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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|      |  |                                                                                          
|      |  | For the quarterly period ended March 31, 2002                                            
|      |  |                                                                                          
|      |  | OR                                                                                       
|      |  |                                                                                          
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-26881

E.PIPHANY, INC.

(Exact Name as Registrant specified in its charter)


|                                                              |  |                                        
|------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                      |  | 77-0443392                             
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification Number)

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

(Address of principal executive offices)


(650) 356-3800
(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 April 30, 2002, was 72,093,164.





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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                           
|PART II: OTHER INFORMATION                          
|                                                     | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                     | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                                     | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                                     | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                     | ITEM 5. OTHER INFORMATION                                                                    
|                                                     | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                          
|EXHIBIT INDEX                                       



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E.PIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2002

TABLE OF CONTENTS

|           |  |                                                                                              |  |         
|---------- |  | -------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                              |  | Page No.
|           |  |                                                                                              |  |         
|PART I     |  | FINANCIAL INFORMATION                                                                        |  |         
|          
|Item 1.    |  | Financial Statements                                                                         |  |         
|           |  | Condensed Consolidated Balance Sheets - As of December 31, 2001 and March 31, 2002           |  | 3       
|           |  | Condensed Consolidated Statements of Operations - Three months ended March 31, 2001 and 2002 |  | 4       
|           |  | Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 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        |  | 13      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 30      
|          
|PART II    |  | OTHER INFORMATION                                                                            |  |         
|          
|Item 1.    |  | Legal Proceedings                                                                            |  | 32      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                    |  | 32      
|Item 3.    |  | Defaults Upon Senior Securities                                                              |  | 32      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                          |  | 32      
|Item 5.    |  | Other Information                                                                            |  | 32      
|Item 6.    |  | Exhibits and reports on Form 8-K                                                             |  | 33      
|          
|SIGNATURES |  |                                                                                              |  | 34      





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PART I: FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS




E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                        |                                                   |                                            |        |              |         |           |        |             |         | 
|--------------------------------------- | ------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------- | --------- | ------ | ----------- | ------- | 
|                                        |                                                   |                                            |        | December 31, |         | March 31,
|                                        |                                                   |                                            |        | 2001         |         | 2002     
|                                        |                                                   |                                            |        |              |         |          
|                                        |                                                   |                                            |        |              |         |           |        | (unaudited)
|ASSETS                                  |                                                   |                                            |        |              |         |           |        |            
|Current assets:                         |                                                   |                                            |        |              |         |           |        |            
|                                        | Cash and cash equivalents                         |                                            | $      | 202,940      |         |           | $      | 167,041     |        
|                                        | Short-term investments                            |                                            |        | 121,324      |         |           |        | 141,522     |        
|                                        | Accounts receivable, net                          |                                            |        | 13,703       |         |           |        | 16,258      |        
|                                        | Prepaid expenses and other assets                 |                                            |        | 3,866        |         |           |        | 3,255       |        
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total current assets                       |        |              | 341,833 |           |        |             | 328,076 | 
|Property and equipment, net             |                                                   |                                            | 22,320 |              |         |           | 19,964 |            
|Goodwill and purchased intangibles, net |                                                   |                                            | 98,113 |              |         |           | 95,465 |            
|Other assets                            |                                                   |                                            | 3,589  |              |         |           | 3,488  |            
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total assets                               |        | $            | 465,855 |           |        | $           | 446,993 | 
|                                        |                                                   |                                            |        |              |         |           |        |            
|LIABILITIES AND STOCKHOLDERS EQUITY    |                                                   |                                            |        |              |         |           |        |            
|Current liabilities:                    |                                                   |                                            |        |              |         |           |        |            
|                                        | Current portion of capital lease obligations      |                                            | $      | 498          |         |           | $      | 467         |        
|                                        | Accounts payable                                  |                                            |        | 2,537        |         |           |        | 1,240       |        
|                                        | Accrued liabilities                               |                                            |        | 11,260       |         |           |        | 10,561      |        
|                                        | Accrued compensation                              |                                            |        | 11,873       |         |           |        | 12,298      |        
|                                        | Current portion of restructuring costs            |                                            |        | 8,954        |         |           |        | 8,199       |        
|                                        | Deferred revenue                                  |                                            |        | 15,380       |         |           |        | 15,845      |        
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total current liabilities                  |        |              | 50,502  |           |        |             | 48,610  | 
|                                        | Restructuring costs, net of current portion       |                                            |        | 23,454       |         |           |        | 21,303      |        
|                                        | Capital lease obligations, net of current portion |                                            |        | 156          |         |           |        | 34          |        
|                                        | Other long-term liabilities                       |                                            |        | 316          |         |           |        | 310         |        
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total liabilities                          |        |              | 74,428  |           |        |             | 70,257  | 
|Minority interest                       |                                                   |                                            | 35     |              |         |           | 35     |            
|Stockholders equity:                   |                                                   |                                            |        |              |         |           |        |            
|                                        | Common stock                                      |                                            |        | 7            |         |           |        | 7           |        
|                                        | Additional paid-in capital                        |                                            |        | 3,807,410    |         |           |        | 3,809,736   |        
|                                        | Stockholders notes receivable                    |                                            |        | (778         | )       |           |        | (778        | )      
|                                        | Accumulated other comprehensive loss              |                                            |        | (564         | )       |           |        | (946        | )      
|                                        | Deferred compensation                             |                                            |        | (901         | )       |           |        | (520        | )      
|                                        | Accumulated deficit                               |                                            |        | (3,413,782   | )       |           |        | (3,430,798  | )      
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total stockholders equity                 |        |              | 391,392 |           |        |             | 376,701 | 
|                                        |                                                   |                                            |        |              |         |           |        |            
|                                        |                                                   | Total liabilities and stockholders equity |        | $            | 465,855 |           |        | $           | 446,993 | 
|                                        |                                                   |                                            |        |              |         |           |        |            

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

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E.PIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

