##### Table of Contents



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 June 30, 2002
|                                            
|OR                                          
|                                            
|                                             | [   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
      
          
      SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-26881

E.PIPHANY, INC.

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(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 July 31, 2002, was 72,181,584.





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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                
|EXHIBIT 99.1                 



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##### Table of Contents



E.PIPHANY, INC.

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

TABLE OF CONTENTS

|           |  |                                                                                                     |  |         
|---------- |  | --------------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                                     |  | Page No.
|          
|PART I     |  | FINANCIAL INFORMATION                                                                               |  |         
|          
|Item 1.    |  | Financial Statements                                                                                |  |         
|          
|           |  | Condensed Consolidated Balance Sheets -
As of December 31, 2001 and June 30, 2002                   |  | 3       
|          
|           |  | Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 2001 and 2002 |  | 4       
|          
|           |  | Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2002           |  | 5       
|          
|           |  | Notes to Condensed Consolidated Financial Statements                                                |  | 6       
|          
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations               |  | 14      
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                          |  | 31      
|          
|          
|PART II    |  | OTHER INFORMATION                                                                                   |  |         
|          
|Item 1.    |  | Legal Proceedings                                                                                   |  | 33      
|          
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                           |  | 33      
|          
|Item 3.    |  | Defaults Upon Senior Securities                                                                     |  | 33      
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                 |  | 33      
|          
|Item 5.    |  | Other Information                                                                                   |  | 34      
|          
|Item 6.    |  | Exhibits and reports on Form 8-K                                                                    |  | 34      
|          
|          
|SIGNATURES |  | 35                                                                                                 
|          
|          





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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, |         | June 30,
|                                                    |                                              |                                            |        | 2001         |         | 2002    
|                                                    |                                              |                                            |        |              |         |         
|                                                    |                                              |                                            |        |              |         |          |        | (unaudited)
|ASSETS                                              |                                              |                                            |        |              |         |          |        |            
|Current assets:                                     |                                              |                                            |        |              |         |          |        |            
|                                                    | Cash and cash equivalents                    |                                            | $      | 202,940      |         |          | $      | 163,478     |        
|                                                    | Short-term investments                       |                                            |        | 121,324      |         |          |        | 139,894     |        
|                                                    | Accounts receivable, net                     |                                            |        | 13,703       |         |          |        | 10,704      |        
|                                                    | Prepaid expenses and other assets            |                                            |        | 3,866        |         |          |        | 3,352       |        
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total current assets                       |        |              | 341,833 |          |        |             | 317,428 | 
|Property and equipment, net                         |                                              |                                            | 22,320 |              |         |          | 16,069 |            
|Goodwill and purchased intangibles, net             |                                              |                                            | 98,113 |              |         |          | 92,541 |            
|Other assets                                        |                                              |                                            | 3,589  |              |         |          | 2,594  |            
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total assets                               |        | $            | 465,855 |          |        | $           | 428,632 | 
|                                                    |                                              |                                            |        |              |         |          |        |            
|LIABILITIES AND STOCKHOLDERS EQUITY                |                                              |                                            |        |              |         |          |        |            
|Current liabilities:                                |                                              |                                            |        |              |         |          |        |            
|                                                    | Current portion of capital lease obligations |                                            | $      | 498          |         |          | $      | 345         |        
|                                                    | Accounts payable                             |                                            |        | 2,537        |         |          |        | 1,017       |        
|                                                    | Accrued liabilities                          |                                            |        | 11,260       |         |          |        | 9,299       |        
|                                                    | Accrued compensation                         |                                            |        | 11,873       |         |          |        | 9,504       |        
|                                                    | Current portion of restructuring costs       |                                            |        | 8,954        |         |          |        | 9,553       |        
|                                                    | Deferred revenue                             |                                            |        | 15,380       |         |          |        | 18,021      |        
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total current liabilities                  |        |              | 50,502  |          |        |             | 47,739  | 
|Restructuring costs, net of current portion         |                                              |                                            | 23,454 |              |         |          | 25,756 |            
|Other long-term liabilities, net of current portion |                                              |                                            | 472    |              |         |          | 157    |            
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total liabilities                          |        |              | 74,428  |          |        |             | 73,652  | 
|Minority interest                                   |                                              |                                            | 35     |              |         |          |       |            
|Stockholders equity:                               |                                              |                                            |        |              |         |          |        |            
|                                                    | Common stock                                 |                                            |        | 7            |         |          |        | 7           |        
|                                                    | Additional paid-in capital                   |                                            |        | 3,807,410    |         |          |        | 3,813,344   |        
|                                                    | Stockholders notes receivable               |                                            |        | (778         | )       |          |        | (730        | )      
|                                                    | Accumulated other comprehensive losses       |                                            |        | (564         | )       |          |        | (147        | )      
|                                                    | Deferred compensation                        |                                            |        | (901         | )       |          |        | (406        | )      
|                                                    | Accumulated deficit                          |                                            |        | (3,413,782   | )       |          |        | (3,457,088  | )      
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total stockholders equity                 |        |              | 391,392 |          |        |             | 354,980 | 
|                                                    |                                              |                                            |        |              |         |          |        |            
|                                                    |                                              | Total liabilities and stockholders equity |        | $            | 465,855 |          |        | $           | 428,632 | 
|                                                    |                                              |                                            |        |              |         |          |        |            

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

3



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##### Table of Contents






E.PIPHANY, INC.

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

|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |        |         |  
|------------------------------------------------------------- | -------------------------------------------------- | ------------------------ | ------ | ------------------ | -------- | ---------------- | ------ | ------ | ------- | ----------- | ------ | ------- | -------- | - | ------ | ------ | ------- | -
|                                                              |                                                    |                          |        | Three Months Ended |          | Six Months Ended
|                                                              |                                                    |                          |        | June 30,           |          | June 30,        
|                                                              |                                                    |                          |        |                    |          |                 
|                                                              |                                                    |                          |        | 2001               |          | 2002             |        | 2001   |         | 2002       
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |            
|                                                              |                                                    |                          |        | as adjusted        |          |                  |        |        |         | as adjusted |        |         |          |  
|                                                              |                                                    |                          |        | (1)                |          |                  |        |        |         | (1)         |        |         |          |  
|Revenues:                                                     |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              | Product license                                    |                          | $      | 16,261             |          |                  | $      | 6,817  |         |             | $      | 38,693  |          |   | $      | 17,728 |        
|                                                              | Services (1)                                       |                          |        | 15,994             |          |                  |        | 12,581 |         |             |        | 32,861  |          |   |        | 23,816 |        
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Total revenues           |        |                    | 32,255   |                  |        |        | 19,398  |             |        |         | 71,554   |   |        |        | 41,544  |  
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|Cost of revenues:                                             |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              | Product license                                    |                          |        | 445                |          |                  |        | 324    |         |             |        | 1,189   |          |   |        | 570    |        
|                                                              | Services (1)                                       |                          |        | 15,070             |          |                  |        | 8,030  |         |             |        | 37,799  |          |   |        | 16,194 |        
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Total cost of revenues   |        |                    | 15,515   |                  |        |        | 8,354   |             |        |         | 38,988   |   |        |        | 16,764  |  
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Gross profit             |        |                    | 16,740   |                  |        |        | 11,044  |             |        |         | 32,566   |   |        |        | 24,780  |  
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|Operating expenses:                                           |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              | Research and development                           |                          |        | 10,789             |          |                  |        | 8,950  |         |             |        | 22,208  |          |   |        | 17,566 |        
|                                                              | Sales and marketing                                |                          |        | 24,223             |          |                  |        | 12,747 |         |             |        | 48,201  |          |   |        | 29,674 |        
|                                                              | General and administrative                         |                          |        | 6,921              |          |                  |        | 3,141  |         |             |        | 15,560  |          |   |        | 6,387  |        
|                                                              | Restructuring costs                                |                          |        |                   |          |                  |        | 11,228 |         |             |        |        |          |   |        | 11,722 |        
|                                                              | Amortization of goodwill and purchased intangibles |                          |        | 274,450            |          |                  |        | 2,640  |         |             |        | 544,886 |          |   |        | 5,288  |        
|                                                              | Stock-based compensation                           |                          |        | 456                |          |                  |        | 168    |         |             |        | 746     |          |   |        | 545    |        
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Total operating expenses |        |                    | 316,839  |                  |        |        | 38,874  |             |        |         | 631,601  |   |        |        | 71,182  |  
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Loss from operations     |        |                    | (300,099 | )                |        |        | (27,830 | )           |        |         | (599,035 | ) |        |        | (46,402 | )
|Other income, net                                             |                                                    |                          | 6,055  |                    |          |                  | 1,540  |        |         |             | 9,596  |         |          |   | 3,096  |       
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|                                                              |                                                    | Net loss                 |        | $                  | (294,044 | )                |        | $      | (26,290 | )           |        | $       | (589,439 | ) |        | $      | (43,306 | )
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|Basic and diluted net loss per share                          |                                                    | $                        | (4.30  | )                  |          | $                | (0.37  | )      |         | $           | (8.79  | )       |          | $ | (0.61  | )     
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       
|Shares used in computing basic and diluted net loss per share |                                                    |                          | 68,306 |                    |          |                  | 71,704 |        |         |             | 67,061 |         |          |   | 71,190 |       
|                                                              |                                                    |                          |        |                    |          |                  |        |        |         |             |        |         |          |   |        |       



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

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

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##### Table of Contents






E.PIPHANY, INC.

