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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 September 30, 2001
 OR

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

Commission File Number 000-26881

E.PIPHANY, INC.

---

(Exact Name as Registrant specified in its charter)


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

1900 South Norfolk Street, Suite 310
San 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 October 31, 2001, was 70,980,855.



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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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##### Table of Contents



E.PIPHANY, INC.
 QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
 TABLE OF CONTENTS

|           |                                                                                                           |    |    |  | 
|---------- | --------------------------------------------------------------------------------------------------------- | -- | -- |  | 
|           | Page No.                                                                                                 
|           |                                                                                                          
|PART I     | FINANCIAL INFORMATION                                                                                     |   
|          
|Item 1.    | Financial Statements                                                                                     
|          
|           | Condensed Consolidated Balance Sheets -
As of December 31, 2000 and September 30, 2001                    |    | 3  | 
|          
|           | Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and 2001 |    | 4  | 
|          
|           | Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 2001           |    | 5  | 
|          
|           | Notes to Condensed Consolidated Financial Statements                                                      |    | 6  | 
|          
|Item 2.    | Managements Discussion and Analysis of
Financial Condition and Results of Operations                     |    | 12 | 
|          
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                                                |    | 30 | 
|          
|PART II    | OTHER INFORMATION                                                                                         |   
|          
|Item 1.    | Legal Proceedings                                                                                         |    | 31 | 
|          
|Item 2.    | Changes in Securities and Use of Proceeds                                                                 |    | 31 | 
|          
|Item 3.    | Defaults Upon Senior Securities                                                                           |    | 31 | 
|          
|Item 4.    | Submission of Matters to a Vote of Securities Holders                                                     |    | 31 | 
|          
|Item 5.    | Other Information                                                                                         |    | 31 | 
|          
|Item 6.    | Exhibits and reports on Form 8-K                                                                          |    | 32 | 
|          
|SIGNATURES |                                                                                                           | 33 |   



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##### Table of Contents






PART I: FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS




E.PIPHANY, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                  |                                              |                                            |           |              |           |               |         |             |         | 
|------------------------------------------------- | -------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- | ------------- | ------- | ----------- | ------- | 
|                                                  |                                              |                                            |           | December 31, |           | September 30,
|                                                  |                                              |                                            |           | 2000         |           | 2001         
|                                                  |                                              |                                            |           |              |           |              
|                                                  |                                              |                                            |           |              |           |               |         | (unaudited)
|ASSETS                                            |                                              |                                            |           |              |           |               |         |            
|Current assets:                                   |                                              |                                            |           |              |           |               |         |            
|                                                  | Cash and cash equivalents                    |                                            | $         | 319,634      |           |               | $       | 214,761     |        
|                                                  | Short-term investments                       |                                            |           | 77,339       |           |               |         | 123,010     |        
|                                                  | Accounts receivable, net                     |                                            |           | 27,592       |           |               |         | 13,527      |        
|                                                  | Prepaid expenses and other assets            |                                            |           | 5,152        |           |               |         | 4,196       |        
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total current assets                       |           |              | 429,717   |               |         |             | 355,494 | 
|Property and equipment, net                       |                                              |                                            | 21,789    |              |           |               | 24,063  |            
|Goodwill and purchased intangibles                |                                              |                                            | 2,541,245 |              |           |               | 115,105 |            
|Other assets                                      |                                              |                                            | 2,323     |              |           |               | 3,643   |            
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total assets                               |           | $            | 2,995,074 |               |         | $           | 498,305 | 
|                                                  |                                              |                                            |           |              |           |               |         |            
|LIABILITIES AND STOCKHOLDERS EQUITY              |                                              |                                            |           |              |           |               |         |            
|Current liabilities:                              |                                              |                                            |           |              |           |               |         |            
|                                                  | Current portion of capital lease obligations |                                            | $         | 658          |           |               | $       | 593         |        
|                                                  | Trade accounts payable                       |                                            |           | 2,191        |           |               |         | 1,236       |        
|                                                  | Accrued liabilities                          |                                            |           | 17,289       |           |               |         | 15,095      |        
|                                                  | Accrued compensation                         |                                            |           | 12,715       |           |               |         | 11,823      |        
|                                                  | Accrued
restructuring costs                  |                                            |           |             |           |               |         | 7,921       |        
|                                                  | Deferred revenue                             |                                            |           | 23,412       |           |               |         | 18,224      |        
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total current liabilities                  |           |              | 56,265    |               |         |             | 54,892  | 
|Accrued
restructuring costs                       |                                              |                                            |          |              |           |               | 17,991  |            
|Capital lease obligations, net of current portion |                                              |                                            | 618       |              |           |               | 244     |            
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total liabilities                          |           |              | 56,883    |               |         |             | 73,127  | 
|Minority interest                                 |                                              |                                            |          |              |           |               | 35      |            
|Stockholders equity:                             |                                              |                                            |           |              |           |               |         |            
|                                                  | Common stock                                 |                                            |           | 6            |           |               |         | 7           |        
|                                                  | Additional paid-in capital                   |                                            |           | 3,746,759    |           |               |         | 3,804,380   |        
|                                                  | Notes receivable                             |                                            |           | (2,668       | )         |               |         | (891        | )      
|                                                  | Accumulated other comprehensive loss         |                                            |           | (550         | )         |               |         | (100        | )      
|                                                  | Deferred compensation                        |                                            |           | (1,009       | )         |               |         | (1,314      | )      
|                                                  | Accumulated deficit                          |                                            |           | (804,347     | )         |               |         | (3,376,939  | )      
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total stockholders equity                 |           |              | 2,938,191 |               |         |             | 425,143 | 
|                                                  |                                              |                                            |           |              |           |               |         |            
|                                                  |                                              | Total liabilities and stockholders equity |           | $            | 2,995,074 |               |         | $           | 498,305 | 
|                                                  |                                              |                                            |           |              |           |               |         |            

