UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

Commission File Number 000-26881

E.PIPHANY, INC.(Exact name of registrant as specified in its charter)

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

475 Concar Drive
San Mateo, California 94402
(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
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X  NO

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
YES X  NO

The
number of shares outstanding of the registrants common stock, par value
$0.0001 per share, as of October 31, 2004, was 76,615,468.



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E.PIPHANY, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

|              |  |  |                                                                                                                        |  |  |  | Page No. | 
|------------- |  |  | ---------------------------------------------------------------------------------------------------------------------- |  |  |  | -------- | 
|             
|PART I        |  |  | FINANCIAL INFORMATION                                                                                                  |  |  |  |          | 
|Item 1.       |  |  | Financial Statements                                                                                                   |  |  |  | 3        | 
|              |  |  | Condensed Consolidated Balance Sheets -
             As of September 30, 2004 and December 31, 2003                    |  |  |  | 3        | 
|              |  |  | Condensed Consolidated Statements of Operations -
             Three and nine months ended September 30, 2004 and 2003 |  |  |  | 4        | 
|              |  |  | Condensed Consolidated Statements of Cash Flows -
             Nine months ended September 30, 2004 and 2003           |  |  |  | 5        | 
|              |  |  | Notes to Condensed Consolidated Financial Statements                                                                   |  |  |  | 6        | 
|Item 2.       |  |  | Managements Discussion and Analysis of
         Financial Condition and Results of Operations                         |  |  |  | 15       | 
|Item 3.       |  |  | Quantitative and Qualitative Disclosures about Market Risk                                                             |  |  |  | 34       | 
|Item 4.       |  |  | Controls and Procedures                                                                                                |  |  |  | 36       | 
|             
|PART II       |  |  | OTHER INFORMATION                                                                                                      |  | 
|Item 1.       |  |  | Legal Proceedings                                                                                                      |  |  |  | 36       | 
|Item 6.       |  |  | Exhibits                                                                                                               |  |  |  | 37       | 
|             
|SIGNATURES    |  |  |                                                                                                                        |  |  |  | 38       | 
|Exhibit Index |  |  |                                                                                                                        |  |  |  | 39       | 
|             

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PART I:    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                  | September 30,2004 |  | December 31,2003 |           
|------------------------------------------------- | ----------------- |  | ---------------- | ----------
|
|ASSETS                                            |                   |  |                  |           
|Current assets:                                   |                   | 
|Cash, cash equivalents and short-term investments |                   |  | $                | 21,603    
|Short-term investments                            |                   |  |                  | 125,663   
|Accounts receivable, net                          |                   |  |                  | 7,586     
|Prepaid expenses and other assets                 |                   |  |                  | 5,072     
|Short-term restricted cash and investments        |                   |  |                  | 1,178     
|                                                  |                   |  |                  |           
|Total current assets                              |                   |  |                  | 161,102   
|Long-term investments                             |                   |  |                  | 107,537   
|Long-term restricted cash and investments         |                   |  |                  | 5,708     
|Property and equipment, net                       |                   |  |                  | 4,626     
|Goodwill, net                                     |                   |  |                  | 81,499    
|Purchased intangibles, net                        |                   |  |                  |          
|Other assets                                      |                   |  |                  | 301       
|                                                  |                   |  |                  |           
|Total assets                                      |                   |  | $                | 360,773   
|                                                  |                   |  |                  |           
|LIABILITIES AND STOCKHOLDERS' EQUITY              |                   | 
|Current liabilities:                              |                   |  |                  |           
|Accounts payable                                  |                   |  | $                | 2,182     
|Accrued compensation                              |                   |  |                  | 6,403     
|Accrued liabilities                               |                   |  |                  | 7,579     
|Current portion of restructuring costs            |                   |  |                  | 6,143     
|Deferred revenue                                  |                   |  |                  | 16,801    
|                                                  |                   |  |                  |           
|Total current liabilities                         |                   |  |                  | 39,108    
|Restructuring costs, net of current portion       |                   |  |                  | 16,749    
|Other long-term liabilities                       |                   |  |                  | 235       
|                                                  |                   |  |                  |           
|Total liabilities                                 |                   |  |                  | 56,092    
|                                                  |                   |  |                  |           
|Stockholders' equity:                             |                   |  |                  |           
|Common stock                                      |                   |  |                  | 7         
|Additional paid-in capital                        |                   |  |                  | 3,828,340 
|Accumulated other comprehensive loss              |                   |  |                  | (1,803    
|Accumulated deficit                               |                   |  |                  | (3,521,863
|                                                  |                   |  |                  |           
|Total stockholders' equity                        |                   |  |                  | 304,681   
|                                                  |                   |  |                  |           
|Total liabilities and stockholders equity        |                   |  | $                | 360,773   
|                                                  |                   |  |                  |           

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

3

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E.PIPHANY, INC.