|                                                              |                                                    |                          |        |                    |          |      |        |        |         |  
|------------------------------------------------------------- | -------------------------------------------------- | ------------------------ | ------ | ------------------ | -------- | ---- | ------ | ------ | ------- | -
|                                                              |                                                    |                          |        | Three Months Ended
|                                                              |                                                    |                          |        | March 31,         
|                                                              |                                                    |                          |        |                   
|                                                              |                                                    |                          |        | 2001               |          | 2002
|                                                              |                                                    |                          |        |                    |          |     
|                                                              |                                                    |                          |        | as adjusted (1)    |          |      |        |       
|Revenues:                                                     |                                                    |                          |        |                    |          |      |        |       
|                                                              | Product license                                    |                          | $      | 22,432             |          |      | $      | 10,911 |        
|                                                              | Services (1)                                       |                          |        | 16,867             |          |      |        | 11,235 |        
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Total revenues           |        |                    | 39,299   |      |        |        | 22,146  |  
|                                                              |                                                    |                          |        |                    |          |      |        |       
|Cost of revenues:                                             |                                                    |                          |        |                    |          |      |        |       
|                                                              | Product license                                    |                          |        | 744                |          |      |        | 246    |        
|                                                              | Services (1)                                       |                          |        | 22,729             |          |      |        | 8,164  |        
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Total cost of revenues   |        |                    | 23,473   |      |        |        | 8,410   |  
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Gross profit             |        |                    | 15,826   |      |        |        | 13,736  |  
|                                                              |                                                    |                          |        |                    |          |      |        |       
|Operating expenses:                                           |                                                    |                          |        |                    |          |      |        |       
|                                                              | Research and development                           |                          |        | 11,419             |          |      |        | 8,616  |        
|                                                              | Sales and marketing                                |                          |        | 23,978             |          |      |        | 16,927 |        
|                                                              | General and administrative                         |                          |        | 8,639              |          |      |        | 3,246  |        
|                                                              | Restructuring costs                                |                          |        |                   |          |      |        | 494    |        
|                                                              | Amortization of goodwill and purchased intangibles |                          |        | 270,436            |          |      |        | 2,648  |        
|                                                              | Stock-based compensation                           |                          |        | 290                |          |      |        | 377    |        
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Total operating expenses |        |                    | 314,762  |      |        |        | 32,308  |  
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Loss from operations     |        |                    | (298,936 | )    |        |        | (18,572 | )
|Other income, net                                             |                                                    |                          | 3,541  |                    |          |      | 1,556  |       
|                                                              |                                                    |                          |        |                    |          |      |        |       
|                                                              |                                                    | Net loss                 |        | $                  | (295,395 | )    |        | $      | (17,016 | )
|                                                              |                                                    |                          |        |                    |          |      |        |       
|Basic and diluted net loss per share                          |                                                    | $                        | (4.48  | )                  |          | $    | (0.24  | )     
|                                                              |                                                    |                          |        |                    |          |      |        |       
|Shares used in computing basic and diluted net loss per share |                                                    |                          | 65,943 |                    |          |      | 70,736 |       
|                                                              |                                                    |                          |        |                    |          |      |        |       



|(1) |  | Pursuant to the Financial Accounting Standards Board Staff announcement
(Topic No. D-103), reimbursable expenses have been reclassified into
revenues, with a corresponding increase in cost of revenues for the three
months ended March 31, 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.

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E.PIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |         |       |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------- | ------------------ | ------- | ------- | ----- | ------ | ------- | -
|                                                              |                                                                              |                                                                             |                                   |                                           |         | Three Months Ended
|                                                              |                                                                              |                                                                             |                                   |                                           |         | March 31,         
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   
|                                                              |                                                                              |                                                                             |                                   |                                           |         | 2001               |         | 2002   
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Cash flows from operating activities:                         |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              | Net loss                                                                     |                                                                             | $                                 | (295,395                                  | )       |                    | $       | (17,016 | )    
|                                                              | Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                             |                                   |                                           |         |                    |         |         |      
|                                                              |                                                                              | Depreciation and amortization                                               |                                   |                                           | 852     |                    |         |         | 2,597 |       
|                                                              |                                                                              | Provision for doubtful accounts                                             |                                   |                                           | 2,000   |                    |         |         | 298   |       
|                                                              |                                                                              | Stock-based compensation                                                    |                                   |                                           | 290     |                    |         |         | 377   |       
|                                                              |                                                                              | Noncash restructuring costs                                                 |                                   |                                           |        |                    |         |         | 371   |       
|                                                              |                                                                              | Amortization of goodwill and purchased intangibles                          |                                   |                                           | 270,436 |                    |         |         | 2,648 |       
|                                                              |                                                                              | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                   |                                           |         |                    |         |         |       |       
|                                                              |                                                                              |                                                                             | Accounts receivable               |                                           |         | (2,061             | )       |         |       | (2,853 | )      
|                                                              |                                                                              |                                                                             | Prepaid expenses and other assets |                                           |         | (1,179             | )       |         |       | 712    |        
|                                                              |                                                                              |                                                                             | Accounts payable                  |                                           |         | 772                |         |         |       | (1,297 | )      
|                                                              |                                                                              |                                                                             | Accrued liabilities               |                                           |         | 205                |         |         |       | (332   | )      
|                                                              |                                                                              |                                                                             | Restructuring costs               |                                           |         |                   |         |         |       | (2,906 | )      
|                                                              |                                                                              |                                                                             | Deferred revenue                  |                                           |         | (2,773             | )       |         |       | 465    |        
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              |                                                                              |                                                                             |                                   | Net cash used in operating activities     |         |                    | (26,853 | )       |       |        | (16,936 | )
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Cash flows from investing activities:                         |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              | Purchases of property and equipment                                          |                                                                             |                                   | (4,662                                    | )       |                    |         | (398    | )    
|                                                              | Acquisition related costs and changes in accruals                            |                                                                             |                                   | (75                                       | )       |                    |         | 51      |      
|                                                              | Purchases and sales of investments, net                                      |                                                                             |                                   | (18,434                                   | )       |                    |         | (20,441 | )    
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              |                                                                              |                                                                             |                                   | Net cash used in investing activities     |         |                    | (23,171 | )       |       |        | (20,788 | )
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Cash flows from financing activities:                         |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              | Principal payments on capital lease obligations                              |                                                                             |                                   | (175                                      | )       |                    |         | (153    | )    
|                                                              | Repayments on notes receivable                                               |                                                                             |                                   | 1,023                                     |         |                    |         |        |      
|                                                              | Proceeds from sale of common stock, net of repurchases                       |                                                                             |                                   | 1,456                                     |         |                    |         | 2,116   |      
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|                                                              |                                                                              |                                                                             |                                   | Net cash provided by financing activities |         |                    | 2,304   |         |       |        | 1,963   |  
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Effect of foreign exchange rates on cash and cash equivalents |                                                                              |                                                                             | 226                               |                                           |         |                    | (138    | )      
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Net decrease in cash and cash equivalents                     |                                                                              |                                                                             | (47,494                           | )                                         |         |                    | (35,899 | )      
|Cash and cash equivalents at beginning of period              |                                                                              |                                                                             | 319,634                           |                                           |         |                    | 202,940 |        
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        
|Cash and cash equivalents at end of period                    |                                                                              | $                                                                           | 272,140                           |                                           |         | $                  | 167,041 |        
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                    |         |        

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

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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). Certain information and footnote disclosures normally
included in 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
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 results
for the three months ended March 31, 2002. The results for the three months
ended March 31, 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 included the accounts of E.piphany
and its subsidiaries. As of March 31, 2002, the Company had one subsidiary,
Nihon E.piphany, K.K., as to which it maintained less than 100% ownership. All
intercompany accounts and transactions have been eliminated in consolidation.

Foreign Currency Translation

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

Use of Estimates in Preparation of Financial Statements

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

Impairment of Long-Lived Assets and Identifiable Intangible Assets

The Company evaluates long-lived assets and certain identifiable
intangibles for impairment on a periodic basis 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.

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Revenue Recognition

E.piphany recognizes revenue according to the following:

Licenses.Fees from licenses are recognized as revenue upon contract
execution, provided all delivery obligations have been met, fees are fixed or
determinable, collection is probable, and vendor specific objective evidence
exists to allocate the total fee between all delivered and undelivered elements
of the arrangement. If vendor specific objective evidence does not exist to
allocate the total fee to all delivered and undelivered elements of the
arrangement, revenue is deferred until the earlier of the time at which (1)
such evidence does exist for the undelivered elements, or (2) all elements are
delivered. Fees from license agreements that include the right to receive
unspecified future products are recognized over the term of the arrangement or,
if not specified, the estimated economic life of the product. When we receive
license fees from resellers, we recognize revenue when the above criteria have
been met and the reseller has sold the subject licenses through to the
end-user.