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

|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |         |       |        |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------ | ----------------------------------------- | ------- | ---------------- | ------- | ------- | ----- | ------ | ------- | -
|                                                              |                                                                              |                                                                             |                                      |                                           |         | Six Months Ended
|                                                              |                                                                              |                                                                             |                                      |                                           |         | June 30,        
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                 
|                                                              |                                                                              |                                                                             |                                      |                                           |         | 2001             |         | 2002   
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Cash flows from operating activities:                         |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              | Net loss                                                                     |                                                                             | $                                    | (589,439                                  | )       |                  | $       | (43,306 | )    
|                                                              | Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                             |                                      |                                           |         |                  |         |         |      
|                                                              |                                                                              | Depreciation and amortization                                               |                                      |                                           | 1,725   |                  |         |         | 5,207 |       
|                                                              |                                                                              | Provision for doubtful accounts                                             |                                      |                                           | 2,700   |                  |         |         | 298   |       
|                                                              |                                                                              | Stock-based compensation                                                    |                                      |                                           | 744     |                  |         |         | 545   |       
|                                                              |                                                                              | Noncash restructuring costs                                                 |                                      |                                           |        |                  |         |         | 2,233 |       
|                                                              |                                                                              | Amortization of goodwill and purchased intangibles                          |                                      |                                           | 544,886 |                  |         |         | 5,288 |       
|                                                              |                                                                              | Minority interest in net loss of consolidated subsidiaries                  |                                      |                                           |        |                  |         |         | (35   | )     
|                                                              |                                                                              | Changes in operating assets and liabilities, net of
effect of acquisitions: |                                      |                                           |         |                  |         |         |       |       
|                                                              |                                                                              |                                                                             | Accounts receivable                  |                                           |         | 2,671            |         |         |       | 2,701  |        
|                                                              |                                                                              |                                                                             | Prepaid expenses and other assets    |                                           |         | (370             | )       |         |       | 1,509  |        
|                                                              |                                                                              |                                                                             | Accounts payable                     |                                           |         | 1,058            |         |         |       | (1,520 | )      
|                                                              |                                                                              |                                                                             | Accrued liabilities and compensation |                                           |         | (5,701           | )       |         |       | (4,250 | )      
|                                                              |                                                                              |                                                                             | Restructuring costs                  |                                           |         |                 |         |         |       | 2,901  |        
|                                                              |                                                                              |                                                                             | Deferred revenue                     |                                           |         | (3,376           | )       |         |       | 2,641  |        
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              |                                                                              |                                                                             |                                      | Net cash used in operating activities     |         |                  | (45,102 | )       |       |        | (25,788 | )
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Cash flows from investing activities:                         |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              | Purchases of property and equipment                                          |                                                                             |                                      | (8,056                                    | )       |                  |         | (975    | )    
|                                                              | Cash acquired in acquisitions                                                |                                                                             |                                      | 208                                       |         |                  |         |        |      
|                                                              | Acquisition related costs and changes in accruals                            |                                                                             |                                      | 1,017                                     |         |                  |         | 45      |      
|                                                              | Purchases and sales of investments, net                                      |                                                                             |                                      | (48,644                                   | )       |                  |         | (18,437 | )    
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              |                                                                              |                                                                             |                                      | Net cash used in investing activities     |         |                  | (55,475 | )       |       |        | (19,367 | )
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Cash flows from financing activities:                         |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              | Principal payments on capital lease obligations                              |                                                                             |                                      | (360                                      | )       |                  |         | (309    | )    
|                                                              | Repayments on notes payable                                                  |                                                                             |                                      | (2,088                                    | )       |                  |         |        |      
|                                                              | Repayments on notes receivable                                               |                                                                             |                                      | 1,023                                     |         |                  |         | 48      |      
|                                                              | Proceeds from subsidiary stock offering                                      |                                                                             |                                      | 35                                        |         |                  |         |        |      
|                                                              | Proceeds from sale of common stock, net of repurchases                       |                                                                             |                                      | 5,380                                     |         |                  |         | 5,670   |      
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|                                                              |                                                                              |                                                                             |                                      | Net cash provided by financing activities |         |                  | 3,990   |         |       |        | 5,409   |  
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Effect of foreign exchange rates on cash and cash equivalents |                                                                              |                                                                             | 289                                  |                                           |         |                  | 284     |        
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Net decrease in cash and cash equivalents                     |                                                                              |                                                                             | (96,298                              | )                                         |         |                  | (39,462 | )      
|Cash and cash equivalents at beginning of period              |                                                                              |                                                                             | 319,634                              |                                           |         |                  | 202,940 |        
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        
|Cash and cash equivalents at end of period                    |                                                                              | $                                                                           | 223,336                              |                                           |         | $                | 163,478 |        
|                                                              |                                                                              |                                                                             |                                      |                                           |         |                  |         |        

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

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##### Table of Contents






E.PIPHANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

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

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the
financial position of E.piphany and its subsidiaries as of June 30, 2002, and
the results of operations for the three and six months ended June 30, 2002 and
2001 and cash flows for the six months ended June 30, 2002 and 2001. The
results for the three and six months ended June 30, 2002 and 2001 are not
necessarily indicative of the results expected for the full fiscal year.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of E.piphany
and its subsidiaries. As of June 30, 2002, the Company held 90% of the capital
stock of its subsidiary, Nihon E.piphany, K.K. The Company maintains an
ownership percentage of 100% for all other subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is the local currency.
The Company translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the current rates of exchange
in effect at the end of each period. Revenues and expenses are translated using
rates that approximate those in effect during the period. Gains and losses from
translation adjustments are reflected in stockholders equity in the condensed
consolidated balance sheets under the caption Accumulated other comprehensive
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.

Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with an original
maturity of 90 days or less at the date of purchase to be cash equivalents.
Short-term investments generally consist of highly liquid securities with
original maturities in excess of 90 days. The Company has classified its
short-term investments as available for sale. Such investments are carried at
fair value with unrealized gains and losses reported within accumulated other
comprehensive losses. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in other
income, net. From time to time, we are required to obtain letters of credit
that serve as collateral for our obligations to third parties under facility lease
agreements. These letters of credit are secured by cash, cash equivalents and
short-term investments. As of June 30, 2002, we had
$9.2 million securing letters of credit, all of which relate to facility lease agreements that have
expiration dates greater than twelve months.

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Use of Estimates in Preparation of Financial Statements

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

Impairment of Long-Lived Assets,
Identifiable Intangible Assets and Other Assets

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

From time to time, the Company obtains the right to embed and distribute
third-party software technology with its products under reseller agreements
with third-party vendors. During 2001, the Company made a prepayment of
royalties to a third-party vendor in exchange for the right to embed and
distribute certain software technology for a specified term. The prepayment is
reflected as a current and long-term asset with a total carrying value of $1.8
million to be amortized using the straight-line method over the estimated
useful life of the asset. In the third quarter of 2002, the Company was
advised by the vendor that it had elected to discontinue its line of business
relating to the embedded technology prior to the natural expiration of the
contract with the Company. While the Company believes that it is contractually
entitled to a refund of its prepayment, it may be required to write down the
value of the asset and record a charge to the income statement.

Revenue Recognition

E.piphany recognizes revenue as follows:

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

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

Maintenance Agreements.Maintenance agreements generally require
E.piphany to provide technical support and unspecified software updates to
customers. Revenue derived from technical support and software updates is
recognized ratably over the term of the maintenance agreement and is included
in services revenue in the accompanying consolidated statements of operations.