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

|                                                              | Three Months EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|------------------------------------------------------------- | ------------------------------- |  | ------------------------------ | ------
|
|Revenues:                                                     |                                 |  |                                |       
|Product license                                               |                                 |  | $                              | 5,691 
|Services                                                      |                                 |  |                                | 4,853 
|Maintenance                                                   |                                 |  |                                | 7,394 
|                                                              |                                 |  |                                |       
|                                                              |                                 |  |                                | 17,938
|                                                              |                                 |  |                                |       
|Cost of revenues:                                             |                                 | 
|Product license                                               |                                 |  |                                | 403   
|Services                                                      |                                 |  |                                | 3,806 
|Maintenance                                                   |                                 |  |                                | 1,635 
|Amortization of purchased technology                          |                                 |  |                                |      
|                                                              |                                 |  |                                |       
|                                                              |                                 |  |                                | 5,844 
|                                                              |                                 |  |                                |       
|Gross profit                                                  |                                 |  |                                | 12,094
|                                                              |                                 |  |                                |       
|Operating expenses:                                           |                                 |  |                                |       
|Research and development                                      |                                 |  |                                | 6,344 
|Sales and marketing                                           |                                 |  |                                | 8,285 
|General and administrative                                    |                                 |  |                                | 3,120 
|Restructuring charges                                         |                                 |  |                                | (137  
|Amortization of purchased intangibles                         |                                 |  |                                |      
|Stock-based compensation                                      |                                 |  |                                |      
|                                                              |                                 |  |                                |       
|Total operating expenses                                      |                                 |  |                                | 17,612
|                                                              |                                 |  |                                |       
|Loss from operations                                          |                                 |  |                                | (5,518
|Other income, net                                             |                                 |  |                                | 1,273 
|                                                              |                                 |  |                                |       
|Loss before provision for taxes                               |                                 |  |                                | (4,245
|Provision for taxes                                           |                                 |  |                                | 53    
|                                                              |                                 |  |                                |       
|Net loss                                                      |                                 |  | $                              | (4,298
|                                                              |                                 |  |                                |       
|Basic and diluted net loss per share                          |                                 |  | $                              | (0.06 
|                                                              |                                 |  |                                |       
|Shares used in computing basic and diluted net loss per share |                                 |  |                                | 76,069
|                                                              |                                 |  |                                |       

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

4

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E.PIPHANY, INC.

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

|                                                               | Nine months endedSeptember 30, | 
|-------------------------------------------------------------- | ------------------------------ | 
|
|Cash flows used in operating activities:                       |                                | 
|Net loss                                                       |                                | 
|Adjustments to reconcile net loss to net cash used  in         |                                | 
|operating activities:                                          |                                | 
|Depreciation and amortization                                  |                                | 
|Loss on disposal of property and equipment                     |                                | 
|Stock-based compensation                                       |                                | 
|Non-cash restructuring costs                                   |                                | 
|Amortization of purchased technology and purchased intangibles |                                | 
|Changes in operating assets and liabilities:                   |                                | 
|Accounts receivable                                            |                                | 
|Prepaid expenses and other assets                              |                                | 
|Accounts payable                                               |                                | 
|Accrued liabilities and compensation                           |                                | 
|Restructuring costs                                            |                                | 
|Deferred revenue                                               |                                | 
|                                                               |                                | 
|Net cash used in operating activities                          |                                | 
|                                                               |                                | 
|Cash flows from investing activities:                          |                                | 
|Purchases of property and equipment                            |                                | 
|Restricted cash and investments                                |                                | 
|Proceeds from maturities of investments                        |                                | 
|Purchases of investments                                       |                                | 
|                                                               |                                | 
|Net cash used in investing activities                          |                                | 
|                                                               |                                | 
|Cash flows from financing activities:                          |                                | 
|Principal payments on capital lease obligations                |                                | 
|Repayments on notes receivable                                 |                                | 
|Proceeds from sale of common stock, net of repurchases         |                                | 
|                                                               |                                | 
|Net cash provided by financing activities                      |                                | 
|                                                               |                                | 
|Effect of foreign exchange rates on cash and cash equivalents  |                                | 
|                                                               |                                | 
|Net increase (decrease) in cash and cash equivalents           |                                | 
|Cash and cash equivalents at beginning of period               |                                | 
|                                                               |                                | 
|Cash and cash equivalents at end of period                     |                                | 
|                                                               |                                | 