When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the
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 dont meet the above
criteria, both the product license revenues and services revenues are
recognized in accordance with the provisions of Statement of Position 81-1,
Accounting for Performance of Construction Type and Certain Production Type
Contracts (SOP 81-1). When reliable estimates are available for the costs
and efforts necessary to complete the implementation services, we account for
the arrangements under the percentage of completion contract method pursuant to
SOP 81-1. When such estimates are not available, the completed contract method
is utilized. To date, when E.piphany has been primarily responsible for the
implementation of the software, services have been considered essential to the
functionality of the software products and therefore license and service
revenues have been recognized pursuant to SOP 81-1. Prior to the first quarter
of 2001, E.piphany was primarily responsible for the implementation services
with respect to the majority of its license arrangements. Since the first
quarter of 2001, 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 software updates to customers.
Revenue on technical support and software update rights is recognized ratably
over the term of the maintenance agreement and is included in services revenue
in the accompanying consolidated statements of operations.

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

The American Institute of Certified Public Accountants issued Statement Of
Position 97-2, Software Revenue Recognition, (SOP 97-2) in October 1997.
The Company believes it is in compliance with this standard. E.piphany adopted
SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions, on January 1, 2000 which has had no material impact
on the Companys financial position or results of operations.

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

Accounts Receivable and Deferred Revenue

Accounts receivable consists of amounts due from customers for which
revenue has been recognized. Deferred revenue consists of amounts received from
customers for which revenue has not been recognized. This generally results
from license revenue being deferred until all requirements under SOP 97-2 and
SOP 81-1 are met, from amounts paid in advance for maintenance contracts and
from professional services revenues being deferred until services are rendered.
Deferred license revenue is recognized upon delivery of our product, as
services are rendered,

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or as other requirements requiring deferral under SOP 97-2 and SOP 81-1
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.

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

The carrying value of the Companys financial instruments, including cash
and cash equivalents, investments, and accounts receivable approximates fair
market value. Financial instruments that subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, investments and
trade accounts receivable. Management believes that financial risks associated
with these financial instruments are minimal. The Company maintains its cash
and cash equivalents and investments with high quality financial institutions.
The Companys customers mainly are resident of businesses 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.

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

|           |  |                    |   |                  |  |      |    |      |  |              |   |           |  |  |    |  
|---------- |  | ------------------ | - | ---------------- |  | ---- | -- | ---- |  | ------------ | - | --------- |  |  | -- | -
|           |  | % of               |   |                  |  |      |    |      |  |             
|           |  | Total Revenues     |   |                  |  |      |    |      |  |             
|           |  |                    |   |                  |  |      |    |      |  |             
|           |  | Three Months Ended |   | % of Accounts   
|           |  | March 31,          |   | Receivable as of
|           |  |                    |   |                 
|           |  |                    |   |                  |  |      |    |      |  | December 31, |   | March 31,
|           |  | 2001               |   | 2002             |  | 2001 |    | 2002
|           |  |                    |   |                  |  |      |    |     
|Customer A |  |                    |  |                  |  |      | 12 | %    |  |              |  |           |  |  | 13 | %

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, 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. Amortization of goodwill and other intangible assets for the quarter
ended March 31, 2002 was $2.6 million. Beginning on January 1, 2002, our
unamortized balance of goodwill and other intangible assets was subject to the
new accounting pronouncements SFAS 141 and SFAS 142. As a result, acquired
goodwill was no longer amortized, but will continue to be subject to a periodic
impairment assessment. We will continue to amortize other intangible assets of
$13.6 million on a straight-line basis over their remaining useful lives.
Amortization related to these intangibles is expected to be $7.9 million for
2002, $5.0 million for 2003 and $0.7 million for 2004.

In November 2001, the Emerging Issues Task Force (EITF) reached
consensus on EITF No. 01-09, 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 did not have a material effect on our financial position or
results of operations.

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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 FASB staff concluded that reimbursements received for out of
pocket expenses incurred should be characterized as revenue in the income
statement. Historically, we have recorded reimbursements as a reduction of cost
of services revenues. Beginning in the first quarter of 2002, we have adopted
Topic D-103 and have recorded reimbursable expenses as revenue. For all
comparative periods, reimbursable expenses have been reclassified into
revenues, with a corresponding increase in cost of revenues. The impact of
Topic D-103 on revenues and cost of revenues for the quarter ended March 31,
2001 and 2002 is presented as follows (in thousands):

|                                              |  |                    |        |      |  |   |        | 
|--------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|                                              |  | Three Months Ended
|                                              |  | March 31,         
|                                              |  |                   
|                                              |  | 2001               |        | 2002
|                                              |  |                    |        |     
|Services revenues (as historically presented) |  | $                  | 15,645 |      |  | $ | 10,861 | 
|Impact of Topic D-103                         |  |                    | 1,222  |      |  |   | 374    | 
|                                              |  |                    |        |      |  |   |        | 
|Services revenues (as currently presented)    |  | $                  | 16,867 |      |  | $ | 11,235 | 
|                                              |  |                    |        |      |  |   |        | 

|                                                      |  |                    |        |      |  |   |       | 
|----------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ----- | 
|                                                      |  | Three Months Ended
|                                                      |  | March 31,         
|                                                      |  |                   
|                                                      |  | 2001               |        | 2002
|                                                      |  |                    |        |     
|Cost of services revenues (as historically presented) |  | $                  | 21,507 |      |  | $ | 7,790 | 
|Impact of Topic D-103                                 |  |                    | 1,222  |      |  |   | 374   | 
|                                                      |  |                    |        |      |  |   |       | 
|Cost of services revenues (as currently presented)    |  | $                  | 22,729 |      |  | $ | 8,164 | 
|                                                      |  |                    |        |      |  |   |       | 

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

3. Stockholders Equity

Stock-Based Compensation

Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of our common stock
and compensation related to equity instruments issued to non-employees for
services rendered. In connection with the grant of certain stock options to
employees during the years ended December 31, 1999, 2000 and 2001 and the
quarter ended March 31, 2002, we recorded deferred compensation of
approximately $2.8 million, $0.0 million, $1.4 million, and $0.0 million,
respectively. As of March 31, 2002, deferred compensation remaining to be
amortized totaled $0.5 million. 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 $0.3
million and $0.4 million for the quarters ended March 31, 2001 and 2002,
respectively. Based on our deferred compensation balance as of December 31,
2001, we expect amortization of approximately $0.2 million, $0.1 million, $0.1
million and $0.1 million for the remaining nine months of 2002 and the years
ended December 31, 2003, 2004 and 2005, respectively.

Comprehensive Income (Loss)

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, (SFAS No. 130) which E.piphany adopted beginning on January 1, 1998.
Under SFAS No. 130, standards are established 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 a measure of
all changes in equity of an enterprise that results from transactions and other
economic events of the period other than transactions with stockholders.
Comprehensive income is the total of net income and all other non-owner changes
in equity. For the three months ended March 31, 2001 and 2002, E.piphanys
comprehensive income (loss) did not differ materially from reported net loss.

