##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission File Number 000-26881

E.PIPHANY, INC.

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(Exact name of registrant as specified in its charter)




|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Delaware                 |  | 77-0443392                             
|                         |  |                                        
|(State of incorporation) |  | (I.R.S. Employer Identification Number)

1900 South Norfolk Street, Suite 310
San Mateo, California 94403

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(Address of principal executive offices)


(650) 356-3800

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(Registrants telephone number, including area code)


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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES  [X]    NO  [   ]

The number of shares outstanding of the registrants common stock, par
value $0.0001 per share, as of October 31, 2002, was 72,784,392.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II: OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|CERTIFICATIONS               
|EXHIBIT INDEX                
|EXHIBIT 3.2                  
|EXHIBIT 10.1                 
|EXHIBIT 99.1                 



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##### Table of Contents



E.PIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

|               |          |                                                                                                           |  |   
|-------------- | -------- | --------------------------------------------------------------------------------------------------------- |  | --
|               | Page No.
|               |         
|              
|              
|              
|              
|PART I         |          | FINANCIAL INFORMATION                                                                                     |  |   
|              
|Item 1.        |          | Financial Statements                                                                                      |  |   
|              
|              
|              
|              
|               |          | Condensed Consolidated Balance Sheets 
As of December 31, 2001 and September 30, 2002                    |  | 3 
|              
|              
|              
|              
|               |          | Condensed Consolidated Statements of Operations 
Three and nine months ended September 30, 2001 and 2002 |  | 4 
|              
|              
|              
|              
|               |          | Condensed Consolidated Statements of Cash Flows 
Nine months ended September 30, 2001 and 2002           |  | 5 
|              
|              
|              
|              
|               |          | Notes to Condensed Consolidated Financial Statements                                                      |  | 6 
|              
|Item 2.        |          | Managements Discussion and Analysis of
Financial Condition and Results of Operations                     |  | 15
|              
|Item 3.        |          | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 32
|              
|Item 4.        |          | Controls and Procedures                                                                                   |  | 34
|              
|PART II        |          | OTHER INFORMATION                                                                                         |  |   
|              
|Item 1.        |          | Legal Proceedings                                                                                         |  | 35
|              
|Item 5.        |          | Other Information                                                                                         |  | 35
|              
|Item 6.        |          | Exhibits and Reports on Form 8-K                                                                          |  | 35
|              
|SIGNATURES     |          | 36                                                                                                       
|              
|Certifications |          | 37                                                                                                       
|              
|Exhibit Index  |          | 39                                                                                                       





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##### Table of Contents






PART I:    FINANCIAL INFORMATION




ITEM 1.    FINANCIAL STATEMENTS

E.PIPHANY, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


|                                                    |                                              |                                            |        |              |         |               |        |             |         | 
|--------------------------------------------------- | -------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | ------------- | ------ | ----------- | ------- | 
|                                                    |                                              |                                            |        | December 31, |         | September 30,
|                                                    |                                              |                                            |        | 2001         |         | 2002         
|                                                    |                                              |                                            |        |              |         |              
|                                                    |                                              |                                            |        |              |         |               |        | (unaudited)
|                                                   
|                                                   
|                                                   
|                                                   
|ASSETS                                              |                                              |                                            |        |              |         |               |        |            
|Current assets:                                     |                                              |                                            |        |              |         |               |        |            
|                                                    | Cash and cash equivalents                    |                                            | $      | 192,378      |         |               | $      | 115,538     |        
|                                                    | Short-term investments                       |                                            |        | 121,324      |         |               |        | 123,929     |        
|                                                    | Accounts receivable, net                     |                                            |        | 13,703       |         |               |        | 9,093       |        
|                                                    | Prepaid expenses and other assets            |                                            |        | 5,061        |         |               |        | 5,977       |        
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total current assets                       |        |              | 332,466 |               |        |             | 254,537 | 
|Long-term investments                               |                                              |                                            |       |              |         |               | 40,004 |            
|Restricted cash                                     |                                              |                                            | 9,367  |              |         |               | 9,337  |            
|Property and equipment, net                         |                                              |                                            | 22,320 |              |         |               | 14,405 |            
|Purchased intangibles, net                          |                                              |                                            | 16,330 |              |         |               | 8,395  |            
|Goodwill, net                                       |                                              |                                            | 81,783 |              |         |               | 81,499 |            
|Other assets                                        |                                              |                                            | 3,589  |              |         |               | 2,701  |            
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total assets                               |        | $            | 465,855 |               |        | $           | 410,878 | 
|                                                    |                                              |                                            |        |              |         |               |        |            
|LIABILITIES AND STOCKHOLDERS EQUITY                |                                              |                                            |        |              |         |               |        |            
|Current liabilities:                                |                                              |                                            |        |              |         |               |        |            
|                                                    | Current portion of capital lease obligations |                                            | $      | 498          |         |               | $      | 249         |        
|                                                    | Accounts payable                             |                                            |        | 2,537        |         |               |        | 1,976       |        
|                                                    | Accrued liabilities                          |                                            |        | 11,260       |         |               |        | 8,958       |        
|                                                    | Accrued compensation                         |                                            |        | 11,873       |         |               |        | 9,067       |        
|                                                    | Current portion of restructuring costs       |                                            |        | 8,954        |         |               |        | 8,459       |        
|                                                    | Deferred revenue                             |                                            |        | 15,380       |         |               |        | 16,790      |        
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total current liabilities                  |        |              | 50,502  |               |        |             | 45,499  | 
|Restructuring costs, net of current portion         |                                              |                                            | 23,454 |              |         |               | 23,853 |            
|Other long-term liabilities, net of current portion |                                              |                                            | 472    |              |         |               | 162    |            
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total liabilities                          |        |              | 74,428  |               |        |             | 69,514  | 
|Minority interest                                   |                                              |                                            | 35     |              |         |               |       |            
|Stockholders equity:                               |                                              |                                            |        |              |         |               |        |            
|                                                    | Common stock                                 |                                            |        | 7            |         |               |        | 7           |        
|                                                    | Additional paid-in capital                   |                                            |        | 3,807,410    |         |               |        | 3,813,410   |        
|                                                    | Stockholders notes receivable               |                                            |        | (778         | )       |               |        | (730        | )      
|                                                    | Accumulated other comprehensive losses       |                                            |        | (564         | )       |               |        | (295        | )      
|                                                    | Deferred compensation                        |                                            |        | (901         | )       |               |        | (337        | )      
|                                                    | Accumulated deficit                          |                                            |        | (3,413,782   | )       |               |        | (3,470,691  | )      
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total stockholders equity                 |        |              | 391,392 |               |        |             | 341,364 | 
|                                                    |                                              |                                            |        |              |         |               |        |            
|                                                    |                                              | Total liabilities and stockholders equity |        | $            | 465,855 |               |        | $           | 410,878 | 
|                                                    |                                              |                                            |        |              |         |               |        |            

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

3



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##### Table of Contents



E.PIPHANY, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)
(unaudited)


|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |        |         |  
|------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------ | ------ | ------------------ | ---------- | ----------------- | ------ | ------ | ------- | ----------- | ------ | --------- | ---------- | - | ------ | ------ | ------- | -
|                                                              |                                                                   |                          |        | Three Months Ended |            | Nine Months Ended
|                                                              |                                                                   |                          |        | September 30,      |            | September 30,    
|                                                              |                                                                   |                          |        |                    |            |                  
|                                                              |                                                                   |                          |        | 2001               |            | 2002              |        | 2001   |         | 2002       
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |            
|                                                              |                                                                   |                          |        | as adjusted        |            |                   |        |        |         | as adjusted |        |           |            |  
|                                                              |                                                                   |                          |        | (1)                |            |                   |        |        |         | (1)         |        |           |            |  
|                                                             
|                                                             
|                                                             
|                                                             
|Revenues:                                                     |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              | Product license                                                   |                          | $      | 16,200             |            |                   | $      | 6,756  |         |             | $      | 54,893    |            |   | $      | 24,484 |        
|                                                              | Services (1)                                                      |                          |        | 12,999             |            |                   |        | 13,039 |         |             |        | 45,860    |            |   |        | 36,855 |        
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Total revenues           |        |                    | 29,199     |                   |        |        | 19,795  |             |        |           | 100,753    |   |        |        | 61,339  |  
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|Cost of revenues:                                             |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              | Product license                                                   |                          |        | 474                |            |                   |        | 301    |         |             |        | 1,663     |            |   |        | 871    |        
|                                                              | Services (1)                                                      |                          |        | 10,012             |            |                   |        | 7,740  |         |             |        | 47,811    |            |   |        | 23,934 |        
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Total cost of revenues   |        |                    | 10,486     |                   |        |        | 8,041   |             |        |           | 49,474     |   |        |        | 24,805  |  
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Gross profit             |        |                    | 18,713     |                   |        |        | 11,754  |             |        |           | 51,279     |   |        |        | 36,534  |  
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|Operating expenses:                                           |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              | Research and development                                          |                          |        | 10,147             |            |                   |        | 8,318  |         |             |        | 32,355    |            |   |        | 25,884 |        
|                                                              | Sales and marketing                                               |                          |        | 21,925             |            |                   |        | 12,169 |         |             |        | 70,126    |            |   |        | 41,843 |        
|                                                              | General and administrative                                        |                          |        | 4,672              |            |                   |        | 3,060  |         |             |        | 20,232    |            |   |        | 9,447  |        
|                                                              | Restructuring costs                                               |                          |        | 32,436             |            |                   |        | 419    |         |             |        | 32,436    |            |   |        | 12,141 |        
|                                                              | Amortization and write-down of goodwill and purchased
intangibles |                          |        | 1,935,315          |            |                   |        | 2,647  |         |             |        | 2,480,201 |            |   |        | 7,935  |        
|                                                              | Stock-based compensation                                          |                          |        | 410                |            |                   |        | 68     |         |             |        | 1,156     |            |   |        | 613    |        
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Total operating expenses |        |                    | 2,004,905  |                   |        |        | 26,681  |             |        |           | 2,636,506  |   |        |        | 97,863  |  
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Loss from operations     |        |                    | (1,986,192 | )                 |        |        | (14,927 | )           |        |           | (2,585,227 | ) |        |        | (61,329 | )
|Other income, net                                             |                                                                   |                          | 3,039  |                    |            |                   | 1,324  |        |         |             | 12,635 |           |            |   | 4,420  |       
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|                                                              |                                                                   | Net loss                 |        | $                  | (1,983,153 | )                 |        | $      | (13,603 | )           |        | $         | (2,572,592 | ) |        | $      | (56,909 | )
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|Basic and diluted net loss per share                          |                                                                   |                          | (28.68 | )                  |            | $                 | (0.19  | )      |         | $           | (38.00 | )         |            | $ | (0.80  | )     
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       
|Shares used in computing basic and diluted net loss per share |                                                                   |                          | 69,152 |                    |            |                   | 72,099 |        |         |             | 67,691 |           |            |   | 71,463 |       
|                                                              |                                                                   |                          |        |                    |            |                   |        |        |         |             |        |           |            |   |        |       