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

5

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E.PIPHANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.   Basis of
Presentation

The
condensed consolidated financial statements included herein have been prepared
by E.piphany, Inc. (hereafter E.piphany or the Company),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). The Condensed Consolidated Balance Sheet
as of December 31, 2003 is derived from audited consolidated financial
statements. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with United States
Generally Accepted Accounting Principles (US GAAP) have been
condensed or omitted pursuant to the rules and regulations regarding interim
financial statements. These condensed consolidated financial statements should
be read in conjunction with the Companys audited consolidated financial
statements and notes thereto included in E.piphanys Annual Report on Form
10-K for the fiscal year ended December 31, 2003, filed with the SEC on March 8,
2004.

The
unaudited condensed consolidated financial statements included herein reflect
all adjustments (which include normal recurring adjustments and restructuring
charges in each of the periods presented) which are, in the opinion of
management, necessary to state fairly the financial position of E.piphany as of
September 30, 2004, the results of its operations for the three and nine months
ended September 30, 2004 and 2003, and its cash flows for the nine months ended
September 30, 2004 and 2003. The results for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results expected for
the full fiscal year.

2.   Summary
of Significant Accounting Policies

Principles
of Consolidation

The
condensed consolidated financial statements include the accounts of E.piphany
and its subsidiaries. As of September 30, 2004, the Company owns 100% of the
outstanding stock of all its subsidiaries. Intercompany accounts and
transactions have been eliminated.

Use of
Estimates in Preparation of Financial Statements

The
condensed consolidated financial statements have been prepared in accordance
with US GAAP. The preparation of these financial statements requires us 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 in
these particular areas could differ from those estimates.

Foreign
Currency Translation

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

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

Cash
equivalents consist of highly liquid investments that are readily convertible  into
cash. Short-term investments consist of highly liquid securities that the  Company
intends to hold for less than one year. Long-term investments consist of  securities that
the Company intends to hold for more than one year with maturity  dates of less than two
years from the date of purchase. The Company has  classified its short-term and long-term
investments as available-for-sale.  Short-term and long-term investments are carried at
fair value with unrealized  gains and losses

6

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reported, net
of tax, as accumulated other  comprehensive loss  in stockholders equity. Realized
gains and losses and declines  in value  which are determined to be other than temporary
on available-for-sale  securities  are included in other income, net and are derived
using the specific  identification method for determining the cost of securities and were
not  significant  for the three or nine month periods ended September 30, 2004 and  2003.

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 and investments. As of September 30,
2004, we had $6.9 million securing letters of credit, which are classified as
restricted cash and investments in the accompanying Condensed Consolidated
Balance Sheets. The classification of restricted cash and investments as
short-term or long-term is determined based on the termination date of the
underlying lease agreement irrespective of the expiration date of the letter of
credit, as the Company is contractually required to maintain letters of credit
during the lease term.

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 criteria for
revenue recognition are satisfied. Deferred maintenance revenue is recognized
ratably over the term of the maintenance agreement, typically one year, and
deferred professional services revenue is recognized as services are rendered or
as other criteria for revenue recognition are satisfied.

Allowances
for Doubtful Accounts

We
evaluate the collectibility of our accounts receivable based on a combination of
factors. When we believe a collectibility issue exists with respect to a
specific receivable, we record an allowance to reduce that receivable to the
amount that we believe to be collectible. For all other receivables, we record
an allowance based on an assessment of the aging of such receivables, our
historical experience with bad debts and the general economic environment.