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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
|                                                                                      |  | March 31,         
|                                                                                      |  |                   
|                                                                                      |  | 2001               |          | 2002
|                                                                                      |  |                    |          |     
|Net loss                                                                              |  | $                  | (295,395 | )    |  | $ | (17,016 | )
|                                                                                      |  |                    |          |      |  |   |         |  
|Basic and diluted:                                                                    |  |                    |          |      |  |   |         |  
|Weighted average shares of common stock outstanding                                   |  |                    | 68,594   |      |  |   | 71,190  |  
|Less: Weighted average shares subject to repurchase                                   |  |                    | (2,651   | )    |  |   | (454    | )
|                                                                                      |  |                    |          |      |  |   |         |  
|Weighted average shares used in computing basic
and diluted net loss per common share |  |                    | 65,943   |      |  |   | 70,736  |  
|                                                                                      |  |                    |          |      |  |   |         |  
|Basic and diluted net loss per common share                                           |  | $                  | (4.48    | )    |  | $ | (0.24   | )
|                                                                                      |  |                    |          |      |  |   |         |  

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
|                                                                                                                                                                                                                         |  | March 31,         
|                                                                                                                                                                                                                         |  |                   
|                                                                                                                                                                                                                         |  | 2001               |        | 2002
|                                                                                                                                                                                                                         |  |                    |        |     
|Options excluded due to the exercise price
exceeding the average fair market value of
the Companys common stock during the
period                                                                                       |  |                    | 8,414  |      |  |  | 4,830  | 
|Options excluded for which the exercise
price was less than the average fair market
value of the Companys common stock during
the period but were excluded as inclusion
would decrease the Companys net loss per
share |  |                    | 3,484  |      |  |  | 8,915  | 
|Common shares excluded resulting from
common stock subject to repurchase                                                                                                                                                 |  |                    | 2,651  |      |  |  | 454    | 
|                                                                                                                                                                                                                         |  |                    |        |      |  |  |        | 
|Total common stock equivalents excluded
from diluted net loss per common share                                                                                                                                           |  |                    | 14,549 |      |  |  | 14,199 | 
|                                                                                                                                                                                                                         |  |                    |        |      |  |  |        | 

5. Commitments and Contingencies

Litigation

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

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

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

Restructuring Costs

In the quarter ended September 30, 2001, the Company initiated a plan to
restructure its worldwide operations, by, among other things, reducing its
workforce and consolidating its operating facilities. This plan was executed
during the quarters ended September 30, 2001, December 31, 2001 and March 31,
2002. Over these three quarters, the restructuring activities resulted in a
total charge of $43.5 million. Of this total charge, $8.8 million was paid in

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cash and $5.2 million reflects a non-cash charge taken during the quarters
ended September 30, 2001, December 31, 2001 and March 31, 2002. Adjustments to
the restructuring reserves will be made in future periods, if necessary, based
upon the then current actual events and circumstances.

The following table summarizes restructuring charges taken through March
31, 2002 (in thousands):

|                                    |                                             |   |              |        |         |   |          |     |          |   |           |        |   |   |      |      |            |   |        |        |  
|----------------------------------- | ------------------------------------------- | - | ------------ | ------ | ------- | - | -------- | --- | -------- | - | --------- | ------ | - | - | ---- | ---- | ---------- | - | ------ | ------ | -
|                                    |                                             |   | Accrued      |        |         |   |          |     |          |   |           |        |   |   |      |      | Accrued   
|                                    |                                             |   | Balance at   |        |         |   |          |     |          |   |           |        |   |   |      |      | Balance at
|                                    |                                             |   | December 31, |        | Total   |   | Cash     |     | Non Cash |   | March 31,
|                                    |                                             |   | 2001         |        | Charges |   | Payments |     | Activity |   | 2002     
|                                    |                                             |   |              |        |         |   |          |     |          |   |          
|Severance and related charges       |                                             | $ | 58           |        |         | $ | 1,070    |     |          | $ | (914      | )      |   | $ | (214 | )    |            | $ |       |       
|Write-off of property and equipment |                                             |   |             |        |         |   | 157      |     |          |   |          |        |   |   | (157 | )    |            |   |       |       
|Lease termination costs             |                                             |   | 32,350       |        |         |   | (733     | )   |          |   | (2,115    | )      |   |   |     |      |            |   | 29,502 |       
|                                    |                                             |   |              |        |         |   |          |     |          |   |           |        |   |   |      |      |            |   |        |       
|                                    | Total                                       |   |              | 32,408 |         |   | $        | 494 |          |   | $         | (3,029 | ) |   | $    | (371 | )          |   |        | 29,502 |  
|                                    |                                             |   |              |        |         |   |          |     |          |   |           |        |   |   |      |      |            |   |        |       
|                                    | Less: current portion                       |   |              | (8,954 | )       |   |          |     |          |   |           |        |   |   |      |      |            |   |        | (8,199 | )
|                                    |                                             |   |              |        |         |   |          |     |          |   |           |        |   |   |      |      |            |   |        |       
|                                    | Restructuring costs, net of
current portion |   | $            | 23,454 |         |   |          |     |          |   |           |        |   |   |      |      |            |   | $      | 21,303 |  
|                                    |                                             |   |              |        |         |   |          |     |          |   |           |        |   |   |      |      |            |   |        |       

Severance and related charges primarily consisted of involuntary
termination benefits, including the acceleration of certain stock option grants
in connection with terminated employees, and payroll taxes. Lease termination
costs are based on estimated exit costs associated with the abandonment of
certain leased facilities in Atlanta, Boston, Chicago, New York, San Mateo, and
Singapore for the remaining lease terms. These lease termination costs reflect
remaining lease liabilities and brokerage fees stated at actual cost reduced by
estimated sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information trend analyses provided by a commercial real estate brokerage firm
retained by the Company. Actual future cash requirements may differ materially
from the accrual balance at March 31, 2002. As of March 31, 2002, $29.5 million
of lease termination costs, net of anticipated sublease income, remains accrued
and is expected to be utilized by 2013.

6. Segment Information

SFAS No. 131 Disclosures About Segments of an Enterprise and Related
Information requires a new basis of determining reportable business segments
(i.e., the management approach). This approach requires that business segment
information used by the chief operating decision maker to assess performance
and manage company resources be the source for segment information disclosure.
On this basis, E.piphany is organized and operates as one business segment,
which manages the design, development, marketing, and sale of software
solutions and related services. The Company distributes its products in the
United States and in foreign countries through the sales personnel of E.piphany
and indirect channel partners.