---

|(1) |  | Pursuant to the Financial Accounting Standards Board Staff announcement
(Topic No. D-103), reimbursable expenses have been reclassified into
service revenues, with a corresponding increase in cost of service
revenues for the three and nine months ended September 30, 2001. See Note
2 of Notes to Condensed Consolidated Financial Statements for more
detailed information.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

4



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##### Table of Contents



E.PIPHANY, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)


|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |          |       |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------ | ----------------------------------------- | --------- | ----------------- | ------- | -------- | ----- | ------ | ------- | -
|                                                              |                                                                              |                                                                             |                                      |                                           |           | Nine Months Ended
|                                                              |                                                                              |                                                                             |                                      |                                           |           | September 30,    
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                  
|                                                              |                                                                              |                                                                             |                                      |                                           |           | 2001              |         | 2002    
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Cash flows from operating activities:                         |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              | Net loss                                                                     |                                                                             | $                                    | (2,572,592                                | )         |                   | $       | (56,909  | )    
|                                                              | Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                             |                                      |                                           |           |                   |         |          |      
|                                                              |                                                                              | Depreciation and amortization                                               |                                      |                                           | 4,315     |                   |         |          | 7,362 |       
|                                                              |                                                                              | Provision for doubtful accounts                                             |                                      |                                           | 2,700     |                   |         |          | 298   |       
|                                                              |                                                                              | Stock-based compensation                                                    |                                      |                                           | 1,154     |                   |         |          | 613   |       
|                                                              |                                                                              | Noncash restructuring costs                                                 |                                      |                                           | 3,737     |                   |         |          | 2,536 |       
|                                                              |                                                                              | Amortization and write-down of goodwill and purchased intangibles           |                                      |                                           | 2,480,201 |                   |         |          | 7,935 |       
|                                                              |                                                                              | Minority interest in net loss of consolidated subsidiary                    |                                      |                                           |          |                   |         |          | (35   | )     
|                                                              |                                                                              | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                      |                                           |           |                   |         |          |       |       
|                                                              |                                                                              |                                                                             | Accounts receivable                  |                                           |           | 11,364            |         |          |       | 4,312  |        
|                                                              |                                                                              |                                                                             | Prepaid expenses and other assets    |                                           |           | (21               | )       |          |       | (28    | )      
|                                                              |                                                                              |                                                                             | Accounts payable                     |                                           |           | (955              | )       |          |       | (561   | )      
|                                                              |                                                                              |                                                                             | Accrued liabilities and compensation |                                           |           | (5,444            | )       |          |       | (4,966 | )      
|                                                              |                                                                              |                                                                             | Restructuring costs                  |                                           |           | 25,912            |         |          |       | (96    | )      
|                                                              |                                                                              |                                                                             | Deferred revenue                     |                                           |           | (5,540            | )       |          |       | 1,410  |        
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              |                                                                              |                                                                             |                                      | Net cash used in operating activities     |           |                   | (55,169 | )        |       |        | (38,129 | )
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Cash flows from investing activities:                         |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              | Purchases of property and equipment                                          |                                                                             |                                      | (10,303                                   | )         |                   |         | (1,769   | )    
|                                                              | Restricted cash                                                              |                                                                             |                                      | (617                                      | )         |                   |         | 30       |      
|                                                              | Cash acquired in acquisitions                                                |                                                                             |                                      | 208                                       |           |                   |         |         |      
|                                                              | Acquisition related costs and changes in accruals                            |                                                                             |                                      | 1,204                                     |           |                   |         | (12      | )    
|                                                              | Proceeds from maturities of investments                                      |                                                                             |                                      | 175,931                                   |           |                   |         | 181,053  |      
|                                                              | Purchases of investments                                                     |                                                                             |                                      | (222,147                                  | )         |                   |         | (223,406 | )    
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              |                                                                              |                                                                             |                                      | Net cash used in investing activities     |           |                   | (55,724 | )        |       |        | (44,104 | )
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Cash flows from financing activities:                         |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              | Principal payments on capital lease obligations                              |                                                                             |                                      | (580                                      | )         |                   |         | (405     | )    
|                                                              | Repayments on notes payable                                                  |                                                                             |                                      | (2,088                                    | )         |                   |         |         |      
|                                                              | Repayments on notes receivable                                               |                                                                             |                                      | 1,777                                     |           |                   |         | 48       |      
|                                                              | Proceeds from subsidiary stock offering                                      |                                                                             |                                      | 35                                        |           |                   |         |         |      
|                                                              | Proceeds from sale of common stock, net of repurchases                       |                                                                             |                                      | 5,532                                     |           |                   |         | 5,737    |      
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|                                                              |                                                                              |                                                                             |                                      | Net cash provided by financing activities |           |                   | 4,676   |          |       |        | 5,380   |  
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Effect of foreign exchange rates on cash and cash equivalents |                                                                              |                                                                             | 360                                  |                                           |           |                   | 13      |         
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Net decrease in cash and cash equivalents                     |                                                                              |                                                                             | (105,857                             | )                                         |           |                   | (76,840 | )       
|Cash and cash equivalents at beginning of period              |                                                                              |                                                                             | 317,913                              |                                           |           |                   | 192,378 |         
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         
|Cash and cash equivalents at end of period                    |                                                                              | $                                                                           | 212,056                              |                                           |           | $                 | 115,538 |         
|                                                              |                                                                              |                                                                             |                                      |                                           |           |                   |         |         

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

5



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##### Table of Contents



E.PIPHANY, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.    Basis of Presentation

The condensed consolidated financial statements included herein have been
prepared by E.piphany, Inc. (hereafter E.piphany or the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). The condensed consolidated balance sheet as of December 31,
2001 is derived from audited consolidated financial statements. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, E.piphany believes that the disclosures are adequate to
make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the Companys audited
consolidated financial statements and notes thereto included in E.piphanys
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed
with the SEC on March 6, 2002.

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the
financial position of E.piphany and its subsidiaries as of September 30, 2002,
and the results of operations for the three and nine months ended September 30,
2002 and 2001 and cash flows for the nine months ended September 30, 2002 and
2001. Certain prior period balances have been reclassified to conform to the
current period presentation. The results for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results expected for
the full fiscal year.

2.    Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of E.piphany
and its subsidiaries. As of September 30, 2002, the Company held 90% of the
capital stock of its subsidiary, Nihon E.piphany, K.K. The Company maintains an
ownership percentage of 100% for all other subsidiaries. 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 at the end of each period. Revenues and expenses are translated using
rates that approximate those in effect during the period. Gains and losses from
translation adjustments are reflected in stockholders equity in the condensed
consolidated balance sheets under the caption Accumulated other comprehensive
losses. 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.

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

The Company considers all highly liquid investments with an original
maturity of 90 days or less at the date of purchase to be cash equivalents. The
Company has classified its short-term and long-term investments as available
for sale. Short-term investments generally consist of highly liquid securities
that the Company intends to hold for more than 90 days but less than 1 year.
Long-term investments generally consist of securities that the Company intends
to hold for more than one year. Such investments are carried at fair value
with unrealized gains and losses reported within accumulated other
comprehensive losses. Realized gains and losses and declines in value which are
determined to be other-than-temporary on available-for-sale securities are
included in other income, net. From time to time, we are required to obtain
letters of credit that serve as collateral for our obligations to third parties
under

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facility lease agreements. These letters of credit are secured by cash,
cash equivalents, short-term investments and long-term investments. As of
September 30, 2002, we had $9.3 million securing letters of credit, which are
classified as restricted cash in the accompanying condensed consolidated
balance sheet, and all of which relate to facility lease agreements that have
expiration dates greater than twelve months.

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 (loss), 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 (loss) equals the total of net income
(loss) and all other non-owner changes in equity.

The components of comprehensive losses are as follows (in thousands):

|                                        |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|--------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                        |  | Three Months Ended |            | Nine Months Ended
|                                        |  | September 30,      |            | September 30,    
|                                        |  |                    |            |                  
|                                        |  | 2001               |            | 2002              |  | 2001 |         | 2002
|                                        |  |                    |            |                   |  |      |         |     
|Net loss                                |  | $                  | (1,983,153 | )                 |  | $    | (13,603 | )    |  | $ | (2,572,592 | ) |  | $ | (56,909 | )
|Unrealized gain (loss) on investments   |  |                    | (22        | )                 |  |      | 123     |      |  |   | 90         |   |  |   | 256     |  
|Foreign currency translation adjustment |  |                    | 71         |                   |  |      | (271    | )    |  |   | 360        |   |  |   | 13      |  
|                                        |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Comprehensive losses                    |  | $                  | (1,983,104 | )                 |  | $    | (13,751 | )    |  | $ | (2,572,142 | ) |  | $ | (56,640 | )
|                                        |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying condensed
consolidated financial statements. 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, excluding goodwill, for impairment on a periodic basis and
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.

Revenue Recognition

E.piphany recognizes revenue as follows:

Licenses.Licenses fees are recognized as revenue upon contract
execution, provided all delivery obligations have been met, fees are fixed or
determinable and collection is probable. We consider all arrangements with
payment terms extending beyond six months to not be fixed and determinable, and
revenue is recognized as payments become due from the customer. If collection
is not considered probable, revenue is recognized when the fee is collected.
The Company uses the residual method to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date and
vendor specific objective evidence of the fair value of all undelivered
elements exists. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue. If vendor specific objective evidence does not exist to
allocate the total fee to all 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 the term is 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 we receive persuasive evidence that the reseller has
sold the subject licenses through to the end-user.