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

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Accounts Receivable and Deferred Revenue

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

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

The carrying value of the Companys financial instruments, including cash
and cash equivalents, investments, and accounts receivable approximates fair
market value. Financial instruments that subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, investments and
trade accounts receivable. Management believes that financial risks associated
with these financial instruments are minimal. The Companys customers are
primarily based in Asia, Australia, Canada, Europe, Latin America and the
United States. The Company performs credit evaluations of its prospective
customers and generally does not require collateral on accounts receivable. The
Company maintains reserves for potential credit losses; historically, such
reserves have been adequate to cover actual losses incurred.

No individual customer account receivable balance accounted for more than
10% of our total accounts receivable as of December 31, 2001 or June 30, 2002.
The Company did not recognize revenues from an individual customer that
accounted for more than 10% of our total revenues for the three and six months
ended June 30, 2002 and 2001.

Recent Accounting Pronouncements

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

The Company adopted the provisions of SFAS 141 and SFAS 142 as of January
1, 2002. Beginning on January 1, 2002, our unamortized balance of
goodwill and other intangible assets was subject to the new accounting
pronouncements of SFAS 141 and SFAS 142. As a result, acquired goodwill was no
longer amortized, but will continue to be subject to a periodic impairment
assessment. The provision of SFAS 142 also required the completion of a transitional
impairment test, with any impairments treated as a cumulative effect of change
in accounting principle. The Company completed the transitional impairment
test upon adoption, which did not result in an impairment of goodwill.

In November 2001, the Emerging Issues Task Force (EITF) reached
consensus on EITF No. 01-09, Accounting for Consideration Given by a Vendor to
a Customer or a Reseller of the Vendors Products. EITF No. 01-09 addresses
the accounting for consideration given by a vendor to a customer and is a
codification of EITF No. 00-14, Accounting for Certain Sales Incentives, EITF
No. 00-22 Accounting for Points and Certain Other Time-Based or Volume-Based
Sales Incentives Offers and Offers for Free Products or Services to be
Delivered in the Future and EITF No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendors Products.
The adoption of these did not have a material effect on our financial position
or results of operations.

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

|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                            |  | Three Months Ended |        | Six Months Ended
|                                            |  | June 30,           |        | June 30,        
|                                            |  |                    |        |                 
|                                            |  | 2001               |        | 2002             |  | 2001 |        | 2002
|                                            |  |                    |        |                  |  |      |        |     
|Services revenues (as originally presented) |  | $                  | 14,837 |                  |  | $    | 12,338 |      |  | $ | 30,482 |  |  | $ | 23,199 | 
|Impact of Topic D-103                       |  |                    | 1,157  |                  |  |      | 243    |      |  |   | 2,379  |  |  |   | 617    | 
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Services revenues (as currently presented)  |  | $                  | 15,994 |                  |  | $    | 12,581 |      |  | $ | 32,861 |  |  | $ | 23,816 | 
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 

|                                                    |  |                    |        |                  |  |      |       |      |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                    |  | Three Months Ended |        | Six Months Ended
|                                                    |  | June 30,           |        | June 30,        
|                                                    |  |                    |        |                 
|                                                    |  | 2001               |        | 2002             |  | 2001 |       | 2002
|                                                    |  |                    |        |                  |  |      |       |     
|Cost of services revenues (as originally presented) |  | $                  | 13,913 |                  |  | $    | 7,787 |      |  | $ | 35,420 |  |  | $ | 15,577 | 
|Impact of Topic D-103                               |  |                    | 1,157  |                  |  |      | 243   |      |  |   | 2,379  |  |  |   | 617    | 
|                                                    |  |                    |        |                  |  |      |       |      |  |   |        |  |  |   |        | 
|Cost of services revenues (as currently presented)  |  | $                  | 15,070 |                  |  | $    | 8,030 |      |  | $ | 37,799 |  |  | $ | 16,194 | 
|                                                    |  |                    |        |                  |  |      |       |      |  |   |        |  |  |   |        | 

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

3. Stockholders Equity

Stock-Based Compensation

Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of our common stock
and compensation related to equity instruments issued to non-employees for
services rendered. As of June 30, 2002, deferred compensation remaining to be
amortized totaled $0.4 million. This amount is being amortized over the
respective vesting periods of these equity instruments in a manner consistent
with FASB Interpretation No. 28. Total stock-based compensation was $0.7
million and $0.5 million for the six months ended June 30, 2001 and 2002,
respectively. Based on our deferred compensation balance as of June 30, 2002,
we expect amortization of approximately $0.1 million, $0.1 million, $0.1
million and $0.1 million for the remaining six months of 2002 and the years
ended December 31, 2003, 2004 and 2005, respectively.

4. Related Party Transactions

In July 1998 we loaned $640,000 to Roger Siboni, our chief executive
officer, to purchase 2,400,000 shares of our common stock at $0.26 2/3 per
share. This loan is secured by 531,151 shares of E.piphany common stock. This
loan is due on July 1, 2008 and accrues interest at 5.88% per annum compounded
monthly. As of June 30, 2002, the outstanding balance of this loan including
accrued interest was $592,000.

Mr. Siboni was also offered a loan of $250,000 per year for a period
beginning August 1, 1998 and ending July 31, 2000, drawable on a monthly basis.
This loan bears interest at 5.6% per annum compounded monthly. Amounts drawn
on this loan as of January 1, 2000 were paid in full upon Mr. Sibonis first
sale of E.piphany stock. Mr.

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Siboni then continued to draw down from this loan through July 31, 2000.
As of June 30, 2002, the outstanding balance of this loan including accrued
interest was $43,000.

As of June 30, 2002, Mr. Siboni was a member of the board of directors of
three of E.piphanys customers. Total revenues to E.piphany from these
customers were $55,000 and $111,000 for the three and six months ended June 30,
2002, respectively. Total revenues to E.piphany from these customers were
$45,000 and $90,000 for the three and six months ended June 30, 2001,
respectively. E.piphany had accounts receivable balances from these customers
totaling $0 and $81,000 as of June 30, 2002 and December 31, 2001,
respectively.

In addition, as of June 30, 2002, three of E.piphanys customers had board
members that were also on E.piphanys Board of Directors. Total revenues to
E.piphany from these customers were $136,000 and $342,000 for the three
and six months ended June 30, 2002, respectively. Total revenues to E.piphany
from these customers were $150,000 and $206,000 for the three and six months
ended June 30, 2001, respectively. E.piphany had accounts receivable balances
from these customers totaling $10,000 and $0 as of June 30, 2002 and December
31, 2001, respectively.

5. Computation of Basic and Diluted Net Loss Per Share

Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, Earnings Per Share, (SFAS No. 128) for all periods
presented. In accordance with SFAS No. 128, basic net loss per common share has
been computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase.

The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share amounts):

|                                                                                      |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------ | -------- | ---------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                                      |  | Three Months Ended |          | Six Months Ended
|                                                                                      |  | June 30,           |          | June 30,        
|                                                                                      |  |                    |          |                 
|                                                                                      |  | 2001               |          | 2002             |  | 2001 |         | 2002
|                                                                                      |  |                    |          |                  |  |      |         |     
|Net loss                                                                              |  | $                  | (294,044 | )                |  | $    | (26,290 | )    |  | $ | (589,439 | ) |  | $ | (43,306 | )
|                                                                                      |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  
|Basic and diluted:                                                                    |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  
|Weighted average shares of common stock outstanding                                   |  |                    | 70,246   |                  |  |      | 71,902  |      |  |   | 69,424   |   |  |   | 71,548  |  
|Less: Weighted average shares subject to repurchase                                   |  |                    | (1,940   | )                |  |      | (198    | )    |  |   | (2,363   | ) |  |   | (358    | )
|                                                                                      |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  
|Weighted average shares used in computing basic
and diluted net loss per common share |  |                    | 68,306   |                  |  |      | 71,704  |      |  |   | 67,061   |   |  |   | 71,190  |  
|                                                                                      |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  
|Basic and diluted net loss per common share                                           |  | $                  | (4.30    | )                |  | $    | (0.37   | )    |  | $ | (8.79    | ) |  | $ | (0.61   | )
|                                                                                      |  |                    |          |                  |  |      |         |      |  |   |          |   |  |   |         |  