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 |          | Nine Months Ended
|                                                              |                                                                   |                          |        | September 30,      |          | September 30,    
|                                                              |                                                                   |                          |        |                    |          |                  
|                                                              |                                                                   |                          |        | 2000               |          | 2001              |        | 2000      |            | 2001
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |     
|Revenues:                                                     |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              | Product license                                                   |                          | $      | 21,382             |          |                   | $      | 16,200    |            |      | $      | 43,943  |          |   | $      | 54,893    |           
|                                                              | Services                                                          |                          |        | 17,758             |          |                   |        | 12,306    |            |      |        | 34,131  |          |   |        | 42,788    |           
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Total revenues           |        |                    | 39,140   |                   |        |           | 28,506     |      |        |         | 78,074   |   |        |           | 97,681     |  
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|Cost of revenues:                                             |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              | Product license                                                   |                          |        | 342                |          |                   |        | 474       |            |      |        | 766     |          |   |        | 1,663     |           
|                                                              | Services                                                          |                          |        | 17,307             |          |                   |        | 9,319     |            |      |        | 32,703  |          |   |        | 44,739    |           
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Total cost of revenues   |        |                    | 17,649   |                   |        |           | 9,793      |      |        |         | 33,469   |   |        |           | 46,402     |  
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Gross profit             |        |                    | 21,491   |                   |        |           | 18,713     |      |        |         | 44,605   |   |        |           | 51,279     |  
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|Operating expenses:                                           |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              | Research and development                                          |                          |        | 8,533              |          |                   |        | 10,147    |            |      |        | 17,699  |          |   |        | 32,355    |           
|                                                              | Sales and marketing                                               |                          |        | 19,872             |          |                   |        | 21,925    |            |      |        | 46,989  |          |   |        | 70,126    |           
|                                                              | General and administrative                                        |                          |        | 6,207              |          |                   |        | 4,672     |            |      |        | 12,503  |          |   |        | 20,232    |           
|                                                              | Restructuring charge                                              |                          |        |                   |          |                   |        | 32,436    |            |      |        |        |          |   |        | 32,436    |           
|                                                              | In-process research and development charge                        |                          |        |                   |          |                   |        |          |            |      |        | 47,000  |          |   |        |          |           
|                                                              | Amortization and write-down of goodwill
and purchased intangibles |                          |        | 269,904            |          |                   |        | 1,935,315 |            |      |        | 427,162 |          |   |        | 2,480,201 |           
|                                                              | Stock-based compensation                                          |                          |        | 332                |          |                   |        | 410       |            |      |        | 1,993   |          |   |        | 1,156     |           
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Total operating expenses |        |                    | 304,848  |                   |        |           | 2,004,905  |      |        |         | 553,346  |   |        |           | 2,636,506  |  
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Loss from operations     |        |                    | (283,357 | )                 |        |           | (1,986,192 | )    |        |         | (508,741 | ) |        |           | (2,585,227 | )
|Other income, net                                             |                                                                   |                          | 6,088  |                    |          |                   | 3,039  |           |            |      | 16,948 |         |          |   | 12,635 |          
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|                                                              |                                                                   | Net loss                 |        | $                  | (277,269 | )                 |        | $         | (1,983,153 | )    |        | $       | (491,793 | ) |        | $         | (2,572,592 | )
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|Basic and diluted net loss per share                          |                                                                   | $                        | (4.35  | )                  |          | $                 | (28.68 | )         |            | $    | (9.28  | )       |          | $ | (38.00 | )        
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          
|Shares used in computing basic and diluted
net loss per share |                                                                   |                          | 63,813 |                    |          |                   | 69,152 |           |            |      | 53,022 |         |          |   | 67,691 |          
|                                                              |                                                                   |                          |        |                    |          |                   |        |           |            |      |        |         |          |   |        |          

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)

|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |            |           |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------- | ----------------- | -------- | ---------- | --------- | ------ | ------- | -
|                                                              |                                                                              |                                                                             |                                   |                                           |         | Nine Months Ended
|                                                              |                                                                              |                                                                             |                                   |                                           |         | September 30,    
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                  
|                                                              |                                                                              |                                                                             |                                   |                                           |         | 2000              |          | 2001      
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Cash flows from operating activities:                         |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              | Net loss                                                                     |                                                                             | $                                 | (491,793                                  | )       |                   | $        | (2,572,592 | )        
|                                                              | Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                             |                                   |                                           |         |                   |          |            |          
|                                                              |                                                                              | Depreciation and amortization                                               |                                   |                                           | 2,045   |                   |          |            | 4,315     |       
|                                                              |                                                                              | Allowance for doubtful accounts                                             |                                   |                                           | 1,450   |                   |          |            | 2,700     |       
|                                                              |                                                                              | Noncash compensation expense                                                |                                   |                                           | 1,993   |                   |          |            | 1,154     |       
|                                                              |                                                                              | Noncash restructuring expense                                               |                                   |                                           |        |                   |          |            | 3,737     |       
|                                                              |                                                                              | In-process research and development charge                                  |                                   |                                           | 47,000  |                   |          |            |          |       
|                                                              |                                                                              | Amortization and write-down of goodwill and purchased intangibles           |                                   |                                           | 427,162 |                   |          |            | 2,480,201 |       
|                                                              |                                                                              | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                   |                                           |         |                   |          |            |           |       
|                                                              |                                                                              |                                                                             | Accounts receivable               |                                           |         | (13,677           | )        |            |           | 11,364 |        
|                                                              |                                                                              |                                                                             | Prepaid expenses and other assets |                                           |         | (3,030            | )        |            |           | (289   | )      
|                                                              |                                                                              |                                                                             | Trade accounts payable            |                                           |         | 1,220             |          |            |           | (955   | )      
|                                                              |                                                                              |                                                                             | Accrued liabilities               |                                           |         | 1,001             |          |            |           | (5,444 | )      
|                                                              |                                                                              |                                                                             | Accrued
restructuring costs       |                                           |         |                  |          |            |           | 25,912 |        
|                                                              |                                                                              |                                                                             | Deferred revenue                  |                                           |         | 12,503            |          |            |           | (5,540 | )      
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              |                                                                              |                                                                             |                                   | Net cash used in operating activities     |         |                   | (14,126  | )          |           |        | (55,437 | )
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Cash flows from investing activities:                         |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              | Purchases of property and equipment                                          |                                                                             |                                   | (8,583                                    | )       |                   |          | (10,303    | )        
|                                                              | Cash acquired in acquisitions                                                |                                                                             |                                   | 24,282                                    |         |                   |          | 208        |          
|                                                              | Direct costs of purchase transactions                                        |                                                                             |                                   | (21,330                                   | )       |                   |          | 1,204      |          
|                                                              | Purchases and sales of investments, net                                      |                                                                             |                                   | (76,918                                   | )       |                   |          | (45,581    | )        
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              |                                                                              |                                                                             |                                   | Net cash used in investing activities     |         |                   | (82,549  | )          |           |        | (54,472 | )
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Cash flows from financing activities:                         |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              | Repayments of notes payable                                                  |                                                                             |                                   |                                          |         |                   |          | (2,088     | )        
|                                                              | Repayments on line of credit                                                 |                                                                             |                                   | (8,319                                    | )       |                   |          |           |          
|                                                              | Principal payments on capital lease obligations                              |                                                                             |                                   | (405                                      | )       |                   |          | (580       | )        
|                                                              | Proceeds from secondary offering, net                                        |                                                                             |                                   | 356,108                                   |         |                   |          |           |          
|                                                              | Repayments on notes receivable                                               |                                                                             |                                   | 246                                       |         |                   |          | 1,777      |          
|                                                              | Proceeds from subsidiary stock offering                                      |                                                                             |                                   |                                          |         |                   |          | 35         |          
|                                                              | Proceeds from sale of common stock, net of repurchases                       |                                                                             |                                   | 4,455                                     |         |                   |          | 5,532      |          
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|                                                              |                                                                              |                                                                             |                                   | Net cash provided by financing activities |         |                   | 352,085  |            |           |        | 4,676   |  
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Effect of foreign exchange rates on cash and cash equivalents |                                                                              |                                                                             | (237                              | )                                         |         |                   | 360      |           
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Net increase (decrease) in cash and cash equivalents          |                                                                              |                                                                             | 255,173                           |                                           |         |                   | (104,873 | )         
|Cash and cash equivalents at beginning of period              |                                                                              |                                                                             | 58,084                            |                                           |         |                   | 319,634  |           
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           
|Cash and cash equivalents at end of period                    |                                                                              | $                                                                           | 313,257                           |                                           |         | $                 | 214,761  |           
|                                                              |                                                                              |                                                                             |                                   |                                           |         |                   |          |           

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, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. 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 financial statements and notes thereto included in E.piphanys Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.