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When licenses are sold together with consulting and implementation
services, license fees are recognized upon delivery, provided that (1) the
criteria set forth in the above paragraph have been met, (2) payment of the
license fees is not dependent upon the performance of the consulting and
implementation services, and (3) the services are not essential to the
functionality of the software. For arrangements that do not meet the above
criteria, both the product license revenues and services revenues are
recognized under the percentage of completion contract method in accordance
with the provisions of Statement of Position 81-1, Accounting for Performance
of Construction Type and Certain Production Type Contracts (SOP 81-1). 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, license and service revenues have been
recognized pursuant to SOP 81-1. Prior to 2001, E.piphany was primarily
responsible for the implementation services with respect to the majority of its
license arrangements. During 2001 and 2002, third-party consulting
organizations have been primarily responsible for the implementation services
with respect to the majority of E.piphanys license arrangements, and
therefore, less license revenues have been recognized pursuant to SOP 81-1.

Maintenance Agreements.Maintenance agreements generally require
E.piphany to provide technical support and unspecified software updates to
customers. Revenue derived 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 condensed 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.

Accounts Receivable and Deferred Revenue

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

Concentration of Credit Risk and Significant Customers

The Companys customers are primarily based in Asia, Australia, Canada,
Europe, Latin America and the United States. The Company performs credit
evaluations of its prospective 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 actual
losses incurred. No individual customer account receivable balance accounted
for more than 10% of our accounts receivable as of December 31, 2001 or
September 30, 2002.

Revenue comprising more than 10% of total amounts by customers is as
follows:

|           |  |                    |    |                   |  |      |   |      |  |  |   |  |  |  |   | 
|---------- |  | ------------------ | -- | ----------------- |  | ---- | - | ---- |  |  | - |  |  |  | - | 
|           |  | % of               |    | % of             
|           |  | Total Revenues     |    | Total Revenues   
|           |  |                    |    |                  
|           |  | Three Months Ended |    | Nine Months Ended
|           |  | September 30,      |    | September 30,    
|           |  |                    |    |                  
|           |  | 2001               |    | 2002              |  | 2001 |   | 2002
|           |  |                    |    |                   |  |      |   |     
|Customer A |  |                    | 16 | %                 |  |      |  |      |  |  |  |  |  |  |  | 

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) approved
for issuance Statement of Financial Accounting Standard No. 141 Business
Combinations (SFAS 141) and No. 142 Goodwill and Other Intangible Assets
(SFAS 142). 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,

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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 was no longer subject to amortization.

The Company adopted the provisions of SFAS 141 and SFAS 142 as of January
1, 2002. Beginning on January 1, 2002, unamortized goodwill and other
intangible assets were subject to new accounting pronouncements SFAS 141 and
SFAS 142. As a result, acquired goodwill and other intangible assets with
indefinite useful lives were no longer amortized, but will continue to be
subject to impairment tests on an annual basis, and on an interim basis in
certain circumstances. SFAS 142 also requires the completion of a transitional
impairment test, with any impairment treated as a cumulative effect of a change
in accounting principle. The Company completed the transitional impairment
test upon adoption, which did not result in an impairment charge. The Company
has not recorded any impairment charge during the nine months ended September
30, 2002. The Company plans to complete an annual impairment test during the
fourth quarter of 2002. We have recorded significant impairment charges in the
past and to the extent that events or circumstances cause our assumptions to
change, additional charges, which could be material, may be required.

In November 2001, the Emerging Issues Task Force (EITF) reached
consensus on EITF No. 01-09, Accounting for Consideration Given by a Vendor to
a Customer or a Reseller of the Vendors Products. EITF No. 01-09 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 adoption of these EITF statements did not have a material effect on our
financial position or results of operations.

In November 2001, the staff of the FASB reached consensus on Topic No.
D-103, entitled Income Statement Characterization of Reimbursements Received
for Out of Pocket Expenses Incurred (Topic D-103). 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 staff of the FASB concluded that reimbursements received for out
of pocket expenses incurred should be characterized as revenue in the income
statement. Prior to January 1, 2002, we recorded reimbursements as a reduction
of cost of services revenues. Beginning in the first quarter of 2002, we have
adopted Topic D-103 and have recorded reimbursable expenses as services
revenue. For all comparative periods, reimbursable expenses have been
reclassified into services revenues, with a corresponding increase in cost of
revenues. The impact of Topic D-103 on services revenues and cost of revenues
for the three and nine months ended September 30, 2001 and 2002 is presented as
follows (in thousands):

|                                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                    |  | Three Months Ended |        | Nine Months Ended
|                                                    |  | September 30,      |        | September 30,    
|                                                    |  |                    |        |                  
|                                                    |  | 2001               |        | 2002              |  | 2001 |        | 2002
|                                                    |  |                    |        |                   |  |      |        |     
|Services revenues (as originally presented)         |  | $                  | 12,306 |                   |  | $    | 12,606 |      |  | $ | 42,788 |  |  | $ | 35,805 | 
|Impact of Topic D-103                               |  |                    | 693    |                   |  |      | 433    |      |  |   | 3,072  |  |  |   | 1,050  | 
|                                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Services revenues (as currently presented)          |  | $                  | 12,999 |                   |  | $    | 13,039 |      |  | $ | 45,860 |  |  | $ | 36,855 | 
|                                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|                                                   
|                                                    |  | Three Months Ended |        | Nine Months Ended
|                                                    |  | September 30,      |        | September 30,    
|                                                    |  |                    |        |                  
|                                                    |  | 2001               |        | 2002              |  | 2001 |        | 2002
|                                                    |  |                    |        |                   |  |      |        |     
|Cost of services revenues (as originally presented) |  | $                  | 9,319  |                   |  | $    | 7,307  |      |  | $ | 44,739 |  |  | $ | 22,884 | 
|Impact of Topic D-103                               |  |                    | 693    |                   |  |      | 433    |      |  |   | 3,072  |  |  |   | 1,050  | 
|                                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|Cost of services revenues (as currently presented)  |  | $                  | 10,012 |                   |  | $    | 7,740  |      |  | $ | 47,811 |  |  | $ | 23,934 | 
|                                                    |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 

With the adoption of Topic D-103, the Company typically recognizes
reimbursable expenses as revenue when an agreement to bill the customer for
reimbursable expenses exists, the expenses have been incurred and billed, and
collection is probable.

In July 2002, the staff of the FASB issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs Associated with Exit and
Disposal Activities (SFAS 146). This statement revises the accounting
treatment

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

3.    Related Party Transactions

In July 1998, we loaned $640,000 to Roger Siboni, our chief executive
officer, to purchase 2,400,000 shares of our common stock at $0.26 2/3 per
share. This loan is secured by 539,151 shares of E.piphany common stock. This
loan is due on July 1, 2008 and accrues interest at 5.88% per annum compounded
monthly. As of September 30, 2002, Mr. Siboni has made a payment totaling $193,000, the
outstanding principle balance of this loan was $447,000 and accrued interest
was $161,000. Subsequent to September 30, 2002, Mr. Siboni made an additional
payment of $214,000. Mr. Siboni has indicated and the Company expects
that this loan will be repaid by August 2004.

Mr. Siboni was also offered a loan of $250,000 per year for a period
beginning August 1, 1998 and ending July 31, 2000, drawable on a monthly basis.
This loan bears interest at 5.6% per annum compounded monthly. Amounts drawn
on this loan as of January 1, 2000 were paid in full upon Mr. Sibonis first
sale of E.piphany stock. Mr. Siboni then continued to draw down from this loan
through July 31, 2000. As of September 30, 2002, the outstanding balance of
this loan including accrued interest was $43,000. Mr. Siboni has
indicated and the Company expects that this loan will be repaid by
December 2003.

As of September 30, 2002, Mr. Siboni was a member of the board of
directors of two of E.piphanys customers. Total revenues to E.piphany from
these customers were $55,000 and $166,000 for the three and nine months ended
September 30, 2002, respectively. Total revenues to E.piphany from these
customers were $54,000 and $144,000 for the three and nine months ended
September 30, 2001, respectively. E.piphany had accounts receivable balances
from these customers totaling $0 and $81,000 as of September 30, 2002 and
December 31, 2001, respectively.

In addition, as of September 30, 2002, three of E.piphanys customers had
board members that were also on E.piphanys Board of Directors. Total revenues
to E.piphany from these customers were $72,000 and $886,000 for the three and
nine months ended September 30, 2002, respectively. Total revenues to E.piphany
from these customers were $84,000 and $290,000 for the three and nine months
ended September 30, 2001, respectively. There were no outstanding accounts
receivable balances from these customers as of September 30, 2002 or December
31, 2001.

4.    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, (SFAS No. 128) 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. The
following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share amounts):

|                                                                                      |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                                                      |  | Three Months Ended |            | Nine Months Ended
|                                                                                      |  | September 30,      |            | September 30,    
|                                                                                      |  |                    |            |                  
|                                                                                      |  | 2001               |            | 2002              |  | 2001 |         | 2002
|                                                                                      |  |                    |            |                   |  |      |         |     
|Net loss                                                                              |  | $                  | (1,983,153 | )                 |  | $    | (13,603 | )    |  | $ | (2,572,592 | ) |  | $ | (56,909 | )
|                                                                                      |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Basic and diluted:                                                                    |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Weighted average shares of common stock outstanding                                   |  |                    | 70,555     |                   |  |      | 72,188  |      |  |   | 69,806     |   |  |   | 71,764  |  
|Less: Weighted average shares subject to repurchase                                   |  |                    | (1,403     | )                 |  |      | (89     | )    |  |   | (2,115     | ) |  |   | (301    | )
|                                                                                      |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Weighted average shares used in computing basic
and diluted net loss per common share |  |                    | 69,152     |                   |  |      | 72,099  |      |  |   | 67,691     |   |  |   | 71,463  |  
|                                                                                      |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Basic and diluted net loss per common share                                           |  | $                  | (28.68     | )                 |  | $    | (0.19   | )    |  | $ | (38.00     | ) |  | $ | (0.80   | )
|                                                                                      |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  