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

|                                                                                                                                                                                                                         |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                                                                                                                                                                                         |  | Three Months Ended |        | Six Months Ended
|                                                                                                                                                                                                                         |  | June 30,           |        | June 30,        
|                                                                                                                                                                                                                         |  |                    |        |                 
|                                                                                                                                                                                                                         |  | 2001               |        | 2002             |  | 2001 |        | 2002
|                                                                                                                                                                                                                         |  |                    |        |                  |  |      |        |     
|Options excluded
due to the exercise
price exceeding the
average fair market
value of the
Companys common
stock during the
period                                                                                       |  |                    | 4,618  |                  |  |      | 11,808 |      |  |  | 6,326  |  |  |  | 6,945  | 
|Options excluded
for which the
exercise price was
less than the
average fair market
value of the
Companys common
stock during the
period but were
excluded as
inclusion would
decrease the
Companys net loss
per share |  |                    | 4,713  |                  |  |      | 1,522  |      |  |  | 4,281  |  |  |  | 6,590  | 
|Common shares
excluded resulting
from common stock
subject to
repurchase                                                                                                                                                 |  |                    | 1,940  |                  |  |      | 198    |      |  |  | 2,363  |  |  |  | 358    | 
|                                                                                                                                                                                                                         |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 
|Total common stock
equivalents
excluded from
diluted net loss
per common share                                                                                                                                           |  |                    | 11,271 |                  |  |      | 13,528 |      |  |  | 12,970 |  |  |  | 13,893 | 
|                                                                                                                                                                                                                         |  |                    |        |                  |  |      |        |      |  |  |        |  |  |  |        | 

6. Commitments and Contingencies

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Litigation

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

The Company, three of our current and former officers, and three
underwriters in our initial public offering (IPO) have been named as
defendants in a consolidated shareholder lawsuit in the United States District
Court for the Southern District of New York, In re E.piphany, Inc. Initial
Public Offering Securities Litigation,01-CV-6158. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation,21 MC 92. Plaintiffs in the coordinated proceeding
bring claims under the federal securities laws against numerous underwriters,
companies, and individuals, alleging generally that defendant underwriters
engaged in improper and undisclosed activities concerning the allocation of
shares in the IPOs of more than 300 companies during late 1998 through 2000.
Among other things, plaintiffs allege that the underwriters customers had to
pay excessive brokerage commissions and purchase additional shares of stock in
the aftermarket in order to receive favorable allocations of shares in an IPO.
The consolidated amended complaint in our case seeks unspecified damages on
behalf of a purported class of purchasers of our common stock between September
21, 1999 and December 6, 2000. Defendants have filed motions to dismiss. We
believe we have meritorious defenses to the claims against us and will defend
ourselves vigorously.

Restructuring Costs

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

The following table summarizes restructuring charges taken through June
30, 2002 (in thousands):

|                                    |                                             |   |              |        |         |   |          |        |          |   |          |        |   |   |        |        |            |   |        |        |  
|----------------------------------- | ------------------------------------------- | - | ------------ | ------ | ------- | - | -------- | ------ | -------- | - | -------- | ------ | - | - | ------ | ------ | ---------- | - | ------ | ------ | -
|                                    |                                             |   | Accrued      |        |         |   |          |        |          |   |          |        |   |   |        |        | Accrued   
|                                    |                                             |   | Balance at   |        |         |   |          |        |          |   |          |        |   |   |        |        | Balance at
|                                    |                                             |   | December 31, |        | Total   |   | Cash     |        | Non Cash |   | June 30,
|                                    |                                             |   | 2001         |        | Charges |   | Payments |        | Charges  |   | 2002    
|                                    |                                             |   |              |        |         |   |          |        |          |   |         
|Severance and related charges       |                                             | $ | 58           |        |         | $ | 2,600    |        |          | $ | (2,006   | )      |   | $ | (214   | )      |            | $ | 438    |       
|Write-off of property and equipment |                                             |   |             |        |         |   | 2,421    |        |          |   |         |        |   |   | (2,019 | )      |            |   | 402    |       
|Lease abandonment costs             |                                             |   | 32,350       |        |         |   | 6,701    |        |          |   | (4,582   | )      |   |   |       |        |            |   | 34,469 |       
|                                    |                                             |   |              |        |         |   |          |        |          |   |          |        |   |   |        |        |            |   |        |       
|                                    | Total                                       |   |              | 32,408 |         |   | $        | 11,722 |          |   | $        | (6,588 | ) |   | $      | (2,233 | )          |   |        | 35,309 |  
|                                    |                                             |   |              |        |         |   |          |        |          |   |          |        |   |   |        |        |            |   |        |       
|                                    | Less: current portion                       |   |              | (8,954 | )       |   |          |        |          |   |          |        |   |   |        |        |            |   |        | (9,553 | )
|                                    |                                             |   |              |        |         |   |          |        |          |   |          |        |   |   |        |        |            |   |        |       
|                                    | Restructuring costs, net of
current portion |   | $            | 23,454 |         |   |          |        |          |   |          |        |   |   |        |        |            |   | $      | 25,756 |  
|                                    |                                             |   |              |        |         |   |          |        |          |   |          |        |   |   |        |        |            |   |        |       

Severance and related charges primarily consisted of involuntary
termination benefits, including the acceleration of certain stock option grants
in connection with terminated employees, and payroll taxes. In the quarter
ended September 30, 2001, the company reduced its workforce by approximately
13%, and in the quarter ended June 30, 2002 by approximately an additional 15%.
The terminations included sales and marketing, research and development and
general administrative personnel, and were across all geographic regions.

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

Lease abandonment costs related to the abandonment of leased facilities in
Atlanta, Boston, Chicago, New York, San Mateo, Hong Kong, Singapore and the
United Kingdom. Lease abandonment costs reflected remaining lease liabilities
and brokerage fees stated at actual costs reduced by estimated sublease income.
The estimated costs of

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abandoning these leased facilities, including estimated sublease costs and
income, were based on market information trend analyses provided by a
commercial real estate brokerage firm retained by the Company.

Adjustments to the restructuring reserves will be made in future periods,
if necessary, based upon the then current actual events and circumstances. As
the assumptions used are subject to changing market conditions and other
factors that are outside of the control of the Company, such adjustments could
result in material increases or decreases in the currently accrued amounts.
Actual future cash requirements may differ materially from the accrual balance
at June 30, 2002. As of June 30, 2002, $34.3 million of lease termination
costs, net of anticipated sublease income, remains accrued and is expected to
be utilized by 2017.

7. Segment Information

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

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

|          |                |       |   |                    |        |                  |   |        |        |      |   |        |        |  |   |        |        | 
|--------- | -------------- | ----- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |                |       |   | Three Months Ended |        | Six Months Ended
|          |                |       |   | June 30,           |        | June 30,        
|          |                |       |   |                    |        |                 
|          |                |       |   | 2001               |        | 2002             |   | 2001   |        | 2002
|          |                |       |   |                    |        |                  |   |        |        |     
|Revenues: |                |       |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|          | United States  |       | $ | 26,877             |        |                  | $ | 13,139 |        |      | $ | 56,932 |        |  | $ | 30,435 |       
|          | United Kingdom |       |   | 4,115              |        |                  |   | 2,096  |        |      |   | 11,896 |        |  |   | 3,854  |       
|          | Rest of World  |       |   | 1,263              |        |                  |   | 4,163  |        |      |   | 2,726  |        |  |   | 7,255  |       
|          |                |       |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|          |                | Total |   | $                  | 32,255 |                  |   | $      | 19,398 |      |   | $      | 71,554 |  |   | $      | 41,544 | 
|          |                |       |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       

8. Goodwill and Other Intangible Assets

Prior to the adoption of SFAS 142, the Company periodically assessed the
impairment of long-lived assets, including identifiable intangibles in
accordance with the provisions of SFAS No. 121, Accounting for the Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed of. The Company
also periodically assessed the impairment of enterprise level goodwill in
accordance with the provisions of Accounting Principals Board Opinion No. 17,
Intangible Assets (APB 17). As part of its review of its third quarter of
2001 financial results, the Company performed an impairment assessment of
identifiable intangible assets and goodwill in connection with all of its
acquisitions. The impairment assessment was performed with the assistance of
independent valuation experts to determine whether any impairment existed. The
impairment indicators included, but were not limited to, the significant
decline in the Companys stock price, the net book value of assets, which
significantly exceeded the Companys market capitalization, and the overall
decline in industry growth rates, which have negatively impacted the Companys
revenues and forecasted revenue growth rates, which precipitated the Companys
reduction in workforce and overall restructuring in the quarter ended September
30, 2001. As a result, the Company recorded a $1.7 billion impairment charge to
reduce goodwill and other intangible assets associated with all of its
acquisitions to reflect their estimated fair market value. Fair market value
was determined based on discounted future cash flows for the acquisitions that
had separately identifiable cash flows. Prior to recording the impairment
charge, the Companys quarterly amortization expense was approximately $270.0
million compared to amortization expense of approximately $17.0 million in the
quarter following the impairment charge.

In the first quarter of 2002, the Company adopted SFAS 142. SFAS 142
supersedes APB 17 and states that goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed for impairment
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. Prior to the adoption of the new
accounting pronouncements, the Companys quarterly amortization expense was
approximately $17.0 million compared to amortization expense of approximately
$2.6 million in the quarter following the adoption.