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

|          |                |       |   |                    |        |      |   |        |        | 
|--------- | -------------- | ----- | - | ------------------ | ------ | ---- | - | ------ | ------ | 
|          |                |       |   | Three Months Ended
|          |                |       |   | March 31,         
|          |                |       |   |                   
|          |                |       |   | 2001               |        | 2002
|          |                |       |   |                    |        |     
|Revenues: |                |       |   |                    |        |      |   |       
|          | United States  |       | $ | 30,055             |        |      | $ | 17,296 |       
|          | United Kingdom |       |   | 7,781              |        |      |   | 1,758  |       
|          | Rest of World  |       |   | 1,463              |        |      |   | 3,092  |       
|          |                |       |   |                    |        |      |   |       
|          |                | Total |   | $                  | 39,299 |      |   | $      | 22,146 | 
|          |                |       |   |                    |        |      |   |       

7. Goodwill and Other Intangible Assets

The Company periodically assesses the impairment of long-lived assets,
including identifiable intangibles in accordance with the provisions of SFAS
No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of. The Company also periodically assesses the
impairment of enterprise level goodwill in accordance with the provisions of
Accounting Principals Board Opinion No. 17, Intangible Assets. 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

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impairment indicators included, but were not limited to, the significant
decline in the Companys stock price, the net book value of assets, which
significantly exceeded the Companys market capitalization, and the overall
decline in industry growth rates, which have negatively impacted the Companys
revenues and forecasted revenue growth rates, which precipitated the Companys
reduction in workforce and overall restructuring in the quarter ended September
30, 2001. As a result, the Company recorded a $1.7 billion impairment charge to
reduce goodwill and other intangible assets associated with all of its
acquisitions to reflect their current estimated fair market value. Fair market
value was determined based on discounted future cash flows for the acquisitions
that had separately identifiable cash flows. Prior to recording the impairment
charge, the Companys quarterly amortization expense was approximately $270.0
million compared to amortization expense of approximately $17.0 million in the
quarter following the impairment charge.

Beginning on January 1, 2002, amortization charges were subject to the new
accounting pronouncements described in Note 2 of Notes to Condensed
Consolidated Financial Statements. 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.

The Company performs periodic assessments regarding the recoverable value
of our goodwill and other intangible assets and at March 31, 2002 the Company
concluded that no factors existed that would indicate that an additional
write-down was needed.

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. has issued a total of 280 shares of
capital stock to date. E.piphany holds 196 shares, or 70% of the subsidiarys
total capital stock, and three local employees of the subsidiary hold 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 $416.67 per share. Nihon E.piphany K.K. markets, sells and
supports E.piphanys products in Japan. As of March 31, 2002, a minority
interest of approximately $35,000 was shown on E.piphanys Condensed
Consolidated Balance Sheets in order to reflect the original investment in
Nihon E.piphany K.K. made by the minority investors.

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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, and statements
regarding our reliance on third parties. All forward-looking statements
included in this document are based on information available to us as of the
date hereof, and we assume no obligation to update any such forward-looking
statement. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including but
not limited to, those discussed in 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.

Source of Revenues and Revenue Recognition Policy

We generate revenues principally from licensing our software solutions
directly to customers and providing related services including implementation,
consulting, support and training. Through March 31, 2002, substantially all of
our revenues were generated by our direct sales force. Our license agreements
generally provide that customers pay a software license fee to perpetually use
one or more software solutions within specified limits. The amount of the
license fee varies 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 solutions, or to purchase
additional software solutions. Each software solution included in the E.piphany
System contains the same core technology, allowing for easy integration of
additional software solutions as they are licensed from us. Our software
solutions are made available either on compact disc or electronically.

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

Fees from licenses are recognized as revenue upon contract execution,
provided that all delivery obligations have been met, fees are fixed or
determinable, collection is probable, and vendor specific objective evidence
exists to allocate the total fee between all delivered and undelivered elements
of the arrangement. If vendor specific objective evidence does not exist to
allocate the total fee to all delivered and undelivered elements of the
arrangement, revenue is deferred until the earlier of the time at which (1)
such evidence does exist for the undelivered elements, or

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(2) all elements are delivered. Fees from license agreements that include
the right to receive unspecified future products are recognized over the term
of the arrangement or, if not specified, the estimated economic life of the
product. When we receive license fees from resellers, we recognize revenue when
the above criteria have been met and the reseller has sold the subject licenses
through to the end-user.

When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the
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 dont meet the above
criteria, both the product license revenues and services revenues are
recognized in accordance with the provisions of SOP 81-1, Accounting for
Performance of Construction Type and Certain Production Type Contracts. When
reliable estimates are available for the costs and efforts necessary to
complete the implementation services, we account for the arrangements under the
percentage of completion contract method pursuant to SOP 81-1. When such
estimates are not available, the completed contract method is utilized. To
date, when we have been primarily responsible for the implementation of the
software, services have been considered essential to the functionality of the
software products and therefore license and services revenues have been
recognized pursuant to SOP 81-1. Prior to the first quarter of 2001, E.piphany
was primarily responsible for the implementation services with respect to the
majority of its license arrangements. Since the first quarter of 2001,
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 generally require that we provide technical support
and software updates to customers. Revenue from technical support and software
updates is recognized ratably over the term of the maintenance agreement and is
included in services revenue in the accompanying consolidated statements of
operations. We also provide consulting, implementation and training services to
our customers separately from our sales of product licenses. Revenue from such
services is generally recognized as the services are performed.

Deferred revenue consists of amounts received from customers for which
revenue has not been recognized. This generally results from license revenue
being deferred until all requirements under SOP 97-2 and SOP 81-1 are met, from
amounts paid in advance for maintenance contracts and from professional
services revenues being deferred until services are rendered. Deferred license
revenue is recognized upon delivery of our product, as services are rendered,
or as other requirements requiring deferral under SOP 97-2 and SOP 81-1 are
satisfied. Deferred maintenance revenue is recognized ratably over the term of
the maintenance agreement and deferred services revenue is recognized as
services are rendered.

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, support 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 their headcount. These allocated charges
include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment.

Software development costs incurred prior to the establishment of
technological feasibility are included in research and development costs as
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

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the

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

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

Where our internal services organization is providing services that are
essential to the functionality of the software, we recognize revenue and profit
as implementation services are performed on software license arrangements,
using the percentage of completion method, which relies on estimates of total
expected contract revenue and costs. We follow this method since reasonably
dependable estimates of the revenue and costs applicable to various stages of a
contract can be made. Recognized revenues and profit are subject to revisions
as the contract progresses to completion. Revisions in profit estimates are
charged to income in the period in which the facts that give rise to the
revision become known.

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required which would result in an additional general and administrative expense
in the period such determination is made.

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

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

We took a restructuring charge in the quarter ended September 30, 2001
that resulted in an accrual to be used primarily to offset future rent expense,
net of sublease income, that is related to abandoned properties. The accrual
will also be used to offset future severance and benefit expenses related to
the reduction of our workforce. We took further related charges in the
quarters ended December 31, 2001 and March 31, 2002 in order to adjust our
initial accrual, on the basis of revised estimates. We have worked with
external real estate experts in each of the markets in which the properties are
located to determine the best estimate of the accrual. However, if the real
estate market continues to worsen and we are not able to sublease the
properties as expected, additional adjustments to the accrual may be required,
which would result in additional restructuring costs in the period in which
such determination is made. Likewise, if the real estate market strengthens,
and we are able to sublease the properties earlier or at more favorable rates
than projected, adjustments to the accrual may be required that would increase
net income in the period in which such determination is made.

Recent Event

During the second quarter, we have taken steps as part of our ongoing
program to bring the company closer to its goal of profitability. In this
regard, we expect headcount at the end of the second quarter to be less than
550 employees, compared to 662 at the end of the first quarter of 2002. We
expect to record an associated restructuring charge during the second quarter.