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

|                                                                                                                                                                                                                 |  |                    |       |                   |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                                                                                                                                                                                 |  | Three Months Ended |       | Nine Months Ended
|                                                                                                                                                                                                                 |  | September 30,      |       | September 30,    
|                                                                                                                                                                                                                 |  |                    |       |                  
|                                                                                                                                                                                                                 |  | 2001               |       | 2002              |  | 2001 |        | 2002
|                                                                                                                                                                                                                 |  |                    |       |                   |  |      |        |     
|Options excluded due to the exercise
price exceeding the average fair market
value of the Companys common
stock during the period                                                                               |  |                    | 4,021 |                   |  |      | 11,480 |      |  |  | 4,158  |  |  |  | 11,112 | 
|Options for which the exercise price
was less than the average fair market
value of the Companys common
stock during the period that were
excluded as inclusion would
decrease the Companys net loss
per share |  |                    | 3,295 |                   |  |      | 922    |      |  |  | 5,340  |  |  |  | 2,042  | 
|Common shares excluded resulting
from common stock subject to
repurchase                                                                                                                                         |  |                    | 1,403 |                   |  |      | 89     |      |  |  | 2,115  |  |  |  | 301    | 
|                                                                                                                                                                                                                 |  |                    |       |                   |  |      |        |      |  |  |        |  |  |  |        | 
|Total common stock equivalents
excluded from diluted net loss
per common share                                                                                                                                   |  |                    | 8,719 |                   |  |      | 12,491 |      |  |  | 11,613 |  |  |  | 13,455 | 
|                                                                                                                                                                                                                 |  |                    |       |                   |  |      |        |      |  |  |        |  |  |  |        | 

5.    Commitments and Contingencies

Litigation

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

The Company, three of our current and former officers, and three
underwriters in our initial public offering (IPO) were named as defendants in
a consolidated shareholder lawsuit in the United States District Court for the
Southern District of New York, In re E.piphany, Inc. Initial Public Offering
Securities Litigation,01-CV-6158. This is one of a number of actions
coordinated for pretrial purposes as In re Initial Public Offering Securities
Litigation,21 MC 92. Plaintiffs in the coordinated proceeding have brought
claims under the federal securities laws against numerous underwriters,
companies, and individuals, alleging generally that defendant underwriters
engaged in improper and undisclosed activities concerning the allocation of
shares in the IPOs of more than 300 companies during the period from late 1998
through 2000. Among other things, plaintiffs allege that the underwriters
customers had to pay excessive brokerage commissions and purchase additional
shares of stock in the aftermarket in order to receive favorable allocations of
shares in an IPO. The consolidated amended complaint in our case seeks
unspecified damages on behalf of a purported class of purchasers of our common
stock between September 21, 1999 and December 6, 2000. The court has appointed
a lead plaintiff for the consolidated action. The underwriter and issuer
defendants have filed motions to dismiss. The individual defendants have been
dismissed from the action without prejudice pursuant to a tolling agreement.
We believe we have meritorious defenses to the claims against us and will
defend ourselves vigorously.

Restructuring Costs

In the third quarter ended September 30, 2001, the Company initiated a
plan to restructure its worldwide operations by reducing its workforce and
consolidating its operating facilities and recorded a restructuring charge of
$32.4 million. Additional charges of $10.5 million and $0.5 million were
recorded during the quarters ended December 31, 2001 and March 31, 2002,
respectively, which primarily reflected changes in the estimated costs of
abandoning certain facilities associated with the plan initiated during the
quarter ended September 30, 2001. In the quarter ended June 30, 2002, the
Company further reduced its workforce and initiated a plan to abandon
additional facilities, and recorded a restructuring charge of $11.2 million.
Additional charges of $0.4 million were recorded during the quarter ended
September 30, 2002, which primarily reflected changes in the estimated costs of
the write-off of property and equipment associated with the charge taken during
the quarter ended June 30, 2002.

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The following table summarizes restructuring charges recorded during the
nine months ended September 30, 2002 (in thousands):

|                                    |                                             |   |              |        |         |   |          |        |          |   |               |        |   |   |        |        |            |   |        |        |  
|----------------------------------- | ------------------------------------------- | - | ------------ | ------ | ------- | - | -------- | ------ | -------- | - | ------------- | ------ | - | - | ------ | ------ | ---------- | - | ------ | ------ | -
|                                    |                                             |   | Accrued      |        |         |   |          |        |          |   |               |        |   |   |        |        | Accrued   
|                                    |                                             |   | Balance at   |        |         |   |          |        |          |   |               |        |   |   |        |        | Balance at
|                                    |                                             |   | December 31, |        | Total   |   | Cash     |        | Non Cash |   | September 30,
|                                    |                                             |   | 2001         |        | Charges |   | Payments |        | Charges  |   | 2002         
|                                    |                                             |   |              |        |         |   |          |        |          |   |              
|Severance and related charges       |                                             | $ | 58           |        |         | $ | 2,737    |        |          | $ | (2,569        | )      |   | $ | (214   | )      |            | $ | 12     |       
|Write-off of property and equipment |                                             |   |             |        |         |   | 2,724    |        |          |   |              |        |   |   | (2,322 | )      |            |   | 402    |       
|Lease abandonment costs             |                                             |   | 32,350       |        |         |   | 6,680    |        |          |   | (7,132        | )      |   |   |       |        |            |   | 31,898 |       
|                                    |                                             |   |              |        |         |   |          |        |          |   |               |        |   |   |        |        |            |   |        |       
|                                    | Total                                       |   |              | 32,408 |         |   | $        | 12,141 |          |   | $             | (9,701 | ) |   | $      | (2,536 | )          |   |        | 32,312 |  
|                                    |                                             |   |              |        |         |   |          |        |          |   |               |        |   |   |        |        |            |   |        |       
|                                    | Less: current portion                       |   |              | (8,954 | )       |   |          |        |          |   |               |        |   |   |        |        |            |   |        | (8,459 | )
|                                    |                                             |   |              |        |         |   |          |        |          |   |               |        |   |   |        |        |            |   |        |       
|                                    | Restructuring costs, net of
current portion |   | $            | 23,454 |         |   |          |        |          |   |               |        |   |   |        |        |            |   | $      | 23,853 |  
|                                    |                                             |   |              |        |         |   |          |        |          |   |               |        |   |   |        |        |            |   |        |       

Severance and related charges primarily resulted from involuntary
termination benefits, including the acceleration of certain stock option grants
in connection with terminated employees, and payroll taxes. In the quarter
ended September 30, 2001, the company reduced its workforce by approximately
13%, and in the quarter ended June 30, 2002, by approximately 14%. The
terminations included sales and marketing, research and development and general
administrative personnel, and were across all geographic regions.

Write-off of property and equipment primarily relates to leasehold
improvements and other property and equipment which have been impaired as a
result of the abandonment of leased facilities and the reduction of headcount.

Lease abandonment costs related to the abandonment of leased facilities in
Atlanta, Boston, Chicago, New York, San Mateo, Hong Kong, Singapore and the
United Kingdom. Lease abandonment costs reflected remaining lease liabilities
and brokerage fees stated at actual costs reduced by estimated sublease income.
The Company calculated the estimated costs of abandoning these leased
facilities, including estimated sublease costs and income, with the assistance
of market information trend analyses provided by a commercial real estate
brokerage firm retained by the Company.

As the estimates used in calculating the restructuring costs are subject
to changing market conditions and other factors that are outside of the control
of the Company, adjustments to these estimates could result in material
increases or decreases in the currently accrued amounts. During the nine
months ended September 30, 2002, the Company paid $9.7 million in severance and
related charges and lease abandonment costs, of which $7.8 million related to
the charge recorded in September 30, 2001 and $1.9 million related to the
charge recorded in June 30, 2002. Actual future cash requirements may differ
materially from the accrual balance at September 30, 2002. As of September 30,
2002, $31.9 million of lease termination costs, net of anticipated sublease
income, remains accrued and is expected to be utilized by 2017.

6. Segment Information

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

Revenue by geographic region is as follows (in thousands):

|          |                |       |   |                    |        |                   |   |        |        |      |   |        |         |  |   |        |        | 
|--------- | -------------- | ----- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------ | ------- |  | - | ------ | ------ | 
|          |                |       |   | Three Months Ended |        | Nine Months Ended
|          |                |       |   | September 30,      |        | September 30,    
|          |                |       |   |                    |        |                  
|          |                |       |   | 2001               |        | 2002              |   | 2001   |        | 2002
|          |                |       |   |                    |        |                   |   |        |        |     
|Revenues: |                |       |   |                    |        |                   |   |        |        |      |   |        |         |  |   |       
|          | United States  |       | $ | 19,287             |        |                   | $ | 13,736 |        |      | $ | 76,219 |         |  | $ | 44,171 |       
|          | United Kingdom |       |   | 8,213              |        |                   |   | 2,511  |        |      |   | 20,109 |         |  |   | 6,365  |       
|          | Rest of World  |       |   | 1,699              |        |                   |   | 3,548  |        |      |   | 4,425  |         |  |   | 10,803 |       
|          |                |       |   |                    |        |                   |   |        |        |      |   |        |         |  |   |       
|          |                | Total |   | $                  | 29,199 |                   |   | $      | 19,795 |      |   | $      | 100,753 |  |   | $      | 61,339 | 
|          |                |       |   |                    |        |                   |   |        |        |      |   |        |         |  |   |       

7.    Goodwill and Purchased Intangible Assets

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Prior to the adoption of SFAS 142, the Company periodically assessed the
impairment of long-lived assets, including identifiable intangibles in
accordance with the provisions of SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed of. The Company
also periodically assessed the impairment of enterprise level goodwill in
accordance with the provisions of Accounting Principles Board Opinion No. 17,
Intangible Assets (APB 17). As part of its review of its third quarter of
2001 financial results, the Company performed an impairment assessment of
identifiable intangible assets and goodwill in connection with all of its
acquisitions. 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 estimated fair market value. Fair market value
was determined based on discounted future cash flows for the acquisitions that
had separately identifiable cash flows. Prior to recording the impairment
charge, the Companys quarterly amortization expense was approximately $274.1
million compared to amortization expense of approximately $17.0 million in the
quarter following the impairment charge.

In the first quarter of 2002, the Company adopted SFAS 142. SFAS 142
supersedes APB 17 and states that goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. The Company has
not recorded any impairment charge during the nine months ended September 30,
2002. The Company plans to complete an annual impairment test during the
fourth quarter of 2002. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.