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

|                                                           |  |                    |          |                    |  |                  |         |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------ | -------- | ------------------ |  | ---------------- | ------- | ---- |  | ---- | -------- | ---- |  | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                                           |  | Three Months Ended |          | Three Months Ended |  | Six Months Ended
|                                                           |  | March 31,          |          | June 30,           |  | June 30,        
|                                                           |  |                    |          |                    |  |                 
|                                                           |  | 2001               |          | 2002               |  | 2001             |         | 2002 |  | 2001 |          | 2002
|                                                           |  |                    |          |                    |  |                  |         |      |  |      |          |     
|Net loss                                                   |  | $                  | (295,395 | )                  |  | $                | (17,016 | )    |  | $    | (294,044 | )    |  | $ | (26,290 | ) |  | $ | (589,439 | ) |  | $ | (43,306 | )
|Amortization of
goodwill and
assembled workforce           |  |                    | 260,012  |                    |  |                  | 0       |      |  |      | 263,090  |      |  |   | 0       |   |  |   | 523,102  |   |  |   | 0       |  
|                                                           |  |                    |          |                    |  |                  |         |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |         |  
|Adjusted net loss                                          |  | $                  | (35,383  | )                  |  | $                | (17,016 | )    |  | $    | (30,954  | )    |  | $ | (26,290 | ) |  | $ | (66,337  | ) |  | $ | (43,306 | )
|Basic and diluted
earnings per share                       |  | $                  | (4.48    | )                  |  | $                | (0.24   | )    |  | $    | (4.30    | )    |  | $ | (0.37   | ) |  | $ | (8.79    | ) |  | $ | (0.61   | )
|Amortization of
goodwill and
assembled workforce
per share |  |                    | 3.94     |                    |  |                  | 0.00    |      |  |      | 3.85     |      |  |   | 0.00    |   |  |   | 7.80     |   |  |   | 0.00    |  
|                                                           |  |                    |          |                    |  |                  |         |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |         |  
|Adjusted basic and
diluted earnings
per share              |  | $                  | (0.54    | )                  |  | $                | (0.24   | )    |  | $    | (0.45    | )    |  | $ | (0.37   | ) |  | $ | (0.99    | ) |  | $ | (0.61   | )
|                                                           |  |                    |          |                    |  |                  |         |      |  |      |          |      |  |   |         |   |  |   |          |   |  |   |         |  

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

|                     |  |                   |        |               |  |         |        |          |  |              |        |         |  |   |        |  |  |   |        |   |  |   |        | 
|-------------------- |  | ----------------- | ------ | ------------- |  | ------- | ------ | -------- |  | ------------ | ------ | ------- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|                     |  | December 31, 2001 |        | June 30, 2002
|                     |  |                   |        |              
|                     |  | Gross             |        |               |  |         |        |          |  |              |        | Gross   |  |   |        |  |  |   |        |  
|                     |  | Carrying          |        | Accumulated   |  | Net     |        | Carrying |  | Accumulated  |        | Net    
|                     |  | Amount            |        | Amortization  |  | Balance |        | Amount   |  | Amortization |        | Balance
|                     |  |                   |        |               |  |         |        |          |  |              |        |        
|Developed technology |  | $                 | 17,652 |               |  | $       | (2,438 | )        |  | $            | 15,214 |         |  | $ | 17,652 |  |  | $ | (7,295 | ) |  | $ | 10,357 | 
|Customer list        |  |                   | 1,332  |               |  |         | (216   | )        |  |              | 1,116  |         |  |   | 1,332  |  |  |   | (647   | ) |  |   | 685    | 
|                     |  |                   |        |               |  |         |        |          |  |              |        |         |  |   |        |  |  |   |        |   |  |   |        | 
|Total                |  | $                 | 18,984 |               |  | $       | (2,654 | )        |  | $            | 16,330 |         |  | $ | 18,984 |  |  | $ | (7,942 | ) |  | $ | 11,042 | 
|                     |  |                   |        |               |  |         |        |          |  |              |        |         |  |   |        |  |  |   |        |   |  |   |        | 

E.piphany will continue to amortize other intangible assets of $11.0
million on a straight-line basis over their remaining useful lives.
Amortization of other intangible assets for the three and six months ended June
30, 2002 was $2.6 million and $5.3 million, respectively. Amortization related
to these intangibles is expected to be $5.3 million for the remaining six
months of 2002, $5.0 million for 2003 and $0.7 million for 2004.

9. Minority Interest in Subsidiary

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

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

To date, the subsidiary has operated at a loss and is expected to incur
losses for the foreseeable future. The intended use of the proceeds from
E.piphanys investment is to fund operations. E.piphany has
consolidated 100% of the losses of the subsidiary to date.

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

The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Forward-looking statements include statements
regarding the extent and timing of future revenues and expenses and customer
demand, statements regarding the deployment of our products, statements
regarding our reliance on third parties and other statements using words such
as anticipate, believe, could, estimate, expect, plan, intend,
may, should, will and would or other similar words. All forward-looking
statements included in this document are based on information available to us
as of the date hereof, and we assume no obligation to update any such
forward-looking statement. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, those discussed in the Risk Factors
section of this quarterly report and the risks discussed in our other SEC
filings.

Overview

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

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

Sources of Revenue

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

Customers generally require consulting and implementation services, which
include evaluating their business needs and installing the software solution in
a manner that fulfills their requirements. Customers can purchase these
services directly from third-party consulting organizations, such as Accenture,
Deloitte & Touche, KPMG Consulting and PricewaterhouseCoopers. Alternatively,
customers can purchase these services directly from us through our internal
professional services organization. Consulting and implementation services can
be acquired on

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either a fixed fee or a time and expense basis. We have also historically
supplemented the capacity of our internal professional services organization
where necessary by subcontracting some of these services to third-party
consulting organizations.

Cost of Revenues and Operating Expenses

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

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

Critical Accounting Policies and Estimates

Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by management and are based upon
managements current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial
statements and because of the possibility that future events affecting them may
differ markedly from managements current judgments. While there are a number
of accounting policies, methods and estimates affecting our financial
statements, areas that are particularly significant include revenue recognition
policies, provision for doubtful accounts, the assessment of recoverability of
goodwill and other intangible assets, and restructuring accruals for abandoned
operating leases. These policies and our practices related to these policies
are described below and in Note 1 of Notes to Condensed Consolidated Financial
Statements.

Licenses fees are recognized as revenue upon contract execution, provided
that all delivery obligations have been met, fees are fixed or determinable and
collection is probable. We consider all arrangements with payments terms
extending beyond six months to not be fixed and determinable, and revenue is
recognized as payments become due from the customer. If collection is not
considered probable, revenue is recognized when the fee is collected. The
Company uses the residual method to recognize revenue when a license agreement
includes one or more elements to be delivered at a future date and vendor
specific objective evidence of the fair value of all undelivered elements
exists. Under the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is recognized as
revenue. If vendor specific objective evidence does not exist to allocate the
total fee to all delivered and undelivered elements of the arrangement, revenue
is deferred until the earlier of the time at which (1) such evidence does exist
for the undelivered elements, or (2) all elements are delivered. Fees from
license agreements that include the right to receive unspecified future
products are recognized over the term of the arrangement or, if not specified,
the estimated economic life of the product. When we receive license fees from
resellers, we recognize revenue when the above criteria have been met and we
have received persuasive evidence that the reseller has sold the subject
licenses through to the end-user.

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

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applicable to various stages of a contract can be made. Recognized
revenues and profit are subject to revisions as the contract progresses to
completion. Revisions in profit estimates are charged to income in the period
in which the facts that give rise to the revision become known. To date, when
we have been primarily responsible for the implementation of the software,
services have been considered essential to the functionality of the software
products and therefore license and services revenues have been recognized
pursuant to SOP 81-1. Prior to the first quarter of 2001, E.piphany was
primarily responsible for the implementation services with respect to the
majority of its license arrangements. Since the first quarter of 2001,
third-party consulting organizations have been primarily responsible for the
implementation services with respect to the majority of E.piphanys license
arrangements and therefore less license revenues have been recognized pursuant
to SOP 81-1.

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. A
considerable amount of judgment is required when we assess the realization of
receivables, including assessing the probability of collection and the current
credit-worthiness of each customer. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required which would result in an
additional general and administrative expense in the period such determination
is made.