Fair
Value of Financial Instruments

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 investments in debt securities and trade
accounts receivable. Management believes the financial risks associated with
these financial instruments are not significant. The Company invests its cash
and investments in government agencies, U.S. treasuries, money market
instruments, auction rate securities, taxable municipal bonds and corporate debt
rated A1/P1 or higher.

Concentration
of Credit Risk and Significant Customers

The
Companys customer base consists primarily of businesses in North America
and Europe. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains reserves for potential credit losses. Historically, such reserves have
been adequate to cover the actual losses incurred. No individual customer
accounted for more than 10% of our total revenues for the three or nine months
ended September 30, 2004 and 2003. As of September 30, 2004, one individual
customer account receivable balance accounted for 10% of our total accounts
receivable balance. One individual customer account receivable balance accounted
for 13% of our total accounts receivable balance as of December 31, 2003.

Impairment
of Long-Lived Assets and Definite Lived Intangible Assets

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

7

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Acquired
goodwill and other intangible assets with indefinite useful lives are not
amortized over time, but are subject to impairment tests on an annual basis, and
on an interim basis in certain circumstances. The Company performs annual
impairment tests in the fourth quarter of each year. The Company completed
annual impairment tests on its Goodwill and Purchased Intangibles assets during
the fourth quarter of 2003 and 2002, which did not result in an impairment
charge. The Company intends to perform annual impairment testing in the fourth
quarter of 2004. The Company did not identify events or circumstances during the
three or nine months ended September 30, 2004 which would more likely than not
reduce the fair value of previously recorded intangible assets.

Revenue
Recognition

E.piphany
recognizes revenue under the following policies which are in accordance with the
provisions of Statement of Position 97-2, Software Revenue
Recognition as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions:

Licenses.
Fees from licenses 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 not to be fixed or determinable, and revenue is
recognized as payments become due from the customer, assuming all other revenue
recognition conditions are met. If collection is not considered probable,
revenue is recognized when the fee is collected. The Company uses the residual
method to recognize revenue from a license arrangement with multiple elements
when vendor specific objective evidence of the fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one of the
delivered elements in the arrangement. Vendor specific objective evidence for
undelivered elements is based on normal pricing for those elements when sold
separately. 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 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. We recognize
license fees from resellers as revenue when the above criteria have been met and
the reseller has sold the subject licenses through to the end-user.

When
licenses are sold together with consulting and implementation services, license
fees are recognized upon 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 or 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 professional 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 the
Company 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 services revenue have been recognized
pursuant to SOP 81-1. The Company follows the percentage of completion method
since reasonably dependable estimates of progress toward completion of a
contract can be made. The Company estimates the percentage of completion on
contracts utilizing hours incurred to date as a percentage of the total
estimated hours to complete the project. 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.

From
time to time, our license and service arrangements include acceptance
provisions. When acceptance provisions exist, we apply judgment in assessing the
significance of the provision. If the Company determines that the likelihood of
non-acceptance in these arrangements is remote, we recognize revenue once all of
the criteria described above have been met. If such a determination cannot be
made, revenue is recognized upon the earlier of customer acceptance or
expiration of the acceptance period, provided that all of the criteria described
above have been met.

Maintenance
Services.Maintenance services include technical support and unspecified
software updates to customers. Revenue derived from maintenance services is
recognized ratably over the applicable maintenance term, typically one year, and
is included in maintenance revenue in the accompanying consolidated statements
of operations.

8

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Professional,
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, except when such
services are subject to acceptance provisions, as discussed above, and is
included in services revenue in the accompanying consolidated statements of
operations.

Warranties
and Indemnification

The
Company generally provides a warranty for its software products and services to
its customers and accounts for its warranties under the Financial Accounting
Standards Boards (FASBs) Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies (SFAS
No. 5). The Companys products are generally warranted to perform
substantially as described in the associated product documentation for a period
of one year. The Companys services are generally warranted to be performed
consistent with industry standards for a period of ninety days from delivery. In
the event there is a failure of such warranties, the Company generally is
obligated to correct the product or service to conform to the warranty provision
or, if the Company is unable to do so, the customer is entitled to seek a refund
of the purchase price of the product or service. The Company has not provided
for a warranty accrual as of September 30, 2004 or December 31, 2003. To date,
the Companys product warranty expense has not been significant.