A reconciliation of previously reported net loss and net loss per share to
the amounts adjusted for the exclusion of amortization of goodwill and
assembled workforce, net of the related income tax effect, is as follows (in
thousands, except per share amounts):

|                                                           |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                           |  | Three Months Ended |            | Nine Months Ended
|                                                           |  | September 30,      |            | September 30,    
|                                                           |  |                    |            |                  
|                                                           |  | 2001               |            | 2002              |  | 2001 |         | 2002
|                                                           |  |                    |            |                   |  |      |         |     
|Net loss                                                   |  | $                  | (1,983,153 | )                 |  | $    | (13,603 | )    |  | $ | (2,572,592 | ) |  | $ | (56,909 | )
|Amortization of goodwill and
assembled workforce           |  |                    | 262,956    |                   |  |      |        |      |  |   | 786,058    |   |  |   |        |  
|                                                           |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Adjusted net loss                                          |  | $                  | (1,720,197 | )                 |  | $    | (13,603 | )    |  | $ | (1,786,534 | ) |  | $ | (56,909 | )
|Basic and diluted net loss per share                       |  |                    | (28.68     | )                 |  |      | (0.19   | )    |  |   | (38.00     | ) |  |   | (0.80   | )
|Amortization of goodwill and
assembled workforce per share |  |                    | 3.80       |                   |  |      | 0.00    |      |  |   | 11.61      |   |  |   | 0.00    |  
|                                                           |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  
|Adjusted basic and diluted net loss
per share              |  | $                  | (24.88     | )                 |  | $    | (0.19   | )    |  | $ | (26.39     | ) |  | $ | (0.80   | )
|                                                           |  |                    |            |                   |  |      |         |      |  |   |            |   |  |   |         |  

|                                                           |  |                         |         |      |  |      |          |   |  |   |            |  
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ---------- | -
|                                                           |  | Year Ended December 31,
|                                                           |  |                        
|                                                           |  | 1999                    |         | 2000 |  | 2001
|                                                           |  |                         |         |      |  |     
|Net loss                                                   |  | $                       | (22,390 | )    |  | $    | (768,478 | ) |  | $ | (2,609,435 | )
|Amortization of goodwill and
assembled workforce           |  |                         |        |      |  |      | 669,178  |   |  |   | 791,695    |  
|                                                           |  |                         |         |      |  |      |          |   |  |   |            |  
|Adjusted net loss                                          |  |                         | (22,390 | )    |  | $    | (99,300  | ) |  | $ | (1,817,740 | )
|Basic and diluted
net loss per share                       |  |                         | (1.46   | )    |  |      | (13.71   | ) |  |   | (38.25     | )
|Amortization of goodwill and
assembled workforce per share |  |                         | 0.00    |      |  |      | 11.94    |   |  |   | 11.60      |  
|                                                           |  |                         |         |      |  |      |          |   |  |   |            |  
|Adjusted basic and diluted net loss
per share              |  | $                       | (1.46   | )    |  | $    | (1.77    | ) |  | $ | (26.65     | )
|                                                           |  |                         |         |      |  |      |          |   |  |   |            |  

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Information regarding the Companys other intangible assets is as follows
(in thousands):

|                     |  |                   |        |                    |  |         |        |          |  |              |        |         |  |   |        |  |  |   |         |   |  |   |       | 
|-------------------- |  | ----------------- | ------ | ------------------ |  | ------- | ------ | -------- |  | ------------ | ------ | ------- |  | - | ------ |  |  | - | ------- | - |  | - | ----- | 
|                     |  | December 31, 2001 |        | September 30, 2002
|                     |  |                   |        |                   
|                     |  | Gross             |        |                    |  |         |        |          |  |              |        | Gross   |  |   |        |  |  |   |         |  
|                     |  | Carrying          |        | Accumulated        |  | Net     |        | Carrying |  | Accumulated  |        | Net    
|                     |  | Amount            |        | Amortization       |  | Balance |        | Amount   |  | Amortization |        | Balance
|                     |  |                   |        |                    |  |         |        |          |  |              |        |        
|Developed technology |  | $                 | 17,652 |                    |  | $       | (2,438 | )        |  | $            | 15,214 |         |  | $ | 17,652 |  |  | $ | (9,726  | ) |  | $ | 7,926 | 
|Customer list        |  |                   | 1,332  |                    |  |         | (216   | )        |  |              | 1,116  |         |  |   | 1,332  |  |  |   | (863    | ) |  |   | 469   | 
|                     |  |                   |        |                    |  |         |        |          |  |              |        |         |  |   |        |  |  |   |         |   |  |   |       | 
|Total                |  | $                 | 18,984 |                    |  | $       | (2,654 | )        |  | $            | 16,330 |         |  | $ | 18,984 |  |  | $ | (10,589 | ) |  | $ | 8,395 | 
|                     |  |                   |        |                    |  |         |        |          |  |              |        |         |  |   |        |  |  |   |         |   |  |   |       | 

E.piphany will continue to amortize other intangible assets of $8.4
million on a straight-line basis over their remaining useful lives.
Amortization of other intangible assets for the three and nine months ended
September 30, 2002 was $2.6 million and $7.9 million, respectively.
Amortization related to these intangibles is expected to be $2.6 million for
the remaining three months of 2002, $5.1 million for 2003 and $0.7 million for
2004.

Prior to the adoption of the new accounting pronouncements, the Companys
quarterly amortization expense was approximately $17.0 million compared to
amortization expense of approximately $2.6 million in the quarter following the
adoption.

8.    Minority Interest in Subsidiary

In April 2001, E.piphany established a consolidated subsidiary in Japan,
Nihon E.piphany K.K. Nihon E.piphany K.K. markets, sells and supports
E.piphanys products in Japan. Upon the incorporation of the subsidiary, Nihon
E.piphany K.K. issued a total of 284 shares of capital stock. E.piphany held
200 shares, or 70% of the subsidiarys total capital stock, and three local
executives of the subsidiary held an aggregate of 84 shares, or 30% of the
subsidiarys total capital stock, each holder having purchased shares for cash
consideration at par value of approximately $417 per share.

In May 2002, the subsidiary issued an additional 530 shares to E.piphany
in exchange for cash consideration of approximately $23,053 per share.
E.piphany currently holds 90% of the subsidiarys total capital stock and the
three local executives hold an aggregate of 10% of the subsidiarys capital
stock.

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ITEM 2.    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, statements
regarding our reliance on third parties and other statements using words such
as anticipate, believe, could, estimate, expect, plan, intend,
may, should, will and would or other similar words. 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 the Risk Factors
section of this quarterly report and the risks discussed in our other SEC
filings.

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. Since our inception, 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.

Sources of Revenue

We generate revenues principally from licensing our software products
directly to customers and providing related services including implementation,
consulting, support and training. Through September 30, 2002, substantially all
of our revenues were generated by our direct sales force. Our license
agreements generally provide that customers pay a software license fee to
perpetually use one or more software products within specified limits. The
amount of license fees vary depending on the software solution and the scope of
usage rights licensed. Customers can subsequently pay additional license fees
to expand the right to use previously licensed software products, or to
purchase additional software products. Each software solution included in the
E.piphany System contains the same core technology, allowing for easy
integration of additional software products as they are licensed from us. Our
software products are made available either on compact disc or electronically.

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

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Cost of Revenues and Operating Expenses

Our cost of license revenues primarily consist of license fees payable to
third parties for technology integrated into our products. Our cost of services
revenues primarily consist of salaries and related expenses for our
implementation, consulting, maintenance and training organizations, an
allocation of facilities, communications and depreciation expenses, cost of
reimbursable expenses and costs of subcontracting to consulting organizations
to provide consulting services to customers. Our operating expenses are
classified into three general categories: sales and marketing, research and
development, and general and administrative. We classify all charges to these
operating expense categories based on the nature of the expenditures. We
allocate the costs for overhead and facilities to each of the functional areas
that use the overhead and facilities services based on headcount. These
allocated charges include 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
they are incurred. Since license revenues from our software solutions are not
recognized until after technological feasibility has been established, software
development costs are not generally expensed in the same period in which
license revenues for the developed products are recognized.

Critical Accounting Policies and Estimates

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

Revenue Recognition

Licenses fees are recognized as revenue upon contract execution, provided
that all delivery obligations have been met, fees are fixed or determinable and
collection is probable. We consider all arrangements with payment terms
extending beyond six months to not be fixed and determinable, and revenue is
recognized as payments become due from the customer. If collection is not
considered probable, revenue is recognized when the fee is collected. We use
the residual method to recognize revenue when a license agreement includes one
or more elements to be delivered at a future date and vendor specific objective
evidence of the fair value of all undelivered elements exists. Under the
residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is recognized as revenue. If vendor
specific objective evidence does not exist to allocate the total fee to all
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 the term is 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 we
receive persuasive evidence that the reseller has sold the subject licenses
through to the end-user.

When licenses are sold together with consulting and implementation
services, license fees are recognized upon delivery, provided that (1) the
criteria set forth in the above paragraph have been met, (2) payment of the
license fees is not dependent upon the performance of the consulting and
implementation services, and (3) the services are not essential to the
functionality of the software. For arrangements that do not meet the above
criteria, both the product license revenues and services revenues are
recognized under the percentage of completion contract method in accordance
with the provisions of SOP 81-1, Accounting for Performance of Construction
Type and Certain Production Type Contracts. 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

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the contract progresses to completion. Revisions in profit estimates are
charged to income in the period in which the facts that give rise to the
revision become known. To date, when 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 license and services
revenues have been recognized pursuant to SOP 81-1. Prior to 2001, we were
primarily responsible for the implementation services with respect to the
majority of our license arrangements. During 2001 and 2002, third-party
consulting organizations have been primarily responsible for the implementation
services with respect to the majority of our license arrangements, and
therefore, less license revenues have been recognized pursuant to SOP 81-1.

Allowances for Doubtful Accounts

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

Goodwill and Purchased Intangible Assets

As discussed in Note 2 of Notes to Condensed Consolidated Financial
Statements, management evaluates long-lived assets, including goodwill and
other intangible assets, for impairment on an annual basis and whenever events
or changes in circumstances indicate that it is more likely than not that the
carrying value is not recoverable. Factors we consider important that could
trigger an impairment test include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets or the strategy
for our overall business, significant negative industry or economic trends, a
significant decline in our stock price for a sustained period, and our market
capitalization relative to net book value. When management determines that an
impairment test is necessary, we measure any impairment based on a projected
discounted cash flow method using a discount rate commensurate with the risk
inherent in our current business model. Significant judgment is required in the
development of projected cash flows for these purposes including assumptions
regarding the underlying forecasts of expected future revenue and expense and
the appropriate level of aggregation of cash flows, their term and discount
rate. The Company plans to complete an annual impairment test during the fourth
quarter of 2002. We have recorded significant impairment charges for goodwill
and intangible assets in the past and to the extent that events or
circumstances cause our assumptions to change, additional charges, which could
be material, may be required.