Results of Operations

Revenues

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Total revenues decreased to $22.1 million for the quarter ended March 31,
2002, from $39.3 million for the quarter ended March 31, 2001. The decrease in
revenues was primarily due to fewer sales of our product licenses and related
services resulting from an economic slowdown and a significant decline in
spending by companies on information technology. The decrease was also due to
the change in our strategy from fulfilling most of our customers
implementation needs with our internal services professionals to encouraging
our customers to contract directly with third-party integrators. If our
revenues remain at or about the level reported for the first quarter of 2002,
our annual revenues for 2002 will decline as compared to 2001.

Product license revenues decreased to $10.9 million, or 49% of total
revenue, for the quarter ended March 31, 2002 from $22.4 million, or 57% of
total revenue, for the quarter ended March 31, 2001. This decrease in product
license revenues was primarily due to fewer sales of our product licenses
resulting from the downturn in the economy and weakness in information
technology spending.

Services revenues decreased to $11.2 million, or 51% of total revenues,
for the quarter ended March 31, 2002 from $16.9 million, or 43% of revenues,
for the quarter ended March 31, 2001. The decrease was due in part to the
decrease in product license revenues and in part to the change in our strategy
from fulfilling most of our customers implementation needs with our internal
services professionals to encouraging our customers to contract directly with
third-party integrators. We do not realize any services revenues when our
customers contract directly with third-party integrators. This approach was
adopted in conjunction with our overall strategy to strengthen our alliances
with system integrators that recommend and implement our software on customers
computer systems. The decrease in professional services revenue was offset by
an increase in maintenance revenue attributable to renewal maintenance
contracts sold to our existing customers.

The relative amount of services revenues as compared to license revenues
has varied depending on the extent to which third party consulting
organizations are engaged directly by customers to provide professional
services, the nature of the solution that has been licensed, the complexity of
customers information technology environment, the resources allocated by
customers to implementation projects and the scope of licensed rights. Services
revenues have substantially lower margins relative to product license revenues.
This is especially true when we are required to subcontract with consulting
organizations to supplement our internal professional services organization. To
the extent that services revenues become a greater percentage of our total
revenues and services margins do not increase, our overall gross margins will
decline.

Cost of Revenues

Total cost of revenues decreased to $8.4 million for the quarter ended
March 31, 2002 as compared to $23.5 million for the quarter ended March 31,
2001. Cost of product license revenues consists primarily of license fees paid
to third parties under technology license arrangements and have not been
significant to date. Cost of services revenues consists primarily of the costs
of consulting, maintenance and training services.

Cost of services revenues decreased to $8.2 million, or 73% of services
revenues, for the quarter ended March 31, 2002 from $22.7 million, or 135% of
services revenues, for the quarter ended March 31, 2001. The decrease was the
result of a significant reduction in the number of internal professional
services employees due to the change in our strategy from fulfilling all of our
customers consulting needs with our internal services professionals to
encouraging our customers to contract directly with third-party integrators.
This approach was adopted in conjunction with our overall strategy to
strengthen our alliances with system integrators that recommend and implement
our software. The decrease in cost of services as a percentage of revenue 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 $8.6 million for the quarter ended March 31,
2002 from $11.4 million for the quarter ended March 31, 2001. Research and
development expenses as a percentage of total revenues increased to 39% for the
quarter ended March 31, 2002 from 29% for the quarter ended March 31,

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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. The increase in
research and development expenses as a percentage of total revenues was due to
the decrease in total revenues for the quarter ended March 31, 2002 compared to
the same quarter in the prior year. We believe that investments in product
development are essential to our future success. We anticipate that research
and development expenses will increase in absolute dollars over the long-term.

Sales and Marketing

Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
decreased to $16.9 million for the quarter ended March 31, 2002 from $24.0
million for the quarter ended March 31, 2001. Sales and marketing expenses as
a percentage of total revenues increased to 76% for the quarter ended March 31,
2002 from 61% for the quarter ended March 31, 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. If we maintain
our sales and marketing expenses at the level of the first quarter of 2002, our
annual expenses for 2002 will be lower as compared to 2001. We anticipate,
however, that these expenses may increase in absolute dollars over the
long-term.

General and Administrative

General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance, legal and administrative
personnel. General and administrative expenses decreased to $3.2 million for
the quarter ended March 31, 2002 from $8.6 million for the quarter ended March
31, 2001. General and administrative expenses as a percentage of total revenues
decreased to 15% for the quarter ended March 31, 2002 from 22% for the quarter
ended March 31, 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. If we maintain our general and
administrative expenses at the level of the first quarter of 2002, our annual
expenses for 2002 will be lower as compared to 2001. However we anticipate that
these expenses may increase in absolute dollars over the long-term.

Restructuring Costs

In the third quarter of 2001, our Board of Directors approved a plan to
restructure our worldwide operations including a reduction in workforce and the
consolidation of our operating facilities. The restructuring resulted in a
charges of $32.4 million $10.5 million and $0.5 million for the three months
ended September 30, 2001, December 31, 2001 and March 31, 2002, respectively.
Please see Note 5 in the Notes to Condensed Consolidated Financial Statements
for more detailed information.

Amortization of Goodwill and Purchased Intangibles

Our acquisitions of Moss Software, Inc., Octane Software, Inc., eClass
Direct, Inc., iLeverage Corporation and RightPoint 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 of goodwill and other intangible assets was $2.6 million and
$270.4 million for the quarters ended March 31, 2002 and 2001, respectively.
The decrease in amortization was primarily due to a decrease in the unamortized
balance as a result of the $1.7 billion impairment of goodwill and intangible
assets charge taken during the third quarter of 2001. Please see Note 7 in the
Notes to Condensed Consolidated Financial Statements for more detailed
information.

Beginning on January 1, 2002, our unamortized balance of goodwill and
other intangible assets was subject to the new accounting pronouncements SFAS
No. 141 and SFAS No. 142 as described in Note 2 in the Notes to Condensed
Consolidated Financial Statements. As a result, acquired goodwill will no
longer be amortized, but is subject to a periodic impairment assessment. We
will continue to amortize other intangible assets of $13.6 million on a
straight-line basis over their remaining useful lives. Amortization related to
these intangibles is currently expected to be $7.9 million for the remaining
nine months of 2002, $5.0 million for 2003 and $0.7 million for 2004.

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Stock-Based Compensation

Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of our common stock
and compensation related to equity instruments issued to non-employees for
services rendered. In connection with the grant of certain stock options to
employees during the years ended December 31, 1999, 2000 and 2001, we recorded
deferred compensation of approximately $2.8 million, $0.0 million and $1.4
million, respectively. As of March 31, 2002, deferred compensation remaining to
be amortized totaled $0.5 million. 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 $0.3
million and $0.4 million for the quarters ended March 31, 2001 and 2002,
respectively. Based on our deferred compensation balance as of December 31,
2001, we expect amortization of approximately $0.2 million, $0.1 million, $0.1
million and $0.1 million for the remaining nine months of 2002 and the years
ended December 31, 2003, 2004 and 2005, respectively.