The Company generally agrees to indemnify its customers against legal claims
that the Companys software products infringe certain third-party
intellectual property rights and accounts for its indemnification obligations
under SFAS No. 5. In the event of such a claim, the Company is generally
obligated to defend its customer against the claim and to either settle the
claim at the Companys expense or pay damages that the customer is legally
required to pay to the third-party claimant. In addition, in the event of an
infringement, the Company agrees to modify or replace the infringing product,
or, if those options are not reasonably possible, to refund the cost of the
software, as pro-rated over a five-year period. To date, the Company has not
been required to make any payment resulting from infringement claims asserted
against our customers. As such, the Company has not provided for an infringement
indemnification accrual as of September 30, 2004 or December 31, 2003 and has
not deferred revenue recognition on license agreements which provide for a
pro-rated refund over a five-year period.

During
the quarter ended September 30, 2003, the Company sold all of the outstanding
capital stock of its Japanese subsidiary, E.piphany Software, K.K.
(E.piphany Japan), to Braxton Ltd. for approximately $4.2 million in
cash. The stock purchase agreement contained customary representations,
warranties and covenants of the parties, including covenants to indemnify each
other in the event of a breach of warranty or representation. Claims under the
indemnification covenants may be submitted within two years from the date of
closing, for a maximum of $0.7 million, and only to the extent that losses
exceed 10% of the purchase price. The fair value of these indemnification
provisions were not material to the Companys financial position, results
of operations or cash flows for the three and nine months ended September 30,
2004.

The
Company indemnifies its directors and officers in their capacity as such. To
date, the Company has not been required to make any payment resulting from these
indemnification obligations. Additionally, the fair value of these
indemnification provisions was not material to the Companys financial
position, results of operations or cash flows for the three and nine months
ended September 30, 2004.

Stock-Based
Compensation

The
Company accounts for stock issued to employees in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees and complies with the disclosure provisions of SFAS
No. 123 (SFAS 123), Accounting for Stock-Based
Compensation and SFAS No. 148 (SFAS 148), Accounting for
Stock-Based Compensation  Transition and Disclosure. Under APB 25,
compensation expense for fixed stock options is based on the difference between
the fair market value of the Companys stock and the exercise price of the
option on the date of grant, if any.

The
following table illustrates the effect on net loss and loss per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123 using
the Black-Scholes stock option pricing model (in thousands except per share
amounts):

9

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|                                                  | Three Months EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|------------------------------------------------- | ------------------------------- |  | ------------------------------ | ------
|
|Net loss, as reported                             |                                 |  | $                              | (4,298
|Add:  Stock-based employee compensation           |                                 | 
|expense included in reported net loss, net of tax |                                 | 
|effects                                           |                                 |  |                                |      
|Deduct: Total stock-based employee compensation   |                                 |  |                                |       
|expense determined under fair value based         |                                 |  |                                |       
|method for all awards, net of tax effects         |                                 |  |                                | (2,984
|                                                  |                                 |  |                                |       
|Pro forma net loss                                |                                 |  | $                              | (7,282
|                                                  |                                 |  |                                |       
|Loss per share:                                   |                                 |  |                                |       
|Basic and dilutedas reported                     |                                 |  | $                              | (0.06 
|Basic and dilutedpro forma                       |                                 |  | $                              | (0.10 

3. Related
Party Transactions

Roger
Siboni, Chairman of the Board, is currently a member of the board of directors
of two of the Companys customers. Total revenues to E.piphany from these
customers were less than $0.1 million for both the three and nine months ended
September 30, 2004, respectively, and $0.1 million for both the three and nine
months ended September 30, 2003, respectively. The Company had no accounts
receivable balances from these customers as of September 30, 2004 and December
31, 2003.

In
addition, three of the Companys customers have board members that were
also on the Companys board of directors at the time revenues from
contracts with these customers were recognized. Total revenues to the Company
from these customers were $1.4 million and $2.0 million for the three and nine
months ended September 30, 2004 and $0.1 million and $0.2 million for the three
and nine months ended September 30, 2003, respectively. The Company had accounts
receivable balances from these customers totaling $1.3 million as of September
30, 2004 and less than $0.1 million as of December 31, 2003.