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 nine months ended September 30, 2001. The results for the nine months
ended September 30, 2001 are not necessarily indicative of the results expected
for the full fiscal year.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the
accounts of E.piphany and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.

Foreign Currency Translation

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

Impairment of Long-Lived Assets and Identifiable Intangible Assets

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

Recent Accounting Pronouncements

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

In March 2000, the FASB issued Financial Standards Board Interpretation
(FIN) No. 44, Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25. FIN No. 44



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

In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 141 Business
Combinations (SFAS 141) and No. 142 Goodwill and Other Intangible Assets
(SFAS 142). Major provisions of these Statements are as follows: (a) 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; (b)
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; (c) goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually 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; (d) in-process research and development
will continue to be written off immediately; (e) all acquired goodwill must be
assigned to reporting units for purposes of impairment testing and segment
reporting; and (f) effective January 1, 2002, existing goodwill will no longer
be subject to amortization.

E.piphany anticipates that future amortization of goodwill and other
intangibles associated with its acquisitions will continue to be amortized on a
straight-line basis for the remaining three months of 2001, and will amount to
approximately $17.0 million. Beginning January 1, 2002, the Company will adopt
SFAS 141 and SFAS 142. As a result, all acquired goodwill will be assigned to
reporting units for purposes of impairment testing and segment reporting and
will no longer be amortized, but will be subject to an annual impairment
assessment. The Company will continue to amortize other intangible assets,
on a
straight-line basis over their remaining useful lives, exclusive of
assembled workforce, as pursuant to SFAS 141 an assembled workforce
shall not be recognized as an intangible asset apart from goodwill. Amortization and
write-down of goodwill for the three and nine months ended September 30, 2001
was $1.9 billion and $2.5 billion, respectively. These
amounts include a $1.7 billion impairment of goodwill and
intangible assets charge for the three and nine months ended
September 30, 2001.

3. Stockholders Equity

Stock-Based Compensation

In connection with the grant of certain stock options to employees during
the years ended December 31, 1998, 1999, 2000 and the first nine months of
2001, the Company recorded deferred compensation of approximately $3.0 million,
$2.8 million, $0, and $1.3 million, respectively. The deferred compensation
represents the difference between the fair value of the common stock and the
option exercise price or stock sale price at the date of the option grant or
stock sale. Such amount is presented as a reduction of stockholders equity and
amortized over the vesting period of the applicable options in a manner
consistent with FASB Interpretation No. 28. Total stock-based compensation
expenses were approximately $0.3 million and $0.4 million during the three
months ended September 30, 2000 and 2001, respectively. Total stock-based
compensation expenses were approximately $2.0 million and $1.2 million during
the nine months ended September 30, 2000 and 2001, respectively. Deferred
compensation expense is decreased in the period of forfeiture for any accrued
but unvested compensation arising from the early termination of an option
holders services.

Comprehensive Income (Loss)

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



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non-owner changes in equity. For the three and nine months ended September
30, 2000 and 2001, E.piphanys comprehensive income (loss) did not differ
materially from reported net loss.

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, 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 net loss per share
(in thousands, except per share amounts):

|                                                                                      |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- |  | ---- | ---------- | ---- |  | - | -------- | - |  | - | ---------- | -
|                                                                                      |  | Three Months Ended |          | Nine Months Ended
|                                                                                      |  | September 30,      |          | September 30,    
|                                                                                      |  |                    |          |                  
|                                                                                      |  | 2000               |          | 2001              |  | 2000 |            | 2001
|                                                                                      |  |                    |          |                   |  |      |            |     
|Net loss                                                                              |  | $                  | (277,269 | )                 |  | $    | (1,983,153 | )    |  | $ | (491,793 | ) |  | $ | (2,572,592 | )
|                                                                                      |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  
|Basic and diluted:                                                                    |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  
|Weighted average
shares of common
stock outstanding                                   |  |                    | 67,902   |                   |  |      | 70,555     |      |  |   | 56,982   |   |  |   | 69,806     |  
|Less: Weighted
average shares
subject to
repurchase                                   |  |                    | (4,089   | )                 |  |      | (1,403     | )    |  |   | (3,960   | ) |  |   | (2,115     | )
|                                                                                      |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  
|Weighted average
shares used in
computing basic and
diluted net loss
per common share |  |                    | 63,813   |                   |  |      | 69,152     |      |  |   | 53,022   |   |  |   | 67,691     |  
|                                                                                      |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  
|Basic and diluted
net loss per common
share                                           |  | $                  | (4.35    | )                 |  | $    | (28.68     | )    |  | $ | (9.28    | ) |  | $ | (38.00     | )
|                                                                                      |  |                    |          |                   |  |      |            |      |  |   |          |   |  |   |            |  

E.piphany has excluded all outstanding stock options, and shares subject
to repurchase from the calculation of diluted net loss per common share because
all such securities are antidilutive for all periods presented. The total
number of shares excluded from the calculations of basic and diluted net loss
per share were 10,942,653 and 3,120,552 for the three months ended September
30, 2000 and September 30, 2001, respectively. The total number of shares
excluded from the calculations of basic and diluted net loss per share were
10,841,347 and 3,832,525 for the nine months ended September 30, 2000 and
September 30, 2001, respectively.

Stock Option Exchange Program

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

5. Commitments and Contingencies

Litigation

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

On July 9, 2001, a putative securities class action, captioned Kucera v.
E.piphany, Inc., et al., Civil Action No. 01-CV-6158, was filed against the
Company, several of its officers, and three
underwriters in the Companys 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



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against all defendants, a violation of Section 15 of the Securities
Act against the individual defendants, and violations of Section 12(a)(2) of
the Securities Act and Section 10(b) of the Securities Exchange
Act of 1934 against the underwriters. The complaint seeks unspecified damages on behalf of
a purported class of purchasers of common stock between September 21, 1999 and
December 6, 2000. One additional lawsuit has been filed
subsequently which contains allegations substantially identical to those in the
Kucera complaint, and other related lawsuits may be brought.

Various plaintiffs have filed similar actions asserting virtually
identical allegations against more than 150 other companies. The lawsuits
against the Company 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. As of
November 8, 2001, no schedule has been established regarding the lawsuits
against the Company. The Company anticipates that all lawsuits against it
specifically will eventually be formally coordinated or consolidated with one
another. The Company believes it has meritorious defenses to these securities
lawsuits and will defend itself vigorously.

Restructuring Costs

In the quarter ended September 30, 2001, the Company restructured its
worldwide operations, by among other things, reducing its workforce and
consolidating its operating facilities. The restructuring resulted in a total
pre-tax charge of $32.4 million of which approximately $2.8 million was paid
and a non cash charge of $3.7 million was incurred during the third quarter
to provide for these actions and other items. The Company recorded the low end of a range of assumptions
modeled for the restructuring charge, in accordance with SFAS No. 5, Accounting
for Contingencies. Adjustments to the restructuring reserves will be made in
future periods, if necessary, based upon the then current actual events and
circumstances.