Restructuring Costs

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

Results of Operations

Revenues

Total revenues decreased to $19.8 million for the quarter ended September
30, 2002, from $29.2 million for the quarter ended September 30, 2001. Total
revenues decreased to $61.3 million for the nine months ended September

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30, 2002, from $100.8 million for the nine months ended September 30,
2001. The decrease in revenues was primarily due to fewer sales of our product
licenses and related services resulting mainly from an economic slowdown and a
significant decline in spending by companies on information technology. We
expect the economic slowdown to continue to adversely impact our revenue growth
for the next few quarters and perhaps significantly longer.

Product license revenues decreased to $6.8 million, or 34% of total
revenue, for the quarter ended September 30, 2002 from $16.2 million, or 55% of
total revenue, for the quarter ended September 30, 2001. Product license
revenues decreased to $24.5 million, or 40% of total revenue, for the nine
months ended September 30, 2002 from $54.9 million, or 54% of total revenue,
for the nine months ended September 30, 2001. This decrease in product license
revenues was primarily due to fewer sales of our product licenses and lower
average selling prices resulting primarily from the downturn in the economy and
weakness in information technology spending.

Services revenues were flat at $13.0 million, or 66% of total revenues,
for the quarter ended September 30, 2002 from $13.0 million, or 45% of
revenues, for the quarter ended September 30, 2001. Services revenues decreased
to $36.9 million, or 60% of total revenues, for the nine months ended September
30, 2002 from $45.9 million, or 46% of revenues, for the nine months ended
September 30, 2001. The decrease was due primarily to the decrease in product
license revenues. The decrease in professional services revenue was offset by
an increase in maintenance revenue attributable to new licenses sold.

The relative amount of services revenues as compared to license revenues
has varied depending on the number of new licenses sold, the extent to which
third-party consulting organizations are engaged directly by customers to
provide professional services, the nature of software products licensed, the
complexity of customers information technology environment, the resources
allocated by customers to implementation projects and the scope of licensed
rights. Services revenues have substantially lower margins relative to product
license revenues. This is especially the case when we are required to
subcontract with consulting organizations to supplement our internal
professional services organization. To the extent that services revenues
comprise a greater percentage of our total revenues, our overall gross margins
will decline provided that the change in composition is not offset by higher
service margins.

Cost of Revenues

Total cost of revenues decreased to $8.0 million for the quarter ended
September 30, 2002 as compared to $10.5 million for the quarter ended September
30, 2001. Total cost of revenues decreased to $24.8 million for the nine months
ended September 30, 2002 as compared to $49.5 million for the nine months ended
September 30, 2001. Cost of product license revenues consists primarily of
license fees paid to third parties under technology license arrangements, which
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 $7.7
million, or 59% of services revenues, for the quarter ended September 30, 2002
from $10.0 million, or 77% of services revenues, for the quarter ended
September 30, 2001. Cost of services revenues decreased to $23.9 million, or
65% of services revenues, for the nine months ended September 30, 2002 from
$47.8 million, or 104% of services revenues, for the nine months ended
September 30, 2001. The decrease in absolute dollars was the result of a
significant reduction in the number of internal professional services
employees. The decrease in cost of services as a percentage of revenue is
primarily due to a higher proportion of maintenance revenue, which has more
favorable margins.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses decreased to $8.3 million for the quarter ended September
30, 2002 from $10.1 million for the quarter ended September 30, 2001. Research
and development expenses decreased to $25.9 million for the nine months ended
September 30, 2002 from $32.4 million for the nine months ended September 30,
2001. The decrease in absolute dollars was primarily due to the restructuring
of our operations, which resulted in a reduction in the number of our employees
and a consolidation of our operating facilities. Research and development
expenses as a percentage of total revenues increased to 42% for the quarter
ended

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September 30, 2002 from 35% for the quarter ended September 30, 2001.
Research and development expenses as a percentage of total revenues increased
to 42% for the nine months ended September 30, 2002 from 32% for the nine
months ended September 30, 2001. We believe that investments in product
development are essential to our future success. Although the previous
restructuring of our operations has reduced our research and development
expenses for the current quarter, these expenses may increase over the longer
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
decreased to $12.2 million for the quarter ended September 30, 2002 from $21.9
million for the quarter ended September 30, 2001. Sales and marketing expenses
decreased to $41.8 million for the nine months ended September 30, 2002 from
$70.1 million for the nine months ended September 30, 2001. The decrease in
sales and marketing expenses in absolute dollars was primarily attributable to
the restructuring of our operations, which resulted in a reduction in the
number of our employees and a consolidation of our operating facilities. Sales
and marketing expenses as a percentage of total revenues decreased to 61% for
the quarter ended September 30, 2002 from 75% for the quarter ended September
30, 2001. Sales and marketing expenses as a percentage of total revenues
decreased to 68% for the nine months ended September 30, 2002 from 70% for the
nine months ended September 30, 2001. Although the previous restructuring of
our operations has reduced our sales and marketing expenses for the current
quarter, these expenses may increase over the longer 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 decreased to $3.1 million for
the quarter ended September 30, 2002 from $4.7 million for the quarter ended
September 30, 2001. General and administrative expenses decreased to $9.4
million for the nine months ended September 30, 2002 from $20.2 million for the
nine months ended September 30, 2001. The decrease in general and
administrative expenses in absolute dollars was primarily attributable to the
restructuring of our operations, which resulted in a reduction in the number of
our employees and a consolidation of our operating facilities. The decrease
for the nine months ended September 30, 2002 was also due to a decrease in bad
debt expense. General and administrative expenses as a percentage of total
revenues decreased to 15% for the quarter ended September 30, 2002 from 16% for
the quarter ended September 30, 2001. General and administrative expenses as a
percentage of total revenues decreased to 15% for the nine months ended
September 30, 2002 from 20% for the nine months ended September 30, 2001.
Although the previous restructuring of our operations has reduced our general
and administrative expenses for the current quarter, these expenses may
increase over the longer term.

Restructuring Costs

In the quarter ended September 30, 2001, we initiated a plan to
restructure our worldwide operations by reducing our workforce and
consolidating our operating facilities and recorded a restructuring charge of
$32.4 million. Additional charges of $10.5 million and $0.5 million were taken
during the quarters ended December 31, 2001 and March 31, 2002, respectively,
which primarily reflected changes in the estimated costs of abandoning certain
facilities associated with the plan initiated during the quarter ended
September 30, 2001. In the quarter ended June 30, 2002, we further reduced our
workforce and planned to abandon additional facilities, and recorded a
restructuring charge of $11.2 million. Additional charges of $0.4 million were
taken during the quarter ended September 30, 2002, which primarily reflected
changes in the estimated costs associated with the charge taken during the
quarter ended June 30, 2002.

Amortization and Write-Down of Goodwill and Purchased Intangibles

Our acquisitions of RightPoint Software, Inc., Octane Software, Inc.,
eClass Direct, Inc., iLeverage Corporation and Moss Software, Inc. 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 $2.6
million and $1.9 billion for the quarters ended September 30, 2002 and 2001,
respectively. The aggregate amortization and write-down of goodwill and other
intangible assets was $7.9 million and $2.5 billion for the nine months ended

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September 30, 2002 and 2001, respectively. The decrease was primarily due
to a decrease in the unamortized balance as a result of a $1.7 billion
impairment of goodwill and intangible assets charge taken during the third
quarter of 2001 and the adoption of SFAS 142, which ceases the systematic
amortization of goodwill. Please see Note 7 of Notes to Condensed Consolidated
Financial Statements for more detailed information.

Beginning on January 1, 2002, unamortized goodwill and other intangible
assets were subject to new accounting pronouncements SFAS No. 141 and SFAS No.
142 as described in Note 2 of Notes to Condensed Consolidated Financial
Statements. As a result, acquired goodwill and other intangible assets with
indefinite useful lives were no longer being amortized, but will continue to be
subject to impairment tests on an annual basis, and on an interim basis in
certain circumstances. SFAS 142 also requires the completion of a transitional
impairment test, with any impairment treated as a cumulative effect of change
in accounting principle. We completed the transitional impairment test upon
adoption, which did not result in an impairment charge. We have not recorded
any impairment charge during the nine months ended September 30, 2002. We plan
to complete an annual impairment test during the fourth quarter of 2002. We
have recorded significant impairment charges in the past and to the extent that
events or circumstances cause our assumptions to change, additional charges,
which could be material, may be required. We continue to amortize other
intangible assets of $8.4 million on a straight-line basis over their remaining
useful lives. Amortization related to these intangibles is currently expected
to be $2.6 million for the remaining three months of 2002, $5.1 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. This amount is being amortized over the respective vesting
periods of these equity instruments in a manner consistent with FASB
Interpretation No. 28. Total stock-based compensation was $0.4 million and $0.1
million for the quarters ended September 30, 2001 and 2002, respectively. Total
stock-based compensation was $1.2 million and $0.6 million for the nine months
ended September 30, 2001 and 2002, respectively.

Other Income, Net

Interest income, net of interest expense, decreased to $1.3 million for
the quarter ended September 30, 2002 from $3.0 million for the quarter ended
September 30, 2001. Interest income, net of interest expense, decreased to $4.4
million for the nine months ended September 30, 2002 from $12.6 million for the
nine months ended September 30, 2001. The decrease was due to a decrease in the
average rate of return on our investments and lower average cash and investment
balances.

Liquidity and Capital Resources

Net cash used in operating activities totaled $38.1 million and $55.2
million for the nine months ended September 30, 2002 and 2001, respectively.
Cash used in operating activities for each period resulted principally from net
losses in those periods, net of non-cash charges for depreciation, amortization
and write-down of goodwill and purchased intangibles, non-cash restructuring
expense, and stock-based compensation. Cash used in operating activities for
the nine months ended September 30, 2002 also resulted from decreases in
accrued liabilities and accounts payable, which was offset by a decrease in
accounts receivable and an increase in deferred revenue. Cash used in operating
activities for the nine months ended September 30, 2001 also resulted from
decreases in accrued liabilities and in deferred revenue, which was partially
offset by a decrease in accounts receivable.

