
|------ |  | ----------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                                               
|       |  |                                                                                                                             
|10.30  |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Roy Camblin.   
|10.31  |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and Jeffrey Pulver.
|10.32  |  | Notice of Stock Option Grant and Stock Option
	Agreement dated November 20, 2001 between the Registrant
	and William Walsh. 
|23.1   |  | Consent of Arthur Andersen LLP, Independent
	Public Accountants.                                                            



---

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