4.
Computation of Basic and Diluted Net Loss Per Share

Basic and
diluted 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 EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|--------------------------------------------------- | ------------------------------- |  | ------------------------------ | ------
|
|Net loss                                            |                                 |  | $                              | (4,298
|Basic and diluted:                                  |                                 | 
|Weighted average shares of common stock outstanding |                                 |  |                                | 76,069
|Less: Weighted average shares subject to repurchase |                                 |  |                                |      
|                                                    |                                 |  |                                |       
|                                                    |                                 |  |                                | 76,069
|                                                    |                                 |  |                                |       
|Basic and diluted net loss per common share         |                                 |  | $                              | (0.06 
|                                                    |                                 |  |                                |       

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 EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|------------------------------------------------------------------------------------ | ------------------------------- |  | ------------------------------ | ------
|
|Options  excluded due to the exercise price exceeding the average fair market value  |                                 |  |                                |       
|of  the Companys common stock during the period                                     |                                 |  |                                | 10,006
|Options  for which the exercise price was less than the average fair market value of |                                 | 
|the Companys common stock during the period that were excluded as inclusion  would  |                                 | 
|decrease the Companys net loss per share                                            |                                 |  |                                | 1,476 
|Common shares excluded resulting from common stock subject to repurchase             |                                 |  |                                |      
|                                                                                     |                                 |  |                                |       
|Total common stock equivalents excluded from diluted net loss per common share       |                                 |  |                                | 11,482
|                                                                                     |                                 |  |                                |       

10

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5.
Commitments and Contingencies

Legal
Proceedings

As
of the date hereof, there is no material litigation pending against us other
than as disclosed in the paragraph below. From time to time, the Company 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, the Company believes 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, two of its current officers, one of its former officers and three
underwriters in its initial public offering (IPO) were named as
defendants in a consolidated shareholder lawsuit in the United States
District Court for the Southern District of New York, In re E.piphany,
Inc. Initial Public Offering Securities Litigation,01-CV-6158. 
This is one of a number of actions coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, 21 MC 92.  Plaintiffs in
the coordinated proceeding have brought claims under the federal securities laws
against numerous underwriters, companies, and individuals, alleging generally
that defendant underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than 300 companies
during the period from late 1998 through 2000.  Specifically, among other
things, the plaintiffs allege that the prospectus pursuant to which shares of
Company common stock were sold in the Companys IPO contained certain false
and misleading statements regarding the practices of the Companys
underwriters with respect to their allocation of shares of common stock in the
Companys IPO to their customers and their receipt of commissions from
those customers related to such allocations, and that such statements and
omissions  caused the Companys post-IPO stock price to be
artificially inflated.The consolidated amended complaint in
the Companys case seeks unspecified damages on behalf of a purported class
of purchasers of the Companys common stock between September 21, 1999 and
December 6, 2000.  The court has appointed a lead plaintiff for the
consolidated action. The underwriter and issuer defendants have filed motions to
dismiss. These motions were denied as to all the underwriter defendants and the
majority of issuer defendants including the Company. The individual defendants
have been dismissed from the action without prejudice pursuant to a tolling
agreement. A stipulation of settlement for the claims against the issuer
defendants, including the Company, has been submitted to the court. The
settlement is subject to a number of conditions, including approval of the
court. If the settlement does not occur, and litigation against the Company
continues, the Company believes it has meritorious defenses and intends to
defend the case vigorously.

6.
Restructuring

In
the quarter ended September 30, 2001, the Company began restructuring worldwide
operations to reduce costs and improve efficiencies in response to a slower  economic
environment. Since that time, operations have been streamlined, sales  models have
changed in certain geographies and facilities have been abandoned to  align the Companys
cost structure to current market conditions. Charges  for these restructuring activities
have been recorded in accordance with  Emerging Issues Task Force No. 94-3, Liability
Recognition for Certain  Employee Termination Benefits and Other Costs to Exit an Activity (EITF
94-3), and with SFAS No. 146, Accounting for Costs  Associated with Exit or
Disposal Activities (SFAS 146), as  applicable. Under EITF 94-3 and
SFAS 146, specified restructuring activities are  deemed the commencement of a separate
restructuring plan in the quarter in which  those activities could be specifically
identified. The first plan was initiated  in the quarter ended September 30, 2001 (Plan
1). The second plan,  initiated during the quarter ended September 30, 2002,
consisted of actions  which were primarily supplemental to Plan 1 (Plan 2)
and a third  plan was initiated during the quarter ended March 31, 2003 (Plan 3).
Charges for these plans were based on assumptions and related estimates that  were

11

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appropriate for
the economic environment that existed at the time these  charges were  recorded. However,
due to the continued deterioration of the  commercial real estate  market, primarily in
the United States and the United  Kingdom, we have made subsequent  adjustments to the
initial restructuring  charges recorded under these plans.