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

As discussed in Note 6 of Notes to Condensed Consolidated Financial
Statements, we have recorded significant restructuring costs in connection with
our abandonment of certain leased facilities. The lease abandonment costs were
estimated to include remaining lease liabilities and brokerage fees offset by
estimated sublease income. Estimates related to sublease costs and income are
based on assumptions regarding the period required to sublease the facilities
and the likely sublease rates. These estimates are based on market trend
information analyses provided by a commercial real estate brokerage firm
retained by us. We review these estimates each reporting period and, to the
extent that our assumptions change, adjustments to the restructuring accrual
are recorded. If the real estate market continues to worsen and we are not
able to sublease the properties as early or at the rates estimated, the accrual
will be increased, which would result in additional restructuring costs in the
period in which such determination is made. If the real estate market
strengthens, and we are able to sublease the properties earlier or at more
favorable rates than projected, the accrual may be decreased which would
increase net income in the period in which such determination is made.

Results of Operations

Revenues

Total revenues decreased to $19.4 million for the quarter ended June 30,
2002, from $32.3 million for the quarter ended June 30, 2001. Total revenues
decreased to $41.5 million for the six months ended June 30, 2002, from $71.6
million for the six months ended June 30, 2001. The decrease in revenues was
primarily due to fewer sales of our product licenses and related services
resulting mainly from an economic slowdown and a significant decline in
spending by companies on information technology. The decrease was also due to
the change in our strategy from fulfilling most of our customers
implementation needs with our internal services professionals to encouraging
our customers to contract directly with third-party integrators. We expect the
economic slowdown to continue to adversely impact our revenue growth
opportunity for the next few quarters and perhaps significantly longer.

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Product license revenues decreased to $6.8 million, or 35% of total
revenue, for the quarter ended June 30, 2002 from $16.3 million, or 50% of
total revenue, for the quarter ended June 30, 2001. Product license revenues
decreased to $17.7 million, or 43% of total revenue, for the six months ended
June 30, 2002 from $38.7 million, or 54% of total revenue, for the six months
ended June 30, 2001. This decrease in product license revenues was primarily
due to fewer sales of our product licenses and lower average selling prices
resulting mainly from the downturn in the economy and weakness in information
technology spending.

Services revenues decreased to $12.6 million, or 65% of total revenues,
for the quarter ended June 30, 2002 from $16.0 million, or 50% of revenues, for
the quarter ended June 30, 2001. Services revenues decreased to $23.8 million,
or 57% of total revenues, for the six months ended June 30, 2002 from $32.9
million, or 46% of revenues, for the six months ended June 30, 2001. The
decrease was due in part to the decrease in product license revenues and in
part to the change in our strategy from fulfilling most of our customers
implementation needs with our internal services professionals to encouraging
our customers to contract directly with third-party integrators. We do not
realize any services revenues when our customers contract directly with
third-party integrators. This approach was adopted in conjunction with our
overall strategy to strengthen our alliances with system integrators that
recommend and implement our software for use on customers computer systems.
The decrease in professional services revenue was offset by an increase in
maintenance revenue attributable to new licenses sold.

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

Cost of Revenues

Total cost of revenues decreased to $8.4 million for the quarter ended
June 30, 2002 as compared to $15.5 million for the quarter ended June 30, 2001.
Total cost of revenues decreased to $16.8 million for the six months ended June
30, 2002 as compared to $39.0 million for the six months ended June 30, 2001.
Cost of product license revenues consists primarily of license fees paid to
third parties under technology license arrangements, which have not been
significant to date. Cost of services revenues consists primarily of the costs
of consulting, maintenance and training services.

Cost of services revenues decreased to $8.0 million, or 64% of services
revenues, for the quarter ended June 30, 2002 from $15.1 million, or 94% of
services revenues, for the quarter ended June 30, 2001. Cost of services
revenues decreased to $16.2 million, or 68% of services revenues, for the six
months ended June 30, 2002 from $37.8 million, or 115% of services revenues,
for the six months ended June 30, 2001. The decrease in absolute dollars was
the result of a significant reduction in the number of internal professional
services employees. The decrease in cost of services as a percentage of
revenue is primarily due to a higher proportion of maintenance revenue, which
has more favorable margins.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses decreased to $9.0 million for the quarter ended June 30,
2002 from $10.8 million for the quarter ended June 30, 2001. Research and
development expenses decreased to $17.6 million for the six months ended June
30, 2002 from $22.2 million for the six months ended June 30, 2001. The
decrease in absolute dollars was primarily due to the restructuring of our
operations, which resulted in a reduction in the number of our employees and a
consolidation of our operating facilities. Research and development expenses as
a percentage of total revenues increased to 46% for the quarter ended June 30,
2002 from 33% for the quarter ended June 30, 2001. Research and development
expenses as a percentage of total revenues increased to 42% for the six months
ended June 30, 2002 from 31% for the six months ended June 30, 2001. We believe
that

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investments in product development are essential to our future success.
Although the restructuring of our operations over the four quarters ended June
30, 2002 reduced our research and development expenses for the current quarter,
these expenses may increase over the longer term.

Sales and Marketing

Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
decreased to $12.7 million for the quarter ended June 30, 2002 from $24.2
million for the quarter ended June 30, 2001. Sales and marketing expenses
decreased to $29.7 million for the six months ended June 30, 2002 from $48.2
million for the six months ended June 30, 2001. The decrease in sales and
marketing expenses in absolute dollars was primarily attributable to the
restructuring of our operations, which resulted in a reduction in the number of
our employees and a consolidation of our operating facilities. Sales and
marketing expenses as a percentage of total revenues decreased to 66% for the
quarter ended June 30, 2002 from 75% for the quarter ended June 30, 2001. Sales
and marketing expenses as a percentage of total revenues increased to 71% for
the six months ended June 30, 2002 from 67% for the six months ended June 30,
2001. Although the restructuring of our operations over the four quarters
ended June 30, 2002 reduced our sales and marketing expenses for the current
quarter, these expenses may increase over the longer term.

General and Administrative

General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance, legal and administrative
personnel. General and administrative expenses decreased to $3.1 million for
the quarter ended June 30, 2002 from $6.9 million for the quarter ended June
30, 2001. General and administrative expenses decreased to $6.4 million for the
six months ended June 30, 2002 from $15.6 million for the six months ended June
30, 2001. The decrease in general and administrative expenses in absolute
dollars was primarily attributable to the restructuring of our operations which
resulted in a reduction in the number of our employees and a consolidation of
our operating facilities. The decrease was also due to a decrease in bad debt
expense. General and administrative expenses as a percentage of total revenues
decreased to 16% for the quarter ended June 30, 2002 from 21% for the quarter
ended June 30, 2001. General and administrative expenses as a percentage of
total revenues decreased to 15% for the six months ended June 30, 2002 from 22%
for the six months ended June 30, 2001. Although the restructuring of our
operations over the four quarters ended June 30, 2002 reduced our general and
administrative expenses for the current quarter, these expenses may increase
over the longer term.

Restructuring Costs

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

Amortization of Goodwill and Purchased Intangibles

Our acquisitions of RightPoint Software, Inc., Octane Software, Inc.,
eClass Direct, Inc., iLeverage Corporation and Moss Software, Inc. were
accounted for under the purchase method of accounting. Accordingly, we recorded
goodwill and other intangible assets representing the excess of the purchase
price paid over the fair value of net assets acquired. The aggregate
amortization of goodwill and other intangible assets was $2.6 million and
$274.5 million for the quarters ended June 30, 2002 and 2001, respectively. The
aggregate amortization of goodwill and other intangible assets was $5.3 million
and $544.9 million for the six months ended June 30, 2002 and 2001,
respectively. The decrease in amortization was primarily due to a decrease in
the unamortized balance as a result of a $1.7 billion impairment of goodwill
and intangible assets charge taken during the third quarter of 2001 and the
adoption of SFAS 142, which ceases the systematic amortization of goodwill.
Please see Note 8 of Notes to Condensed Consolidated Financial Statements for
more detailed information.

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Beginning on January 1, 2002, our unamortized balance of goodwill and
other intangible assets was subject to the new accounting pronouncements SFAS
No. 141 and SFAS No. 142 as described in Note 2 of Notes to Condensed
Consolidated Financial Statements. As a result, acquired goodwill is no longer
being amortized, but is subject to a periodic impairment assessment. The provision
of SFAS 142 also required the completion of a transitional
impairment test, with any impairments treated as a cumulative effect of change
in accounting principle. The Company completed the transitional impairment
test upon adoption, which did not result in an impairment of
goodwill. We
continue to amortize other intangible assets of $11.0 million on a
straight-line basis over their remaining useful lives. Amortization related to
these intangibles is currently expected to be $5.3 million for the remaining
six months of 2002, $5.0 million for 2003 and $0.7 million for 2004.