Net cash used in investing activities totaled $44.1 million for the nine
months ended September 30, 2002 compared to $55.7 million used in investing
activities for the nine months ended September 30, 2001. Cash used in investing
activities for the nine months ended September 30, 2002 primarily resulted from
the purchase of investments. Cash used in investing activities for the nine
months ended September 30, 2001 primarily resulted from the purchase of
investments and property and equipment.

Net cash provided by financing activities totaled $5.4 million and $4.7
million for the nine months ended September 30, 2002 and 2001, respectively.
Cash provided by financing activities for the nine months ended September 30,
2002 primarily resulted from the receipt of proceeds from the issuance of
common stock pursuant to

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the exercise of stock options and purchases of stock from the employee
stock purchase plan. Cash provided by financing activities for the nine months
ended September 30, 2001 primarily resulted from the receipt of proceeds from
the issuance of common stock pursuant to the exercise of stock options and
purchases of stock from the employee stock purchase plan and from the repayment
of notes receivable offset by repayments on notes payable.

From time to time, we are required to obtain letters of credit that serve
as collateral for our obligations to third parties under facility lease
agreements. These letters of credit are secured by cash, cash equivalents,
short-term investments and long-term investments As of September 30, 2002, we
had $9.3 million securing letters of credit, all of which relate to facility
lease agreements that have expiration dates greater than twelve months.

We lease certain equipment and our facilities under capital and operating
lease agreements. The leases expire at various dates through 2017. Future
minimum lease payments under these leases as of September 30, 2002 were as
follows (in thousands):

|                         |  |         |     |           |  |   |        | 
|------------------------ |  | ------- | --- | --------- |  | - | ------ | 
|                         |  | Capital |     | Operating
|Year Ending December 31, |  | Leases  |     | Leases   
|                         |  |         |     |          
|2002                     |  | $       | 99  |           |  | $ | 3,849  | 
|2003                     |  |         | 154 |           |  |   | 14,523 | 
|2004                     |  |         |    |           |  |   | 11,432 | 
|2005                     |  |         |    |           |  |   | 8,949  | 
|2006                     |  |         |    |           |  |   | 6,293  | 
|2007 and thereafter      |  |         |    |           |  |   | 34,810 | 
|                         |  |         |     |           |  |   |        | 
|                         |  | $       | 253 |           |  | $ | 79,856 | 
|                         |  |         |     |           |  |   |        | 

Operating lease commitments shown above exclude adjustments for lease
income due under noncancelable subleases of excess facilities, which amounted
to $12.7 million as of September 30, 2002. In addition, operating lease
commitments shown above exclude accrued lease abandonment costs, which amounted
to $31.9 million as of September 30, 2002. We do not have commercial
commitments under lines of credit, standby lines of credit, guarantees, standby
repurchase obligations or other such arrangements.

We believe that our current cash and cash equivalents, short-term
investments and long-term investments will be sufficient to meet our
anticipated liquidity needs for working capital and capital expenditures for at
least the next twelve 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.

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RISK FACTORS

An investment in our common stock is very risky. You should carefully
consider the risks described below, together with all of the other information
in this quarterly report, before making an investment decision. 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 $56.9 million for the nine months ended
September 30, 2002, $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 $3.5 billion as of
September 30, 2002. We expect to continue to incur losses in the foreseeable
future. These losses will be substantial, and we may never become profitable.
Therefore, our operating results will be harmed if our revenue does not keep
pace with our 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 and industry specific economic conditions
do not improve, or continue to worsen.

Our revenues are dependent on the health of the economy and the growth of
our customers and potential future customers. If the economy does not improve,
our customers may continue to delay or reduce their spending on customer
relationship management software. When economic conditions weaken, sales cycles
for software products tend to lengthen and companies information technology
budgets tend to be reduced. When this happens, our revenues suffer and our
stock price may decline. Further, if the economic conditions in the United
States worsen or do not improve, or if a wider or global economic slowdown
occurs, we may experience a material adverse impact on our business, operating
results, and financial condition.

Competition from other software vendors could adversely affect our ability to
sell our products and 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 software, 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, Siebel Systems,
Unica 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 have and will continue to attempt to build capabilities into their
products that are similar to the capabilities of our products. Some of our
competitors products may be more effective than our products at performing
particular functions or be more customized for customers particular needs.
Even if these functions are more limited than those provided by our products,
our competitors software products could discourage potential customers from
purchasing our products. Further, our competitors may be able to respond more
quickly than we can to changes in customer requirements.

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

Our competitors have made and may 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. Our competitors may also
establish or strengthen cooperative relationships with our current or future
distributors or other parties with whom we have relationships, thereby

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limiting our ability to sell through these channels, reducing promotion of
our products and limiting the number of consultants available to implement our
software.

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



| |  |  | varying size, timing and contractual terms of orders for our products and services,                                                                                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to timely complete our service obligations related to product sales,                                                                                                                                        
|
| |  |  | changes in the mix of revenue attributable to higher-margin product
license revenue as opposed to substantially lower-margin service
revenue,                                                                           
|
| |  |  | customers decisions to defer or cancel orders or implementations,
particularly large orders or implementations, from one quarter to the
next,                                                                          
|
| |  |  | changes in demand for our software or for enterprise software generally,                                                                                                                                                
|
| |  |  | reductions in the rate at which opportunities in our pipeline convert into binding license agreements,                                                                                                                  
|
| |  |  | announcements or introductions of new products by our competitors,                                                                                                                                                      
|
| |  |  | software defects and other product quality problems,                                                                                                                                                                    
|
| |  |  | our ability to integrate acquisitions,                                                                                                                                                                                  
|
| |  |  | our ability to release new, competitive products on a timely basis,                                                                                                                                                     
|
| |  |  | any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting
organizations to help provide implementation services when our own
capacity is constrained,
|
| |  |  | restructuring and other non-recurring costs, including severance and lease abandonment cost, and                                                                                                                        
|
| |  |  | our ability to hire, train and retain qualified engineering, consulting, training, sales and other personnel.                                                                                                           

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.

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

Although no single customer accounted for more than 10% of total revenues
for the three or nine months ended September 30, 2002, a few large license
transactions may account for a substantial amount of our license revenues. For
example, for the three months ended March 31, 2002, revenues from a customer
accounted for 12% of total revenues. If a customer or potential customer
cancels or does not enter into an anticipated large transaction, or delays the
transaction beyond the end of the quarter, our financial results may be
materially adversely affected.

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 maintain 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 manage our internal professional services
organization to keep pace with our customers needs, we may 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 qualified
subcontractors, our ability to sell software for which these services are
required will be harmed and our revenues will suffer.

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

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



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

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

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 liability claims. Although our license agreements
with customers typically contain provisions designed to limit our exposure,
some courts may not enforce all or part of these limitations. Although we have
not experienced any such liability claims to date, we may encounter these
claims in the future. Liability claims, whether or not successful, could:



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

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| |  |  | be expensive to defend, and   
| | - |  | ------------------------------
|
| |  |  | result in large damage awards.

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

We do not have substantial experience in international markets.

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



| |  |  | unexpected changes in regulatory requirements, taxes, trade laws and tariffs,                    
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | differing intellectual property rights,                                                          
|
| |  |  | differing labor regulations,                                                                     
|
| |  |  | unexpected changes in regulatory requirements,                                                   
|
| |  |  | changes in a specific countrys or regions political or economic conditions,                    
|
| |  |  | greater difficulty in establishing, staffing and managing foreign operations,                    
|
| |  |  | the complexity and cost of developing and maintaining international versions of our products, and
|
| |  |  | fluctuating exchange rates.                                                                      

Our international operations require a significant amount of attention
from our management and substantial financial resources. As of September 30,
2002, we had 113 employees located in Asia, Australia, Canada, Europe, and
Latin America.

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

Our service revenues, which includes fees for consulting, implementation,
maintenance and training services, were 60% of our revenues for the nine months
ended September 30, 2002, 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 nine months ended September 30, 2002 and for the years ended
December 31, 2001, 2000 and 1999 was 65%, 97%, 101% and 102%, respectively, of
our service revenues. A decrease in the percentage of total revenues
represented by license 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 number and amount of licenses sold,                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | the extent to which customers obtain services directly from us rather
than from third party consulting organizations,

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| |  |  | the nature of the software products licensed,                                                      
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | the complexity of the customers information technology environment,                               
|
| |  |  | the resources allocated by customers to their implementation projects,                             
|
| |  |  | the extent to which customers desire to customize our software products,                           
|
| |  |  | the scope of licensed rights, and                                                                  
|
| |  |  | the extent to which licenses expand rights to use previously installed E.piphany software products.

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

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

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

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. Our customers frequently require that
we provide services directly to our customers, especially when such customers
have licensed new releases of our products. 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.

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

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



| |  |  | the complex nature of our products,                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | our need to educate potential customers about the uses and benefits of our products,                                
|
| |  |  | the purchase of our products requires a significant investment of resources by a customer,                          
|
| |  |  | our customers have budget cycles which affect the timing of purchases,                                              
|
| |  |  | uncertainty regarding future economic conditions,                                                                   
|
| |  |  | many of our potential customers require competitive evaluation and
internal approval before purchasing our products,

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| |  |  | 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 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.

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

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



| |  |  | not understand or see the benefits of using these products,                
| | - |  | ---------------------------------------------------------------------------
|
| |  |  | not achieve favorable results using these products,                        
|
| |  |  | experience technical difficulty in implementing or using these products, or
|
| |  |  | use alternative methods to solve the same or similar business problems.    

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, BearingPoint
(formerly KPMG Consulting), Deloitte & Touche, and IBM; resellers, including
Accenture, Hewlett-Packard and Harte-Hanks; hardware and software technology
platform partners including IBM and Sun Microsystems, as well as outsourcing or
application services providers that use our software products to provide hosted
services to their customers over the Internet, including Harte-Hanks 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 typically require these third parties to devote substantial
resources to promoting, selling and supporting our products. We therefore have
little control over the actions of these third parties. We cannot assure you
that we can generate and maintain relationships that offset the significant
time and effort that are necessary to develop these relationships. In addition,
our pricing policies and contract terms with our distribution partners are
designed to support each partner with a minimum level of channel conflict. If
we fail to minimize channel conflicts between our direct sales force and our
channel partners, or among our channel partners, our operating results and
financial condition could be harmed.