Other Income (Expense), Net

Interest income, net of interest expense, decreased to $1.6 million for
the quarter ended March 31, 2002 from $3.5 million for the quarter ended March
31, 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 $16.9 million and $26.9
million for the three months ended March 31, 2002 and 2001, respectively. Cash
used in operating activities for each period resulted principally from net
losses in those periods. Cash used in operating activities for the three months
ended March 31, 2002 also resulted from decreases in accounts payable and
accrued restructuring costs and an increase in accounts receivable. Cash used
in operating activities for the three months ended March 31, 2001 also resulted
from an increase in accounts receivable, and prepaid expenses and other assets,
and a decrease in deferred revenue.

Net cash used in investing activities totaled $20.8 million for the three
months ended March 31, 2002 compared to $23.2 million used in investing
activities for the three months ended March 31, 2001. Cash used in investing
activities for the three months ended March 31, 2002 primarily resulted from
the purchase of investments. Cash used in investing activities for the three
months ended March 31, 2001 primarily resulted from the purchase of investments
and property and equipment.

Net cash provided by financing activities totaled $2.0 million and $2.3
million for the three months ended March 31, 2002 and 2001, respectively. Cash
provided by financing activities for the three months ended March 31, 2002
primarily resulted from the receipt of proceeds from the issuance of common
stock pursuant to the exercise of stock options. Cash provided by financing
activities for the three months ended March 31, 2001 primarily resulted from
the receipt of proceeds from the issuance of common stock pursuant to the
exercise of stock options and from the repayment of notes receivable.

From time to time, we are required to obtain letters of credit that
collateralize our obligations to third-parties under facility lease agreements.
These letters of credit are secured by cash, cash equivalents and short-term
investments. In February 2002, we renewed four secured letters of credit
totaling $5.2 million, which expire in February 2003. In July 2001, we renewed
a secured letter of credit totaling $0.5 million, which expires in July 2002.
In October 2001, we renewed a secured letter of credit totaling $0.4 million,
which expires in October 2002. In November 2001, we renewed a secured letter of
credit totaling $3.3 million, which expires in November 2002.

We lease certain equipment and our facilities under capital and operating
lease agreements. The leases expire at various dates through 2013. Future
minimum lease payments under these leases as of March 31, 2002 were as follows
(in thousands):

|                         |  |         |     |           |  |   |        | 
|------------------------ |  | ------- | --- | --------- |  | - | ------ | 
|                         |  | Capital |     | Operating
|Year Ending December 31, |  | Leases  |     | Leases   
|                         |  |         |     |          
|2002                     |  | $       | 463 |           |  | $ | 11,191 | 
|2003                     |  |         | 34  |           |  |   | 13,803 | 
|2004                     |  |         |    |           |  |   | 11,248 | 

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|                         |  |         |     |           |  |   |        | 
|------------------------ |  | ------- | --- | --------- |  | - | ------ | 
|                         |  | Capital |     | Operating
|Year Ending December 31, |  | Leases  |     | Leases   
|                         |  |         |     |          
|2005                     |  |         |    |           |  |   | 8,859  | 
|2006                     |  |         |    |           |  |   | 6,356  | 
|2007 and thereafter      |  |         |    |           |  |   | 36,604 | 
|                         |  |         |     |           |  |   |        | 
|                         |  | $       | 497 |           |  | $ | 88,061 | 
|                         |  |         |     |           |  |   |        | 

Operating lease payments shown above exclude adjustments for lease income
due under noncancelable subleases of excess facilities, which
amounted to $5.9 million as of March 31, 2002. We do not have commercial commitments under
lines of credit, standby lines of credit, guarantees, standby repurchase
obligations or other such arrangements.

As of March 31, 2002, our principal sources of liquidity included $167.0
million of cash and cash equivalents and $141.5 million in short-term
investments. We believe that our current cash and cash equivalents and
short-term investments will be sufficient to meet our anticipated liquidity
needs for working capital and capital expenditures for at least 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 $17.0 million for the quarter ended March 31,
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 $3.4 billion as of March 31, 2002. We
expect to continue to incur losses in the foreseeable future. These losses will
be substantial, and we may not ever become profitable. Therefore, our operating
results will be harmed if our revenue does not keep pace with our expenses or
is not sufficient for us to achieve profitability. If we do achieve
profitability in any period, it cannot be certain that we will sustain or
increase profitability on a quarterly or annual basis.

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

Our revenues are dependent on the health of the economy and the growth of
our customers and potential future customers. If the economy remains stagnant,
our customers may continue to delay or reduce their spending on 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 if a wider or global economic slowdown occurs, we may
experience a material adverse impact on our business, operating results, and
financial condition.

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

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



| |  |  | varying size, timing and contractual terms of orders for our products and services,                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to timely complete our service obligations related to product sales,                                                             
|
| |  |  | changes in the mix of revenue attributable to higher-margin product
license revenue as opposed to substantially lower-margin service
revenue,

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| |  |  | customers decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next,                                                                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in demand for our software or for enterprise software generally,                                                                                                                                                     
|
| |  |  | announcements or introductions of new products by our competitors,                                                                                                                                                           
|
| |  |  | software defects and other product quality problems,                                                                                                                                                                         
|
| |  |  | our ability to integrate acquisitions,                                                                                                                                                                                       
|
| |  |  | our ability to release new, competitive 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, 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.

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

In any quarter, a few large license transactions at the end of the quarter
may account for a substantial amount of our license revenue. For the three
months ended March 31, 2002 revenues from a customer accounted for 12% of total
revenues. For the three months ended March 31, 2001, no single accounted for
more than 10% 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. In this regard, a major customer recently
informed us that it sought to reevaluate its customer relationship management
software requirements. As a result, we did not recognize revenue from an
executed transaction with this customer as previously anticipated, and we
cannot assure you that we will ever recognize revenue from this transaction.

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

Our service revenues, which includes fees for consulting, implementation,
maintenance and training, were 51% of our revenues for the quarter ended March
31, 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
quarter ended March 31, 2002 and for the years ended December 31, 2001, 2000
and 1999 was 73%, 97%, 101% and 102%, respectively, of our service revenues. An
increase in the percentage of total revenues represented by service revenues
could adversely affect our overall gross margins.

Service revenues as a percentage of total revenues and cost of service
revenues as a percentage of total revenues have varied significantly from
quarter-to-quarter due to our relatively early stage of development. The amount
and profitability of services can depend in large part on:

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

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

We focus on providing software solutions rather than services. As a
result, we encourage our customers to purchase consulting and implementation
services directly from third party consulting organizations instead of
purchasing these services from us. While we do not receive any fees directly
from these consulting organizations when they contract directly with our
customers, we believe that these consulting organizations increase market
awareness and acceptance of our software solutions and allow us to focus on
software development and licensing. If consulting organizations are unwilling
or unable to provide a sufficient level and quality of service directly to our
customers or if customers are unwilling to contract directly with these
consulting organizations, we may not realize these benefits and our revenues
and profitability may be harmed.

Further, to the extent that consulting organizations do not provide
consulting and implementation services directly to our customers, we need to
provide these services to our customers. We provide these services to our
customers either directly through our internal professional services
organization or indirectly through subcontractors we hire to perform these
services on our behalf. Because our margins on service revenues are less than
our margins on license revenues, our overall margins decline when we provide
these services to customers. This is particularly true if we hire
subcontractors to perform these services because it costs us more to hire
subcontractors to perform these services than to provide the services
ourselves.