The following table describes restructuring charges taken through
September 30, 2001 (in thousands):

|                                      |       |   |                    |   |         |   |          |        |                   |   |                    |        |                    |   |        |        |   |   |        |        | 
|------------------------------------- | ----- | - | ------------------ | - | ------- | - | -------- | ------ | ----------------- | - | ------------------ | ------ | ------------------ | - | ------ | ------ | - | - | ------ | ------ | 
|                                      |       |   | Accrued Balance at |   | Total   |   | Cash     |        |                   |   |                    |        | Accrued Balance at
|                                      |       |   | December 31, 2000  |   | Charges |   | Payments |        | Non Cash Activity |   | September 30, 2001
|                                      |       |   |                    |   |         |   |          |        |                   |   |                   
|Severance and related charges         |       | $ |                   |   |         | $ | 1,532    |        |                   | $ | (1,509             | )      |                    | $ | (23    | )      |   | $ |       |       
|Write-off of leasehold
improvements   |       |   |                   |   |         |   | 3,714    |        |                   |   |                   |        |                    |   | (3,714 | )      |   |   |       |       
|Lease termination costs  current     |       |   |                   |   |         |   | 9,199    |        |                   |   | (1,278             | )      |                    |   |       |        |   |   | 7,921  |       
|Lease
termination costs  non-current |       |   |                   |   |         |   | 17,991   |        |                   |   |                   |        |                    |   |       |        |   |   | 17,991 |       
|                                      |       |   |                    |   |         |   |          |        |                   |   |                    |        |                    |   |        |        |   |   |        |       
|                                      | Total |   | $                  |  |         |   | $        | 32,436 |                   |   | $                  | (2,787 | )                  |   | $      | (3,737 | ) |   | $      | 25,912 | 
|                                      |       |   |                    |   |         |   |          |        |                   |   |                    |        |                    |   |        |        |   |   |        |       

Severance and related charges primarily consisted of involuntary
termination benefits and payroll taxes. Lease termination costs of $27.2
million are based on estimated exit costs associated with the abandonment of
certain leased facilities in Atlanta, Boston, Chicago, New York, and San Mateo
for the remaining lease terms. These lease termination costs reflect remaining
lease liabilities and brokerage fees stated at actual cost reduced by estimated
sublease income. The estimated costs of abandoning these leased facilities,
including estimated costs to sublease were based on market information trend
analyses provided by a commercial real estate brokerage firm retained by the
Company. Actual future cash requirements may differ materially from the reserve
balance at September 30, 2001. As of September 30, 2001, $25.9 million of lease
termination costs, net of anticipated sublease income, remains accrued and is
expected to be utilized by fiscal 2013.

6. Segment Information

E.piphany reports segment information under the provisions of SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 131 requires that business segment information used by management to
assess performance and manage company resources be the source for segment
information disclosure (i.e. the management approach). On this basis, E.piphany
is organized and operates as one business



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segment, the design, development, and marketing of software solutions. The
Company markets its products in the United States and in foreign countries
through its sales personnel and its subsidiaries.

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

|          |               |       |   |                    |        |                   |   |        |        |      |   |        |        |  |   |        |        | 
|--------- | ------------- | ----- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |               |       |   | Three Months Ended |        | Nine Months Ended
|          |               |       |   | September 30,      |        | September 30,    
|          |               |       |   |                    |        |                  
|          |               |       |   | 2000               |        | 2001              |   | 2000   |        | 2001
|          |               |       |   |                    |        |                   |   |        |        |     
|Revenues: |               |       |   |                    |        |                   |   |        |        |      |   |        |        |  |   |       
|          | North America |       | $ | 36,089             |        |                   | $ | 17,140 |        |      | $ | 74,212 |        |  | $ | 71,905 |       
|          | International |       |   | 3,051              |        |                   |   | 11,366 |        |      |   | 3,862  |        |  |   | 25,776 |       
|          |               |       |   |                    |        |                   |   |        |        |      |   |        |        |  |   |       
|          |               | Total |   | $                  | 39,140 |                   |   | $      | 28,506 |      |   | $      | 78,074 |  |   | $      | 97,681 | 
|          |               |       |   |                    |        |                   |   |        |        |      |   |        |        |  |   |       

7. Acquisitions

The Radnet Acquisition

On January 29, 2001, E.piphany acquired certain intellectual property
assets of Radnet, Inc. from a secured creditor of Radnet. Under the terms of
the asset purchase agreement, E.piphany issued 238,032 shares of common stock
in exchange for the assets. This transaction added to E.piphanys strategic
intellectual property and complement its current product development plan. The
total purchase price was approximately $10.3 million, and is being amortized on
a straight-line basis over a useful life of three years. Accumulated
amortization was approximately $2.3 million for the nine months ended September
30, 2001. On September 30, 2001, we performed an
impairment assessment of goodwill and identifiable intangible assets
recorded in connection with our acquisition of certain intellectual
property assets of Radnet and recorded an
impairment charge. Please see the section under the heading
Impairment in Note 7 in the Notes to Condensed
Consolidated Financial Statements for more detailed information.

The Moss Acquisition

On April 12, 2001, E.piphany acquired Moss Software, Inc. through a merger
of a wholly-owned subsidiary of E.piphany with and into Moss Software, Inc.
Moss Software is a provider of customer relationship management products that
resolve its customer sales automation challenges and better manage their sales
cycles. Under the terms of the Reorganization Agreement, stockholders of Moss
Software received approximately 0.0581 shares of E.piphany common stock for
each share of Moss Software common stock held by them, which resulted in a
total issuance of approximately 1,370,296 shares. In addition, E.piphany
assumed all outstanding options to purchase Moss Software common stock, as
adjusted to reflect the exchange ratio. The total purchase price was
approximately $40.6 million. The total cost associated with the acquisition is
subject to adjustments based upon finalization of managements integration
plans, which may include elimination of duplicate facilities and fixed assets
as well as employee severance. In connection with the assumption of all
outstanding options, the Company recorded deferred compensation of
approximately $1.0 million. The deferred compensation represents the
difference between the fair value of the common stock at the date of
acquisition and the option exercise price at the date of the option grant, and
will be amortized over the vesting period. Purchased intangibles, representing
purchase price in excess of identified tangible and intangible assets, of
approximately $45.5 million were recorded and are being amortized on a
straight-line basis over a useful life of three years. Accumulated amortization
was approximately $7.6 million at September 30, 2001. There can be no
assurance that the value of the purchased intangible assets may not become
impaired prior to its amortization.

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

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

On September 30, 2001, we performed an
impairment assessment of goodwill and identifiable intangible assets
recorded in connection with our acquisition of Moss Software and recorded an
impairment charge. Please see the section under the heading
Impairment in Note 7 in the Notes to Condensed
Consolidated Financial Statements for more detailed information.

Impairment

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



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goodwill in accordance with the provisions of APB Opinion No. 17,
Intangible Assets. As part of its review of its third quarter financial
results, the Company performed an impairment assessment of identifiable
intangible assets and goodwill in connection with all of its acquisitions. The
impairment assessment was performed with the assistance of independent
valuation experts to determine whether any impairment existed. The impairment
indicators included, but were not limited to, the significant decline in the
Companys stock price, the net book value of assets, which significantly
exceeds 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.
Also, current economic indicators suggest that these lower growth rates may continue for an
indefinite period. 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 combined with
amortization of goodwill and other intangible assets of
$0.2 billion resulting in a total amortization and impairment
charge of $1.9 billion in the quarter ended September 30,
2001. Fair market value was determined based on discounted future cash flows for the acquisitions that
had separately identifiable cash flows. Prior to the impairment
charge, the goodwill and intangible assets related to the acquisition of
Octane Software consisted of 84% of the total goodwill and intangible
assets balance and the impairment of the goodwill and intangible
assets related to the acquisition of Octane Software consisted of 86% of the
$1.7 billion impairment charge. It is reasonably possible that the
estimates and assumptions used under our assessment may change in the short
term resulting in the need to further write-down our goodwill and other
long-lived assets.