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

We have grown quickly, both through acquisitions and hiring, at times
since our inception. Recently, however, we have restructured our operations
by, among other things, reducing the size of our workforce. Although we have
significantly reduced our expenses, we may need to further reduce expenses in
the future. If we are not able to effectively address the effects of reducing
the workforce, such as the deterioration of employee morale and productivity,
and the general reduction of available human resources, our business may be
harmed. In addition, future expansion in the size of our business will require
that we hire, train and integrate new personnel in key areas. If future
expansion becomes necessary and we are unable to successfully expand our
workforce, our revenues will be harmed.

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

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



| |  |  | introduce new and improved customer relationship management software
products,                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | improve the effectiveness and performance of our software,
particularly in implementations involving very large databases and large
numbers of simultaneous users,
|
| |  |  | enhance the flexibility and configurability of our software to enable
our customers to better address their needs at a lower cost of
deployment and maintenance.  
|
| |  |  | enhance our softwares ease of use and administration,                                                                                                            
|
| |  |  | develop software for vertical markets,                                                                                                                            
|
| |  |  | make available international versions of our software,                                                                                                            
|
| |  |  | improve our softwares ability to extract data from existing software systems, and                                                                                
|
| |  |  | adapt to rapidly changing computer operating system and database standards and Internet technology.                                                               

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

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

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

In order to operate our products, they 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 also have and continue to develop products to
be compliant with J2EE standards. This capability affords our customers greater
flexibility in the deployment of our software products. If we fail to
successfully develop and maintain products compatible with these operating
systems, database versions or programming standards, we may lose sales and
revenues. In addition, users access our products on their network through
standard Internet browsers such as Microsoft Internet Explorer. If we fail to
obtain access to developer versions of any of these software products, we may
be unable to build and enhance our products on schedule. After installation,
our products collect and analyze data to profile customers characteristics and
preferences. This data may be stored in a variety of our customers existing
software systems, including systems from Oracle, PeopleSoft, Siebel Systems and
SAP, running on a variety of computer operating systems. If we fail to enhance
our software to collect data from new versions of these products, we may lose
potential and existing customers. If we lose customers, our revenues and
profitability may be harmed.

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

In order to grow our business, we need to increase market awareness of our
company and products and enhance the effectiveness and productivity of our
direct sales force and indirect sales channels. If we fail to do so, this
failure

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could harm our revenues. We currently receive substantially all of our
revenues from direct sales, but we may increase sales through indirect sales
channels in the future.

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

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

From time to time, patent holders contact us for the purpose of licensing
to us various intellectual property rights. We cannot assure you that the
holder of the patents will not file litigation against us or that we would
prevail in the case of such litigation. Any litigation regarding intellectual
property rights could be costly and time-consuming and divert the attention of
our management and key personnel from our business operations. This is true
even if we are ultimately successful in defending against such litigation. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement might also require us to enter into costly royalty or license
agreements. Further, we may not be able to obtain royalty or license agreements
on terms acceptable to us, or at all. We also may be subject to significant
damages or an injunction 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.

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

In addition, we typically charge for our software based on the number of
users at a particular site that will be permitted to use the software.
Customers that have licenses to use our products could allow unauthorized use
of our software. Unauthorized use is difficult to detect and, to the extent
that our software is used without authorization, we may lose potential license
fees.

The loss of key personnel, or 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 advance our business.
Competition for qualified personnel in high technology is high, notwithstanding
a weakening economy, 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 stock options are priced above market
value may choose not to remain employed by us. In that case, our ability to
attract or retain employees will be adversely affected.

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

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

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. If 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 members of 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 also
would be required to provide advance notice

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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.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 quarterly report.

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, Canada, 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.

Interest Rate Risk

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

As of September 30, 2002, we had cash and cash equivalents of $115.5
million that consisted of cash and highly liquid short-term investments having
original maturity dates of no more than 90 days. Declines in interest rates
over time would reduce interest income from our cash and cash equivalents.
Based upon our balance of cash and cash equivalents, a decrease in interest
rates of 100 basis points would cause a corresponding decrease in our annual
interest income of approximately $1.2 million. Due to the nature of our highly
liquid short-term investments and their maturities, an increase in interest
rates would not materially change the fair market value of our cash and cash
equivalents.

As of September 30, 2002, we had short-term investments, long-term
investments and restricted cash of $173.3 million that consisted of taxable
fixed income securities having original maturity dates between three months and
two years. Declines in interest rates over time would reduce our interest
income from our short-term investments, long-term investments and restricted
cash. Based upon our balance of short-term investments, long-term investments
and restricted cash, a decrease in interest rates of 100 basis points would
cause a corresponding decrease in our annual interest income of approximately
$1.7 million. Increases in interest rates would cause the fair market value of
our portfolio to decline. Based upon our balance of short-term investments,
long-term investments and restricted cash, an immediate and uniform increase in
interest rates of 100 basis points would cause the fair market value of our
portfolio to decrease by approximately $1.2 million.

As of September 30, 2002, we did not have any debt outstanding other than
capital lease obligations.

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The following summarizes our investments and the weighted average yields
as of September 30, 2002 (in thousands, except interest rates):

|                            |  |                        |        |      |  |      |        |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|--------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | - |  |  | - | - |  |  | - | - |  |  | - | ------- | -
|                            |  | Expected maturity date
|                            |  |                       
|                            |  | 2002                   |        | 2003 |  | 2004 |        | 2005 |  | 2006 |        | Thereafter |  | Total
|                            |  |                        |        |      |  |      |        |      |  |      |        |            |  |      
|Corporate bonds             |  | $                      | 17,851 |      |  | $    | 38,430 |      |  | $    |       |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 56,281  |  
|Weighted average yield      |  |                        | 2.12   | %    |  |      | 2.39   | %    |  |      |       |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.30    | %
|Government notes/bonds      |  | $                      | 29,486 |      |  | $    | 40,750 |      |  | $    | 37,416 |            |  |       |  |  |  |   |  |  |  |   |  |  |  | $ | 107,652 |  
|Weighted average yield      |  |                        | 2.14   | %    |  |      | 1.77   | %    |  |      | 1.93   | %          |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.28    | %
|                            |  |                        |        |      |  |      |        |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|Total investment securities |  | $                      | 47,337 |      |  | $    | 79,180 |      |  | $    | 37,416 |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 163,933 |  
|                            |  |                        |        |      |  |      |        |      |  |      |        |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  

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ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within the 90 days prior to the date of this quarterly report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (pursuant to Exchange Act Rules 240.13a-14(c) and 15d-14(c)). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our current disclosure controls and procedures are effective and
timely.

Changes in Internal Controls

There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.

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PART II:    OTHER INFORMATION




ITEM 1.    LEGAL PROCEEDINGS

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

The Company, three of our current and former officers, and three
underwriters in our initial public offering (IPO) were named as defendants in
a consolidated shareholder lawsuit in the United States District Court for the
Southern District of New York, In re E.piphany, Inc. Initial Public Offering
Securities Litigation,01-CV-6158. This is one of a number of actions
coordinated for pretrial purposes as In re Initial Public Offering Securities
Litigation,21 MC 92. Plaintiffs in the coordinated proceeding have brought
claims under the federal securities laws against numerous underwriters,
companies, and individuals, alleging generally that defendant underwriters
engaged in improper and undisclosed activities concerning the allocation of
shares in the IPOs of more than 300 companies during the period from late 1998
through 2000. Among other things, plaintiffs allege that the underwriters
customers had to pay excessive brokerage commissions and purchase additional
shares of stock in the aftermarket in order to receive favorable allocations of
shares in an IPO. The consolidated amended complaint in our case seeks
unspecified damages on behalf of a purported class of purchasers of our common
stock between September 21, 1999 and December 6, 2000. The court has appointed
a lead plaintiff for the consolidated action. The underwriter and issuer
defendants have filed motions to dismiss. The individual defendants have been
dismissed from the action without prejudice pursuant to a tolling agreement. We
believe we have meritorious defenses to the claims against us and will defend
ourselves vigorously.




ITEM 5.    OTHER INFORMATION

Deadline for Receipt of Stockholder Proposals for 2003 Annual Meeting of
Stockholders

Stockholders may present proposals for action at future meetings of
stockholders only if they comply with the proxy rules established by the
Securities and Exchange Commission, applicable Delaware law and our Certificate
of Incorporation and Bylaws. Stockholder proposals to be presented at our 2003
annual meeting of stockholders must be delivered to the secretary of the
corporation at our principal executive offices not earlier than January 26,
2003 or later than February 25, 2003; provided, however, that if the date of
the annual meeting is advanced more than 30 days prior to or delayed by more
than 30 days after May 30, 2003, notice by the stockholder must be delivered
not later than the close of business on the later of (i) the 90th day prior to
such annual meeting or (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made.




ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



| | (a) | Exhibits                          
| | --- | ----------------------------------
|
| |     | See Exhibit Index attached hereto.
|
| | (b) | Reports on Form 8-K               
|
| |     | None.                             

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|      |                   |  |            |  |                                                                                                   
|----- | ----------------- |  | ---------- |  | --------------------------------------------------------------------------------------------------
|      | E.PIPHANY, INC.  
|     
|DATE: | November 13, 2002 |  | SIGNATURE: |  | /s/    Roger S. SiboniRoger S. Siboni
President, Chief Executive
Officer and Chairman of the Board
|     
|     
|DATE: | November 13, 2002 |  | SIGNATURE: |  | /s/    Kevin J. YeamanKevin J. Yeaman
Chief Financial Officer                                     

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CERTIFICATIONS

I, Roger S. Siboni, certify that:

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

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

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

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

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

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

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

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

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

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

6.    The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

| |                                                              
| | -------------------------------------------------------------
| | /s/    Roger S. SiboniRoger S. Siboni
Chief Executive Officer

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I, Kevin J. Yeaman, certify that:

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

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

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

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

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

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

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

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

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

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

6.    The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

| |                                                              
| | -------------------------------------------------------------
| | /s/    Kevin J. YeamanKevin J. Yeaman
Chief Financial Officer

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EXHIBIT INDEX

|       |  |                                                                                                                                                                                
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit Title                                                                                                                                                                  
|       |  |                                                                                                                                                                                
|3.1*   |  | Restated Certificate of Incorporation of the Registrant.                                                                                                                       
|      
|      
|      
|      
|3.2    |  | Restated Bylaws of the Registrant.                                                                                                                                             
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|4.1*   |  | Form of Stock Certificate.                                                                                                                                                     
|      
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|10.1   |  | Restated 1999 Employee Stock Purchase Plan                                                                                                                                     
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|99.1   |  | Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.



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