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

Customers that license our products typically require consulting and
implementation services and can obtain them from our internal professional
services organizations, or from outside consulting organizations. When we are
primarily responsible for the implementation services, we generally recognize
revenue from the licensing of our software products as the implementation
services are performed. If our internal professional services organization does
not effectively implement our products, or if we are unable to 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.

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 AG, Siebel Systems
and Xchange.

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Many of these companies have significantly greater financial, technical,
marketing, sales, service and other resources than we do. Many of these
companies also have a larger installed base of users, have been in business
longer and/or have greater name recognition than we do. In addition, some large
companies may attempt to build capabilities into their products that are
similar to the capabilities of our products. Some of our competitors products
may be more effective than our products at performing particular functions or
be more customized for customers particular needs. Even if these functions are
more limited than those provided by our products, our competitors software
products could discourage potential customers from purchasing our products.
Further, our competitors may be able to respond more quickly than we can to
changes in customer requirements. In addition, our products must integrate with
software solutions provided by a number of our existing or potential
competitors. These competitors could alter their products so that our products
no longer integrate with them.

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

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

If the market 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 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 solutions and
professional services. To achieve increased market acceptance of our products,
we must, among other things, continue to:



| |  |  | improve and introduce new customer relationship management software
solutions,                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | improve the effectiveness and performance of our software,
particularly in implementations involving very large databases and large
numbers of simultaneous users,
|
| |  |  | enhance our softwares ease of 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.                                                               

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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 the 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.

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

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



| |  |  | the complex nature of our products,                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our need to educate potential customers about the uses and benefits of our products,                                           
|
| |  |  | the purchase of our products requires a significant investment of resources by a customer,                                     
|
| |  |  | our customers have budget cycles which affect the timing of purchases,                                                         
|
| |  |  | uncertainty regarding future economic conditions,                                                                              
|
| |  |  | many of our potential customers require competitive evaluation and
internal approval before purchasing our products,           
|
| |  |  | potential customers delay purchases due to announcements or planned
introductions of new products by us or our competitors, and
|
| |  |  | many of our potential customers are large organizations, which may
require a long time to make decisions.                      

The delay or failure to complete sales in a particular quarter could
reduce our revenues in that quarter, as well as subsequent quarters over which
revenues for the sale would likely be recognized. Our sales cycle lengthens
when general economic conditions worsen and spending on information technology
declines. If our sales cycle unexpectedly lengthens in general or for one or
more large orders, it would adversely affect the timing of our revenues. If we
were to experience a delay of several weeks on a large order, it could harm our
ability to meet our forecasts for a given quarter.

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

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

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

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

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

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

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



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

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

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

In addition to the acquisitions that we have already completed, we may
acquire or make investments in other complementary companies, services and
technologies in the future. If we fail to successfully complete acquisitions
and investments, they may seriously harm our business and prospects. To
successfully complete an acquisition, we must:

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| |  |  | properly evaluate the business, personnel and technology of the
company to be acquired,                            
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses,
|
| |  |  | integrate and retain personnel,                                                                                    
|
| |  |  | combine potentially different corporate cultures,                                                                  
|
| |  |  | effectively integrate products and research and development, sales, marketing and support operations, and          
|
| |  |  | maintain focus on our day-to-day operations.                                                                       

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

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

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

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

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

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

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

Our pending patent and trademark registration applications may not be
allowed or competitors may successfully challenge the validity or scope of
these registrations. In addition, our patents may not provide a significant
competitive advantage. Other software providers could copy or otherwise obtain
and use our 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.

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The laws of some foreign countries do not protect proprietary rights to
the same extent as do the laws of the United States.

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

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

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

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

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

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

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

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

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



| |  |  | expend significant resources to locate and correct the error,            
| | - |  | -------------------------------------------------------------------------
|
| |  |  | delay introduction of new products or commercial shipment of products, or

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

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

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

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



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

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

We do not have substantial experience in international markets.

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

Our international operations require a significant amount of attention
from our management and substantial financial resources. As of March 31, 2002
we had 130 employees located in Asia, Australia, Canada, Europe, and Latin
America.

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

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

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

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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 March 31, 2002, we had cash and cash equivalents of $167.0 million
that consist of cash and highly liquid short-term investments having maturity
dates of no more than 90 days. Declines of interest rates over time would
reduce our interest income from our highly liquid short-term investments. Based
upon our balance of cash and cash equivalents, a decrease in interest rates of
0.5% would cause a corresponding decrease in our annual interest income of
approximately $0.8 million.

As of March 31, 2002, we had short-term investments of $141.5 million that
consist of taxable fixed income securities having maturity dates of no more
than one year. Declines of interest rates over time would reduce our interest
income from our short-term investments. Based upon our balance of short-term
investments, a decrease in interest rates of 0.5% would cause a corresponding
decrease in our annual interest income of approximately $0.7 million.

As of March 31, 2002, we did not have any short-term or long-term debt
outstanding other than capital lease obligations.

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The following summarizes our short-term investments and the weighted
average yields as of March 31, 2002 (in thousands, except interest rates):

|                            |  |                        |         |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|--------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | - | ---------- |  | ----- | - |  |  | - | - |  |  | - | - |  |  | - | ------- | -
|                            |  | Expected maturity date
|                            |  |                       
|                            |  | 2002                   |         | 2003 |  | 2004 |        | 2005 |  | 2006 |   | Thereafter |  | Total
|                            |  |                        |         |      |  |      |        |      |  |      |   |            |  |      
|Corporate bonds             |  | $                      | 43,547  |      |  | $    | 10,901 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 54,448  |  
|Weighted average yield      |  |                        | 2.30    | %    |  |      | 2.33   | %    |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.31    | %
|Government notes/bonds      |  | $                      | 59,186  |      |  | $    | 27,888 |      |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  | $ | 87,074  |  
|Weighted average yield      |  |                        | 2.25    | %    |  |      | 2.41   | %    |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.30    | %
|                            |  |                        |         |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|Total investment securities |  | $                      | 102,733 |      |  | $    | 38,789 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 141,522 |  
|                            |  |                        |         |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  

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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 paragraphs 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.

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

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




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)  None.

(b)  None.

(c)  None.

(d)  None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




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

None.




ITEM 5. OTHER INFORMATION

None.

32



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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

See Exhibit Index attached hereto.

(b)  Reports on Form 8-K

None.

33



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##### Table of Contents






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: May 14, 2002 | SIGNATURE:     | /s/ Roger S. Siboni                                                                         
|                   |                |                                                                                             
|                   |                | Roger S. Siboni
        President, Chief Executive
        Officer and Chairman of the Board
|                   |                |                                                                                             
|DATE: May 14, 2002 | SIGNATURE:     | /s/ Kevin J. Yeaman                                                                         
|                   |                |                                                                                             
|                   |                | Kevin J. Yeaman
        Chief Financial Officer                                             

34



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##### Table of Contents






EXHIBIT INDEX

|       |  |                                                          |  |  |  | 
|------ |  | -------------------------------------------------------- |  |  |  | 
|Number |  | Exhibit Title                                            |  |  |  | 
|       |  |                                                          |  |  |  | 
|3.1*   |  | Restated Certificate of Incorporation of the Registrant.
|3.2*   |  | Restated Bylaws of the Registrant.                      
|4.1*   |  | Form of Stock Certificate.                              



---

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