The remaining goodwill and identifiable intangible assets
of $115.1 million will be amortized using the straight-line method, resulting in an estimated quarterly
charge of approximately $17.0 million for the three months ended December 31,
2001. Beginning on January 1, 2002, amortization charges will be subject to
the new accounting pronouncements described in Note 2 of Notes to Condensed
Consolidated Financial Statements.

8. Minority Interest in Subsidiary

In April 2001, the
Company established a consolidated subsidiary, Nihon E.piphany
K.K., through the issuance of 196 shares for a 70% interest.
In addition, 84 shares, or 30% of the common stock was purchased by
three employees of the subsidiary, for cash consideration of approximately $35,000, which was deemed
to be purchased at fair market value. Nihon E.piphany K.K.s operations consist
of the marketing, distribution, service and support of the Companys products
in Japan. As of September 30, 2001, a minority interest of approximately
$35,000 was recorded on the Condensed Consolidated Balance Sheet in order to
reflect the original investment in Nihon E.piphany K.K. held by minority
investors.



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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This registration statement on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, without
limitation, statements regarding the extent and timing of future revenues,
expenses and customer demand, the deployment of our products and services, and
reliance on third parties. Our actual results could differ materially from
those in such forward-looking statements. Factors that might cause or
contribute to such a difference include, but are not limited to, those
discussed under the heading Risk Factors in this Form 10-Q and the risks
discussed in our other filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-K for the year ended December 31, 2000.
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.

Overview

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

We were founded in November 1996. From our founding through the end of
1997, we primarily engaged in research activities, developing products and
building business infrastructure. We began shipping our first software product
and first generated revenues from software license fees, implementation and
consulting fees, and maintenance fees in early 1998. Despite our revenue
growth, we have incurred significant costs to develop our technology and
products, to recruit research and development personnel, to build a direct
sales force and a professional services organization, and to expand our general
and administrative infrastructure. Our total headcount has increased from 279
employees at December 31, 1999 to 736 employees at September 30, 2001.

Recent Events

Acquisitions

On January 29, 2001, we acquired certain intellectual property assets of
Radnet, Inc. from a secured creditor of Radnet. Under the terms of the asset
purchase agreement, we issued 238,032 shares of common stock in exchange for
the assets. This transaction will add to our strategic intellectual property
and complement our current product development plan. The total purchase price
was approximately $10.3 million, and is being amortized on a straight-line
basis over a useful life of three years. Accumulated amortization was
approximately $2.3 million for the nine months ended September 30, 2001. On
September 30, 2001, we performed an impairment assessment of goodwill and
identifiable intangible assets recorded in connection with our acquisition of
certain intellectual property assets of Radnet and recorded an impairment charge. Please see Note 7 in the Notes to
Condensed Consolidated Financial Statements for more detailed information.

On April 12, 2001, we acquired Moss Software, Inc. through a merger of a
wholly-owned subsidiary of E.piphany with and into Moss Software, Inc. Moss
Software is a provider of customer relationship management products that enable
customers to resolve sales automation challenges and better manage sales
cycles. Under the terms of the Reorganization Agreement, we acquired all of the
outstanding shares of capital stock of Moss Software in exchange for 1,370,296
million shares of our common stock. In addition, we assumed all outstanding
options to purchase Moss Software common stock. The total purchase price was
approximately $40.6 million, and is being amortized on a straight-line basis
over a useful life of three years. Accumulated amortization was approximately



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$7.6 million at September 30, 2001. On September 30, 2001, we performed an
impairment assessment of goodwill and identifiable intangible assets recorded
in connection with our acquisition of Moss Software and recorded an impairment
charge. Please see Note 7 in the Notes to Condensed Consolidated Financial
Statements for more detailed information.

Stock Option Exchange Program

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

Restructuring Charge

In the quarter ended September 30, 2001, we initiated a plan to
restructure our worldwide operations including a reduction in workforce and the
consolidation of our operating facilities. The restructuring resulted in a
charge of $32.4 million of which $2.8 million was paid and a non cash charge of
$3.7 million was incurred during the third quarter to provide
for these actions and other items. Please see
Note 5 in the Notes to Condensed Consolidated Financial Statements for more
detailed information.

Amortization and Write-Down of 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 APB Opinion No. 17, Intangible
Assets. As part of its review of its third quarter financial
results, the Company performed an impairment assessment of
identifiable intangible assets and goodwill in connection with all of
its acquisitions. The impairment assessment was performed with the
assistance of independent valuation experts to determine whether any
impairment existed. The impairment indicators included, but were not
limited to, the significant decline in the Companys stock price, the
net book value of assets, which significantly exceeds 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. Also, current economic indicators suggest
that these lower growth rates may continue for an indefinite period.
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 the impairment charge, the goodwill
and intangible assets related to the acquisition of Octane Software
consisted of 84% of the total goodwill and intangible assets balance
and the impairment of the goodwill and intangible assets related to
the acquisition of Octane Software consisted of 86% of the
$1.7 billion impairment charge. It is reasonably possible that
the estimates and assumptions used under our assessment may change in
the short term resulting in the need to further write-down our
goodwill and other long-lived assets. The aggregate amortization and
write-down of goodwill and these other intangible assets increased to
$1.9 billion for the three months ended September 30, 2001
from $270.0 million for the three months ended
September 30, 2000. The aggregate amortization of goodwill and
these other intangible assets increased to $2.5 billion for the
nine months ended September 30, 2001 from $427.2 million
for the nine months ended September 30, 2000. The increase was
due to the $1.7 billion impairment of goodwill and intangible
assets charge that was included in the results of operations for the
three and nine months ended September 30, 2001.

The remaining
goodwill and identifiable intangible assets of $115.1 million
will be amortized using the straight-line method, resulting in an
estimated quarterly charge of approximately $17.0 million for the
three months ended December 31, 2001. Beginning on
January 1, 2002, amortization charges will be subject to the new
accounting pronouncements described in Note 2 of Notes to
Condensed Consolidated Financial Statements.

Source of Revenues and Revenue Recognition Policy

We generate revenues principally from licensing our software products
directly to customers and providing related professional services including
implementation, consulting, support and training. Through September 30, 2001,
substantially all of our revenues were generated by our direct sales force. Our
license agreements generally provide that customers pay a software license fee
to perpetually use one or more software solutions within specified limits. The
amount of the license fee varies depending on which software solution is
purchased, the number of software solutions purchased and the scope of the
license rights. Customers can subsequently pay additional license



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fees to allow additional users to use previously purchased software
solutions or to purchase additional software solutions. Each software solution
included in the E.piphany E.5 System contains the same core technology,
allowing for easy integration of additional software solutions as they are
purchased from us. Customers that purchase software solutions receive the
software on compact disc or via Internet delivery.