Stock-Based Compensation

Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of our common stock
and compensation related to equity instruments issued to non-employees for
services rendered. This amount is being amortized over the respective vesting
periods of these equity instruments in a manner consistent with FASB
Interpretation No. 28. Total stock-based compensation was $0.5 million and $0.2
million for the quarters ended June 30, 2001 and 2002, respectively. Total
stock-based compensation was $0.7 million and $0.5 million for the six months
ended June 30, 2001 and 2002, respectively. Based on our deferred compensation
balance as of December 31, 2001, we expect amortization of approximately $0.1
million, $0.1 million, $0.1 million and $0.1 million for the remaining six
months of 2002 and the years ended December 31, 2003, 2004 and 2005,
respectively.

Other Income (Expense), Net

Interest income, net of interest expense, decreased to $1.5 million for
the quarter ended June 30, 2002 from $6.1 million for the quarter ended June
30, 2001. Interest income, net of interest expense, decreased to $3.1 million
for the six months ended June 30, 2002 from $9.6 million for the six months
ended June 30, 2001. The decrease was due to a decrease in the average rate of
return on our investments and lower average cash and investment balances. The
decrease for the quarter ended June 30, 2002 was also due to a gain of $1.9
million on an investment that was recognized in the quarter ended June 30,
2001, as described below.

From time to time we reevaluate our accounting for all of our investments and
we may recognize a loss in our income statement if we determine that an
investment is permanently impaired. We held $7.5 million in commercial paper in
a California public utility as of March 31, 2001. The investment had a maturity
date of February 15, 2001 and was not paid by the public utility. As of March
31, 2001, we determined that the investment was permanently impaired based on
our evaluation and therefore we recognized a loss of $1.9 million during the
three months ended March 31, 2001. Subsequent to the date of the write-down,
our investment advisor agreed to repurchase our commercial paper at par value
in the total sum of $7.5 million. As a result, we recognized a $1.9 million
gain on this investment for the three months ended June 30, 2001.

Liquidity and Capital Resources

Net cash used in
operating activities totaled $25.8 million and $45.1
million for the six months ended June 30, 2002 and 2001, respectively. Cash
used in operating activities for each period resulted principally from net
losses in those periods. Cash used in operating activities for the six months
ended June 30, 2002 also resulted from decreases in accounts payable and
accrued liabilities, which was offset by an increase in accrued restructuring
costs, an increase in deferred revenue and a decrease in accounts receivable.
Cash used in operating activities for the six months ended June 30, 2001
resulted from decreases in accrued liabilities and in deferred revenue, which
was partially offset by a decrease in accounts receivable.

Net cash used in
investing activities totaled $19.4 million for the six
months ended June 30, 2002 compared to $55.5 million used in investing
activities for the six months ended June 30, 2001. Cash used in investing
activities for the six months ended June 30, 2002 primarily resulted from the
purchase of investments. Cash used in investing activities for the six months
ended June 30, 2001 primarily resulted from the purchase of investments and
property and equipment.

Net cash provided by financing activities totaled $5.4 million and $4.0
million for the six months ended June 30, 2002 and 2001, respectively. Cash
provided by financing activities for the six months ended June 30, 2002
primarily resulted from the receipt of proceeds from the issuance of common
stock pursuant to the exercise of stock options and purchases of stock from the
employee stock purchase plan. Cash provided by financing activities for the
six

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months ended June 30, 2001 primarily resulted from the receipt of proceeds
from the issuance of common stock pursuant to the exercise of stock options and
purchases of stock from the employee stock purchase plan and from the repayment
of notes receivable.

From time to time, we are required to obtain letters of
credit that serve as collateral for our obligations to third parties under facility lease agreements.
These letters of credit are secured by cash, cash equivalents and short-term
investments. As of June 30, 2002, we had $9.2 million
securing letters of
credit, all of which relate to facility lease agreements that have expiration
dates greater than twelve months.

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

|                         |  |         |     |           |  |   |        | 
|------------------------ |  | ------- | --- | --------- |  | - | ------ | 
|                         |  | Capital |     | Operating
|Year Ending December 31, |  | Leases  |     | Leases   
|                         |  |         |     |          
|2002                     |  | $       | 197 |           |  | $ | 7,515  | 
|2003                     |  |         | 148 |           |  |   | 13,803 | 
|2004                     |  |         |    |           |  |   | 11,248 | 
|2005                     |  |         |    |           |  |   | 8,859  | 
|2006                     |  |         |    |           |  |   | 6,356  | 
|2007 and thereafter      |  |         |    |           |  |   | 36,605 | 
|                         |  |         |     |           |  |   |        | 
|                         |  | $       | 345 |           |  | $ | 84,386 | 
|                         |  |         |     |           |  |   |        | 

Operating lease commitments shown above exclude adjustments for lease
income due under noncancelable subleases of excess facilities, which amounted
to $12.2 million as of June 30, 2002. We do not have commercial commitments
under lines of credit, standby lines of credit, guarantees, standby repurchase
obligations or other such arrangements.

As of June 30, 2002, our principal sources of
liquidity included $163.5
million of cash and cash equivalents and $139.9 million in short-term
investments. We believe that our current cash and cash equivalents and
short-term investments will be sufficient to meet our anticipated liquidity
needs for working capital and capital expenditures for at least the next twelve
months. If we require additional capital resources to grow our business
internally or to acquire complementary technologies and businesses at any time
in the future, we may seek to sell additional equity or debt securities or
secure a bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. We cannot
assure you that any financing arrangements will be available in amounts or on
terms acceptable to us in the future.

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RISK FACTORS

An investment in our common stock is very risky. You should carefully
consider the risks described below, together with all of the other information
in this quarterly report, before making an investment decision. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected, the trading price of our
common stock could decline, and you may lose all or part of your investment.

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

We incurred net losses of $43.3 million for the six months ended June 30,
2002, $2.6 billion for the year ended December 31, 2001, $768.5 million for the
year ended December 31, 2000 and $22.4 million for the year ended December 31,
1999. We had an accumulated deficit of $3.5 billion as of June 30, 2002. We
expect to continue to incur losses in the foreseeable future. These losses will
be substantial, and we may not ever become profitable. Therefore, our operating
results will be harmed if our revenue does not keep pace with our expenses or
is not sufficient for us to achieve profitability. If we do achieve
profitability in any period, it cannot be certain that we will sustain or
increase profitability on a quarterly or annual basis.

Our revenues may be harmed if general economic conditions continue to worsen,
or do not improve.

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

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

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

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



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

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

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

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

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

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

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

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

Our competitors have made and may also continue to make strategic
acquisitions or establish cooperative relationships among themselves or with
other software vendors. This may increase the ability of their products to
address the need for software solutions such as ours. Our competitors may also
establish or strengthen cooperative relationships with our current or future
distributors or other parties with whom we have relationships, thereby 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 financial results for a particular quarter may be materially adversely
affected by the delay or cancellation of large transactions.

Although no single customer accounted for more than 10% of total revenues
for the three or six months ended June 30, 2002, in any quarter, a few large
license transactions may account for a substantial amount of our license
revenues. For example, for the three months ended March 31, 2002, revenues
from a customer accounted for 12% of total revenues. If a customer or potential
customer cancels or does not enter into an anticipated large transaction, or
delays the transaction beyond the end of the quarter, our financial results may
be materially adversely affected. In this regard, a major customer informed us
in the first quarter of 2002 that it sought to reevaluate its customer
relationship management software requirements. As a result, we did not
recognize the revenue that we expected to recognize from an executed
transaction with this customer in the first quarter of 2002 and in subsequent
quarters.

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

Our service revenues, which includes fees for consulting, implementation,
maintenance and training, were 57% of our revenues for the six months ended
June 30, 2002, 43% of our revenues for the year ended December 31, 2001, 42% of
our revenues for the year ended December 31, 2000 and 47% of our revenues for
the year ended December 31, 1999. Our service revenues have substantially lower
gross margins than license revenues. Our cost of service revenues for the six
months ended June 30, 2002 and for the years ended December 31, 2001, 2000 and
1999 was 68%, 97%, 101% and 102%, respectively, of our service revenues. A
decrease in the percentage of total revenues represented by license revenues
could adversely affect our overall gross margins.

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



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

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

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

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

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

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

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

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

In addition, our customers generally store their data across computer
networks, which are often connected to the Internet. Our software operates
across our customers computer networks and can, at the customers option, be
accessed through an Internet connection. Our software contains technology
designed to prevent theft or loss of data.

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Nevertheless, customers may encounter security issues with their existing
databases installed across networks, particularly the Internet, or with our
software. A security breach involving our software, or a widely publicized
security breach involving the Internet generally, could harm our sales. A
security breach involving our software could also expose us to claims for
damages.