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

Fees from licenses are recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or
determinable, collection is probable, and vendor specific objective evidence
exists to allocate the total fee between all delivered and undelivered elements
of the arrangement. If vendor specific objective evidence does not exist to
allocate the total fee to all delivered and undelivered elements of the
arrangement, revenue is deferred until the earlier of the time at which 1) such
evidence does exist for the undelivered elements, or 2) all elements are
delivered. Fees from license agreements which include the right to receive
unspecified future products are recognized over the term of the arrangement or,
if not specified, the estimated economic life of the product.

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

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

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

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

Cost of Revenues and Operating Expenses

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



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

Results of Operations

Revenues

Total revenues decreased to $28.5 million for the three months ended
September 30, 2001, from $39.1 million for the three months ended September 30,
2000. The decrease in revenues was primarily due to fewer sales of
our product licenses resulting from an economic slowdown and
the significant decline in spending by corporations in information technology. Total
revenues increased to $97.7 million for the nine months ended September 30,
2001, from $78.1 million for the nine months ended September 30, 2000. The
increase in revenues reflects our sequential year to date growth through the
quarter ended June 30, 2001, that was primarily due to expansion of our
business outside the United States and the introduction and shipment of new
products.

Product license revenues decreased to $16.2 million, or 57% of total
revenue, for the three months ended September 30, 2001 from $21.4 million, or
55% of total revenue, for the three months ended September 30, 2000. The
decrease in dollar amount of product license revenues was primarily due to the
downturn in the economy and weakness in information technology spending. Product license
revenues increased to $54.9 million, or 56% of total revenue, for the nine
months ended September 30, 2001 from $43.9 million, or 56% of total revenue,
for the nine months ended September 30, 2000. The increase in dollar amount of
product license revenues was due to expansion of our business internationally
and the introduction and shipment of new products.

Services revenues decreased to $12.3 million, or 43% of total revenues,
for the three months ended September 30, 2001 from $17.8 million, or 45% of
revenues, for the three months ended September 30, 2000. The decrease in dollar
amount of services revenues was primarily attributable to a decrease in
services provided by our internal professional services organization as we
continue to encourage our customers to contract directly with third party
consulting organizations and a decrease in license sales due to the economic
slowdown. Services revenues increased to $42.8 million, or 44% of total
revenues, for the nine months ended September 30, 2001 from $34.1 million, or
44% of revenues, for the nine months ended September 30, 2000. The increase in
dollar amount of services revenues was primarily attributable to increased
implementation and consulting services performed in connection with increased
license sales and to maintenance contracts sold to our new customers.

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 to provide services directly to our customers, the
nature of our solution which has been licensed, the complexity of the customers information
technology environment, the resources allocated by customers to their
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 $9.8 million for the three months
ended September 30, 2001 from $17.6 million for the three months ended
September 30, 2000. Total cost of revenues increased to $46.4 million for the
nine months ended September 30, 2001 from $33.5 million for the nine months
ended September 30, 2000. Cost of product license revenues consists primarily
of license fees paid to third parties under technology license arrangements and
have not been significant to date. Cost of services revenues consists primarily
of the costs of consulting and customer service and support.

Cost of services revenues decreased to $9.3 million, or 76% of services
revenues, for the three months ended September 30, 2001 from $17.3 million, or
97% of services revenues, for the three months ended September 30, 2000. The
decrease in cost of services revenues in absolute dollars is due to a decrease
in internal services



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professionals. The decrease in cost of services as a percentage of
revenues is primarily due to a higher proportion of maintenance revenues, which
has more favorable margins.

Cost of services revenues increased to $44.8 million, or 105% of services
revenues, for the nine months ended September 30, 2001 from $32.7 million, or
96% of services revenues, for the nine months ended September 30, 2000. The
increase in cost of services revenues in absolute dollars reflects our
sequential year to date growth through the quarter ended June 30, 2001, resulting primarily
from the growth of our internal professional services organization to support
increased customer demand for consulting services. The increase in cost of
services revenues as a percentage of services revenues for the nine months
ended September 30, 2001 resulted from excess capacity in our internal
professional services organization resulting from our decision to encourage
customers to contract directly with third party consulting organizations. 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. Cost of services revenues may exceed services
revenues in future periods as we continue to transition our services capacity
to have a greater reliance on system integrators or if services revenues
decrease in future periods.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses increased to $10.1 million for the three months ended
September 30, 2001 from $8.5 million for three months ended September 30, 2000.
Research and development expenses increased to $32.4 million for the nine
months ended September 30, 2001 from $17.7 million for nine months ended
September 30, 2000. Research and development expenses as
a percentage of total revenues increased to 33% for the nine months ended
September 30, 2001 from 23% for the nine months ended September 30, 2000. The increase was primarily due to an
increase in the number of employees engaged in research and development from
our internal growth and acquisitions, and fees paid to outside contractors for
the internationalization of our products. We
believe that investments in product development are essential to our future
success. We anticipate that our recent restructuring of our operations will
reduce research and development expenses over the short term, although these
expenses may increase over the long term.

Sales and Marketing

Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $21.9 million for the three months ended September 30, 2001 from
$19.9 million for the three months ended September 30, 2000. Sales and
marketing expenses increased to $70.1 million for the nine months ended
September 30, 2001 from $47.0 million for the nine months ended September 30,
2000. Sales and marketing expenses as a percentage of total revenues increased
to 72% for the nine months ended September 30, 2001 from 60% for the nine
months ended September 30, 2000. The increase in sales and marketing expenses
in absolute dollars was primarily attributable to an increase in the number of
sales and marketing employees resulting from internal growth and acquisitions,
and the establishment of sales offices in additional domestic and international
locations including Europe and Asia. We anticipate that the recent
restructuring of our operations will reduce sales and marketing expenses over
the short term, although these expenses may increase over the long term.

General and Administrative

General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance, legal and administrative
personnel. General and administrative expenses decreased to $4.7 million for
the three months ended September 30, 2001 from $6.2 million for the three
months ended September 30, 2000. The decrease in absolute dollars was primarily
due to a decrease in salary expense and professional fees. General and
administrative expenses increased to $20.2 million for the nine months ended
September 30, 2001 from $12.5 million for the nine months ended September 30,
2000. The increase in general and administrative expenses in absolute dollars
was primarily attributable to an increase in the number of general and
administrative employees



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from our internal growth and acquisitions necessary to support our
expanding operations. General and administrative expenses as a percentage of
total revenues increased to 21% for the nine months ended September 30, 2001
from 16% for the nine months ended September 30, 2000. We expect that our
recent restructuring of our operations will reduce general and administrative
expenses over the short term, although these expenses may increase over the
long term.

In-Process Research and Development Charge

In connection with the acquisitions of RightPoint Software, Inc. and
Octane Software Inc., we recorded a charge of $47.0 million in the nine months
ended September 30, 2000. There was no in-process research and development
charge incurred during the nine months ended September 30, 2001.

The RightPoint Acquisition

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

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

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

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

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

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

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

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



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The Octane Acquisition

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

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

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

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

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

If these projects are not successfully developed, our sales and
profitability may be adversely affected in future periods. As part of
our review of our results for the three months ended September 30,
2001, we performed an impairment assessment of identifiable
intangible assets and goodwill in connection with all of our
acquisitions. As a result, we recorded a $1.7 billion impairment
charge to reduce goodwill and other intangible assets associated with
all of our acquisitions to reflect their current estimated fair
market value. It is reasonably possible that the estimates and
assumptions used under our assessment may change in the short term
resulting in the need to further write-down our goodwill and other
long-lived assets.

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, 1998, 1999, 2000 and the first
nine months of 2001, we recorded deferred compensation of approximately $3.0
million, $2.8 million, $0, and $1.3 million, respectively. As of September 30,
2001, deferred compensation remaining to be amortized totaled $1.3 million.
This amount is being amortized over the respective vesting periods of these
equity instruments in a manner consistent with Financial Accounting Standards
Board Interpretation No. 28. Total stock-based compensation was $410,000 and
$1.2 million for the three and nine months ended September 30, 2001,
respectively. We expect amortization of approximately $408,000 in the fourth
quarter of 2001 and $632,000, $123,000, $100,000 and $50,000 for the years
ended December 31, 2002, 2003, 2004 and 2005, respectively.



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Other Income (Expense), Net

Interest income, net of interest expense, decreased to $3.0 million for
the three months ended September 30, 2001 from $6.1 million for the three
months ended September 30, 2000. Interest income, net of interest expense,
decreased to $12.6 million for the nine months ended September 30, 2001 from
$16.9 million for the nine months ended September 30, 2000. The decrease was
due to lower average cash and investment balances and a decrease in the average
rate of return on our investments.

Liquidity and Capital Resources

Net cash used in operating activities totaled $57.0 million and $14.1
million for the nine months ended September 30, 2001 and 2000, respectively.
Cash used in operating activities for each period resulted principally from net
losses in those periods, net of non-cash charges for amortization and
write-down of goodwill
and purchased intangibles, in-process research and development, and stock-based
compensation. Cash used in operating activities for the nine months ended
September 30, 2001 also resulted from decreases in accrued liabilities and
deferred revenue. These uses of cash were partially offset by a decrease in
accounts receivable.

Net cash used in investing activities totaled $52.9 million for the nine
months ended September 30, 2001 compared to $82.5 million provided by investing
activities for the nine months ended September 30, 2000. The increase in cash
used resulted primarily from the purchase of short term investments.

Net cash provided by financing activities totaled $4.7 million and $352.1
million for the nine months ended September 30, 2001 and 2000, respectively.
The decrease in cash provided was due primarily to the receipt of proceeds from
our secondary offering completed during the first quarter of 2000.

As of September 30, 2001, our principal sources of liquidity included
$214.8 million of cash and cash equivalents and $123.0 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 an additional bank line of credit. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. We cannot assure you that any financing arrangements will be
available in amounts or on terms acceptable to us in the future.

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 $2.6 billion for the nine months ended September
30, 2001, $768.5 million for the year ended December 31, 2000, $22.4 million
for the year ended December 31, 1999 and $10.3 million for the year ended
December 31, 1998. We had an accumulated deficit of $3.4 billion as of
September 30, 2001, and $804.3 million as of December 31, 2000. We expect to
continue to incur losses before amortization charges for the foreseeable
future. In addition, in connection with the acquisitions of Octane Software,
RightPoint Software, eClass Direct, iLeverage and Moss Software, we are
incurring significant accounting charges for the amortization of intangible
assets over the three years following these mergers, even after our significant
write-down of goodwill and other intangible assets in the three months ended
September 30, 2001. These losses will be substantial, and we may not ever
become profitable. Therefore, our operating results will be harmed if our
revenue does not keep pace with our expected increase in expenses or is not
sufficient for us to achieve profitability. If we do achieve profitability in
any period, it cannot be certain that we will sustain or increase profitability
on a quarterly or annual basis.



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

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

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

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

The September 11, 2001 terrorist attacks in the United States and
subsequent U.S. military operations in Afghanistan, as well as future
developments occurring in connection with these events including, without
limitation, actual or threatened future terrorist attacks against the United
States or other countries, an escalation in the current armed conflict in
Afghanistan or elsewhere, or full-scale war, 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 postpone 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, results of
operations and financial condition.

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

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



| |  |  | varying size, timing and contractual terms of orders for our products,                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to timely complete our service obligations related to product sales,                                                             
|
| |  |  | changes in the mix of revenue attributable to higher-margin product
license revenue as opposed to substantially lower-margin service
revenue,
|
| |  |  | customers decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next,         
|
| |  |  | changes in demand for our software or for enterprise software generally,                                                                     
|
| |  |  | announcements or introductions of new products by our competitors,                                                                           



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| |  |  | software defects and other product quality problems,                                                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to integrate acquisitions,                                                                                                                                                                                                            
|
| |  |  | our ability to release new U.S. and international products on a timely basis,                                                                                                                                                                     
|
| |  |  | any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting
organizations to help provide implementation, support and training
services when our own capacity is constrained, and
|
| |  |  | our ability to hire, train and retain sufficient engineering,
consulting, training and sales staff.                                                                                                                                               

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

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

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

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

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

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



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

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

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

Our service revenues, which includes fees for consulting, implementation,
maintenance and training, were 44% of our revenues for the nine months ended
September 30, 2001, 42% of our revenues for the year ended December 31, 2000,
47% of our revenues for the year ended December 31, 1999 and 34% of our
revenues for the year ended December 31, 1998. Our service revenues have
substantially lower gross margins than license revenues. Our cost of service
revenues for the nine months ended September 30, 2001 and the years ended
December 31, 2000, 1999 and 1998 was 105%, 101%, 102% and 120%, respectively,
of our service revenues. An increase in the percentage of total revenues
represented by services revenues could adversely affect our overall gross
margins.

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



| |  |  | the 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 outside consulting organizations provide services directly to customers.

New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products and could result in pressure
to price our products in a manner that reduces our margins.

Competitive pressures could prevent us from growing, reduce our market
share or require us to reduce prices on our products and services, any of which
could harm our business. We compete principally with vendors of:



| |  |  | data management and data analysis software tools such as Kana Software, Microstrategy and Oracle,
| | - |  | -------------------------------------------------------------------------------------------------
|
| |  |  | enterprise application software such as PeopleSoft, SAP and Siebel Systems,                      
|
| |  |  | marketing campaign management software tools such as Xchange, Chordiant and Recognition Systems. 



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

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

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

Our revenues might be harmed by resistance to adoption of our software by
information technology departments.

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

If the market in which we sell our products and services does not grow as we
anticipate, our revenues will be lower than our expectations or even reduced.

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



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

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

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



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Our future success depends on our ability to address the rapidly changing
needs of our customers and potential customers. We must maintain and improve
our E.piphany E.5 System and develop new products that include new
technological developments, keep pace with products of our competitors and
satisfy the changing requirements of our customers. If we do not, we may not
achieve market acceptance and we may be unable to attract new customers.
E.piphany may also lose existing customers, to whom we seek to sell additional
software solutions and professional services.

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



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

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

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

The E.piphany E.5 System must work with commercially available software
programs that are currently popular. If these software programs do not remain
popular, or we do not update our software to be compatible with newer versions
of these programs, we may lose customers.

In order to operate the E.piphany E.5 System, the system must be installed
on both a computer server running the Microsoft Windows NT or Windows 2000
computer operating systems and a computer server running database software from
Microsoft or Oracle. We are currently in various stages of porting our software
to operate on additional operating systems and databases, including UNIX, IBM
DB2 and other third party application servers such as BEA Systems Web Logic
product. If we fail to successfully complete these modifications in a timely
manner, we may lose sales and revenues. In addition, users access the E.piphany
E.5 System through standard Internet browsers such as Microsoft Internet
Explorer. If we fail to obtain access to developer versions of any of these
software products, we may be unable to build and enhance our products on
schedule.