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



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

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

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

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



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

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

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

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



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

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

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



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

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

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

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

In order to operate our products, they must be installed on a computer
server running either the Microsoft Windows computer operating system or the
Unix computer operating system, and a computer server running database software
from IBM, Microsoft or Oracle. We also have and continue to develop products to
be compliant with J2EE standards. This capability affords our customers greater
flexibility in the deployment of our software products. If we fail to
successfully develop and maintain products compatible with these operating
systems, database versions or programming standards, we may lose sales and
revenues. In addition, users access our products on their network through
standard Internet browsers such as Microsoft Internet Explorer. If we fail to
obtain access to developer versions of any of these software products, we may
be unable to build and enhance our products on

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

We do not have substantial experience in international markets.

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



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

Our international operations require a significant amount of attention
from our management and substantial financial resources. As of
June 30, 2002, we
had 126 employees located in Asia, Australia, Canada, Europe, and Latin
America.

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

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

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

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

We also seek to increase 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 may be
even more dependent on indirect sales channels in the future due to our
international strategy.

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

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



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

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

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

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

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

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

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

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

In addition, 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.

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

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

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

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

The market price of our common stock has fluctuated substantially since
our initial public offering in September 1999. Consequently, potential
employees may perceive our equity incentives such as stock options as less
attractive and current employees whose options are priced above market value
may choose not to remain employed by us. In that case, our ability to attract
or retain employees will be adversely affected.

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

The effectiveness of our software products relies on the storage and use
of customer data collected from various sources, including information
collected on web sites, as well as other data derived from customer
registrations, billings, purchase transactions and surveys. The collection and
use of such data for customer profiling may raise privacy and security
concerns. Our customers generally have implemented security measures to protect
customer

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data from disclosure or interception by third parties. However, the
security measures may not be effective against all potential security threats.
If a well-publicized breach of customer data security were to occur, our
software products may be perceived as less desirable, impacting our future
sales and profitability.

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

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

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

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

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

Foreign Currency Exchange Rate Risk

The majority of our operations are based in the United States and,
accordingly, the majority of our transactions are denominated in U.S. dollars.
However, we do have foreign-based operations where transactions are denominated
in foreign currencies and are subject to market risk with respect to
fluctuations in the relative value of currencies. Currently, we have
international operations in Asia, Australia, Canada, Europe and Latin America
and conduct transactions in the local currency of each location. To date, our
exposure to fluctuations in the relative value of other currencies has been
limited because substantially all of our assets are denominated in U.S.
dollars, and those assets which are not denominated in U.S. dollars have
generally been denominated in historically stable currencies. Therefore, the
impact to our financial statements has not been material. To date, we have not
entered into any foreign exchange hedges or other derivative financial
instruments.

Interest Rate Risk

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

As of June 30, 2002, we had cash and cash equivalents of $163.5 million
that consist of cash and highly liquid short-term investments having maturity
dates of no more than 90 days. Declines in interest rates over time would
reduce our interest income from our highly liquid short-term investments. Based
upon our balance of cash and cash equivalents, a decrease in interest rates of
0.5% would cause a corresponding decrease in our annual interest income of
approximately $0.8 million.

As of June 30, 2002, we had short-term investments of $139.9 million that
consist of taxable fixed income securities having maturity dates of no more
than one year. Declines in interest rates over time would reduce our interest
income from our short-term investments. Based upon our balance of short-term
investments, a decrease in interest rates of 0.5% would cause a corresponding
decrease in our annual interest income of approximately $0.7 million.

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

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

|                            |  |                        |        |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|--------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | - | ---------- |  | ----- | - |  |  | - | - |  |  | - | - |  |  | - | ------- | -
|                            |  | Expected maturity date
|                            |  |                       
|                            |  | 2002                   |        | 2003 |  | 2004 |        | 2005 |  | 2006 |   | Thereafter |  | Total
|                            |  |                        |        |      |  |      |        |      |  |      |   |            |  |      
|Corporate bonds             |  | $                      | 27,446 |      |  | $    | 33,574 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 61,020  |  
|Weighted average yield      |  |                        | 2.26   | %    |  |      | 2.43   | %    |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.35    | %
|Government notes/bonds      |  | $                      | 41,335 |      |  | $    | 37,539 |      |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  | $ | 78,874  |  
|Weighted average yield      |  |                        | 2.12   | %    |  |      | 2.54   | %    |  |      |  |            |  |       |  |  |  |   |  |  |  |   |  |  |  |   | 2.32    | %
|                            |  |                        |        |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  
|Total investment securities |  | $                      | 68,781 |      |  | $    | 71,113 |      |  | $    |  |            |  | $     |  |  |  | $ |  |  |  | $ |  |  |  | $ | 139,894 |  
|                            |  |                        |        |      |  |      |        |      |  |      |   |            |  |       |   |  |  |   |   |  |  |   |   |  |  |   |         |  

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PART II: OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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

The Company, three of our current and former officers, and three
underwriters in our initial public offering (IPO) have been named as
defendants in a consolidated shareholder lawsuit in the United States District
Court for the Southern District of New York, In re E.piphany, Inc. Initial
Public Offering Securities Litigation,01-CV-6158. This is one of a number of
actions coordinated for pretrial purposes as In re Initial Public Offering
Securities Litigation,21 MC 92. Plaintiffs in the coordinated proceeding
bring claims under the federal securities laws against numerous underwriters,
companies, and individuals, alleging generally that defendant underwriters
engaged in improper and undisclosed activities concerning the allocation of
shares in the IPOs of more than 300 companies during late 1998 through 2000.
Among other things, plaintiffs allege that the underwriters customers had to
pay excessive brokerage commissions and purchase additional shares of stock in
the aftermarket in order to receive favorable allocations of shares in an IPO.
The consolidated amended complaint in our case seeks unspecified damages on
behalf of a purported class of purchasers of our common stock between September
21, 1999 and December 6, 2000. Defendants have filed motions to dismiss. We
believe we have meritorious defenses to the claims against us and will defend
ourselves vigorously.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

(c) None.

(d) None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




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

The Companys annual meeting of stockholders was held on May 30, 2002 and
the following matters were considered and voted upon:

To approve the reelection of Paul M. Hazen to serve as a Class III member of
E.piphanys Board of Directors with a term expiring on the date of the 2005
annual meeting of shareholders.

|              |  |      |            |          |  |          |           |  |  |  |   | 
|------------- |  | ---- | ---------- | -------- |  | -------- | --------- |  |  |  | - | 
|              |  | FOR: |            | AGAINST: |  | ABSTAIN:
|              |  |      |            |          |  |         
|Common Stock: |  |      | 53,841,832 |          |  |          | 1,052,517 |  |  |  | 0 | 

To approve the reelection of Robert L. Joss to serve as a Class III member of
E.piphanys Board of Directors with a term expiring on the date of the 2005
annual meeting of shareholders.

|              |  |      |            |          |  |          |           |  |  |  |   | 
|------------- |  | ---- | ---------- | -------- |  | -------- | --------- |  |  |  | - | 
|              |  | FOR: |            | AGAINST: |  | ABSTAIN:
|              |  |      |            |          |  |         
|Common Stock: |  |      | 53,847,845 |          |  |          | 1,046,504 |  |  |  | 0 | 

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Following the reelection of directors Paul M. Hazen and Robert L. Joss on
May 30, 2002, Roger S. Siboni and Sam H. Lee continued to serve as Class I
directors with terms expiring on the date of the 2003 annual meeting of
shareholders, and Douglas J. Mackenzie and Jenny J. Ming continued to serve as
Class II directors with terms expiring on the date of the 2004 annual meeting
of shareholders.




ITEM 5. OTHER INFORMATION

None.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|    |  |                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                                                                                                                                                                                                              
|   
|    |  | See Exhibit Index attached hereto.                                                                                                                                                                                    
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                   
|   
|    |  | A current report on Form 8-K was filed with the Securities and
Exchange Commission by E.piphany on May 16, 2002 to report a change
in E.piphanys certifying accountant from Arthur Anderson LLP to
Ernst & Young LLP.

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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: August 14, 2002 |  | SIGNATURE:     |  | /s/ Roger S. Siboni                                                         
|                      |  |                |  |                                                                             
|                      |  |                |  | Roger S. Siboni
President, Chief Executive
Officer and Chairman of the Board
|                     
|DATE: August 14, 2002 |  | 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.                                                             
|      
|99.1   |  | Statement of the Chief Executive Officer and Chief Financial Officer of E.piphany, Inc.



---

|* |  | 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36