After installation, the E.piphany E.5 System collects and analyzes data to
profile customers characteristics and preferences. This data may be stored in
a variety of our customers existing software systems, including systems from
Oracle, PeopleSoft, Siebel Systems, and SAP, running on a variety of computer
operating systems. If we fail to enhance our software to collect data from new
versions of these products, we may lose potential customers. If we lose
customers, our revenues and profitability may be harmed.

Our products have long sales cycles which makes it difficult to plan expenses
and forecast results.

It takes us between three and 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 the quarter in which a particular sale will occur and to plan
expenditures



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

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

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

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

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

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

We expect as part of our strategy to increase international sales through
the use of direct and indirect sales channels. We will be even more dependent
on indirect sales channels in the future due to our international strategy.



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We also plan to expand our international direct sales force and therefore
must hire additional sales personnel outside the United States. Our ability to
develop and maintain these channels will significantly affect our ability to
penetrate international markets.

We have grown very quickly and if we fail to manage our growth, our ability to
generate new revenues and achieve profitability would be harmed.

We have grown significantly since our inception and will need to grow
quickly in the future. Any failure to manage this growth could impede our
ability to increase revenues and achieve profitability. We have increased our
number of employees from 21 at December 31, 1997 to 736 as of September 30,
2001. Our future expansion could be expensive and strain our management and
other resources. In order to manage growth effectively, we must:



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

If we do 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:



| |  |  | 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 goodwill and
other intangible assets and the incidence of contingent liabilities.

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

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



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We have been contacted by a company which has asked us to evaluate the
need for a license of several patents that the company holds directed to data
extraction technology. This company has filed litigation alleging infringement
of its patents against several of our competitors. We cannot assure you that
the holder of the patents will not file litigation against us or that we would
prevail in the case of such litigation. In addition, the patent holder has
informed us that it has applications pending in numerous foreign countries. The
patent holder may also have applications on file in the United States covering
related subject matter which are confidential until the patent or patents, if
any, 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. 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 patent, copyright, trademark and trade secrets,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. We may be required to spend significant resources to
monitor and police our intellectual property rights. If we fail to successfully
enforce our intellectual property rights, our competitive position may be
harmed.

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

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

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

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

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

In addition, due to privacy concerns, some Internet commentators, consumer
advocates, and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of
customer profiling data. In



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addition, Internet users can, if they choose, configure their web browsers
to limit the collection of user data for customer profiling. Should many
Internet users choose to limit the use of customer profiling technologies, or
if major countries or regions adopt legislation or other restrictions on the
use of customer profiling data, our software would be less useful to customers,
and our sales and profits could decrease.

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

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



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

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

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

Because our software products are used for important decision-making
processes and enable our customers to interact with their customers, product
defects may also give rise to product liability claims. Although our license
agreements with customers typically contain provisions designed to limit our
exposure, some courts may not enforce all or part of these limitations.
Although we have not experienced any product 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, our business and operating
results could be seriously harmed. In addition, doing business internationally
involves greater expense and many additional risks, particularly:



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



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| |  |  | differing intellectual property rights,                                          
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | differing labor regulations,                                                     
|
| |  |  | unexpected changes in regulatory requirements,                                   
|
| |  |  | changes in a specific countrys or regions political or economic conditions,    
|
| |  |  | greater difficulty in establishing, staffing and managing foreign operations, and
|
| |  |  | fluctuating exchange rates.                                                      

We have expanded our international operations, which has required a
significant amount of attention from our management and substantial financial
resources. As of September 30, 2001, we had 144 employees located in Asia,
Australia, Canada, Europe, and Latin America.

If database access becomes standardized, demand for our products will be
reduced.

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

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

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

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

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

Our board of directors also has the ability to issue preferred stock
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 antitakeover 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. We have not entered into any
foreign currency hedging transactions to manage this risk. Currently, we have
operations in Asia, Australia, Canada, Europe, and Latin America and conduct
transactions in the local currency of each location. To date, the impact of
fluctuations in the relative value of other currencies has not been material
and we do not expect them to be material in the future.

Interest Rate Risk

As of September 30, 2001, we had short-term investments of $123.0 million
which consisted of fixed income securities. Declines of interest rates over
time would reduce our interest income from our short-term investments. Based
upon our balance of short-term investments, a decrease in interest rates of
0.5% would cause a corresponding decrease in our annual interest income by
approximately $615,000. As of September 30, 2001, we did not have any
short-term or long-term debt outstanding.

The following summarizes the Companys short-term investments and the
weighted average yields, as of September 30, 2001 (in thousands, except
interest rates):

|                            |  |                        |        |      |  |       |        |   |  |   |         |  
|--------------------------- |  | ---------------------- | ------ | ---- |  | ----- | ------ | - |  | - | ------- | -
|                            |  | Expected maturity date
|                            |  |                       
|                            |  | 2001                   |        | 2002 |  | Total
|                            |  |                        |        |      |  |      
|Commercial paper            |  | $                      | 32,476 |      |  | $     | 6,414  |   |  | $ | 38,890  |  
|Weighted average yield      |  |                        | 3.82   | %    |  |       | 2.97   | % |  |   | 3.67    | %
|Corporate bonds             |  | $                      | 18,531 |      |  | $     | 21,879 |   |  | $ | 40,410  |  
|Weighted average yield      |  |                        | 3.91   | %    |  |       | 3.34   | % |  |   | 3.60    | %
|Government notes/bonds      |  | $                      | 38,695 |      |  | $     | 5,015  |   |  | $ | 43,710  |  
|Weighted average yield      |  |                        | 4.58   | %    |  |       | 3.66   | % |  |   | 4.47    | %
|                            |  |                        |        |      |  |       |        |   |  |   |         |  
|Total investment securities |  | $                      | 89,702 |      |  | $     | 33,308 |   |  | $ | 123,010 |  
|                            |  |                        |        |      |  |       |        |   |  |   |         |  



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PART II: OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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

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

Various plaintiffs have filed similar actions asserting virtually
identical allegations against more than 150 other companies. The lawsuits
against the Company 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. As of
November 8, 2001, no schedule has been established regarding the lawsuits
against the Company. The Company anticipates that all lawsuits against it
specifically will eventually be formally coordinated or consolidated with one
another. The Company believes it has meritorious defenses to these securities
lawsuits and will defend itself 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.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

See exhibit index attached hereto.

(b)  Reports on Form 8-K

None.



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SIGNATURES

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

|                        |                                                                              |                    
|----------------------- | ---------------------------------------------------------------------------- | -------------------
|                        | E.PIPHANY, INC                                                              
|                       
|DATE: November 14, 2001 | SIGNATURE:                                                                   | /s/ Roger S. Siboni
|                        |                                                                             
|                        | Roger S. Siboni
President, Chief Executive
Officer and Chairman of the Board

|                        |                                         |                    
|----------------------- | --------------------------------------- | -------------------
|DATE: November 14, 2001 | SIGNATURE:                              | /s/ Kevin J. Yeaman
|                        |                                        
|                        | Kevin J. Yeaman
Chief Financial Officer



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EXHIBIT INDEX

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



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