The
following table summarizes the Companys restructuring accrual as of
September 30, 2004 (in thousands):

|                                            | SeveranceandRelated Charges |  | Impairment ofproperty andequipment |      | Lease Costs |   | OtherRestructuringActivities |   | Total |       
|------------------------------------------- | --------------------------- |  | ---------------------------------- | ---- | ----------- | - | ---------------------------- | - | ----- | ------
|Accrued balance at December 31, 2002        |                             |  | $                                  | 26   |             | $ |                             |   | $     | 32,920
|Charges accrued during 2003  Plan 3        |                             |  |                                    | 620  |             |   | 301                          |   |       | 122   
|Adjustments to previous estimates  Plan 1  |                             |  |                                    | --   |             |   |                             |   |       | 1,846 
|Adjustments to previous estimates  Plan 2  |                             |  |                                    | (13  | )           |   |                             |   |       | 689   
|Adjustments to previous estimates  Plan 3  |                             |  |                                    |     |             |   |                             |   |       | 52    
|Cash payments  Plan 1                      |                             |  |                                    |     |             |   |                             |   |       | (6,580
|Cash payments  Plan 2                      |                             |  |                                    |     |             |   |                             |   |       | (1,228
|Cash payments  Plan 3                      |                             |  |                                    | (633 | )           |   |                             |   |       | (117  
|Non-cash activity  Plan 3                  |                             |  |                                    |     |             |   | (301                         | ) |       |      
|                                            |                             |  |                                    |      |             |   |                              |   |       |       
|Accrued balance at December 31, 2003        |                             |  | $                                  |     |             | $ |                             |   | $     | 27,704
|                                            |                             |  |                                    |      |             |   |                              |   |       |       
|Adjustments to previous estimates  Plan 1  |                             |  |                                    |     |             |   |                             |   |       | 686   
|Adjustments to previous estimates  Plan 2  |                             |  |                                    |     |             |   |                             |   |       | 178   
|Adjustments to previous estimates  Plan 3  |                             |  |                                    |     |             |   |                             |   |       | 5     
|Cash payments  Plan 1                      |                             |  |                                    |     |             |   |                             |   |       | (4,936
|Cash payments  Plan 2                      |                             |  |                                    |     |             |   |                             |   |       | (711  
|Cash payments  Plan 3                      |                             |  |                                    |     |             |   |                             |   |       | (34   
|                                            |                             |  |                                    |      |             |   |                              |   |       |       
|Accrued balance at September 30, 2004       |                             |  |                                    |     |             |   |                             |   |       | 22,892
|Less:  current portion                      |                             |  |                                    |     |             |   |                             |   |       | 6,143 
|                                            |                             |  |                                    |      |             |   |                              |   |       |       
|Restructuring costs, net of current portion |                             |  | $                                  |     |             | $ |                             |   | $     | 16,749
|                                            |                             |  |                                    |      |             |   |                              |   |       |       

Severance
and related charges primarily result from involuntary termination benefits and
related payroll taxes. The impairment of property and equipment primarily
relates to leasehold improvements and other property and equipment impaired as a
result of the abandonment of leased facilities and the reduction of headcount.
Lease costs reflect remaining operating lease obligations and brokerage fees
stated at actual costs reduced by estimated sublease income. The Company
calculates the estimated costs of abandoning these leased facilities, including
estimated sublease costs and income, with the assistance of market information
trend analyses provided by commercial real estate brokerage firms retained by
the Company. Charges shown as other restructuring activities consist of the net
loss on the sale of the Companys subsidiary located in Japan and related
costs.

Year ended
December 31, 2003

During
2003, the Company recorded restructuring charges of $3.9 million, of which $1.3
million related to restructuring charges for Plan 3 and $2.6 million related to
changes in estimated lease costs.

The
Company initiated Plan 3 to reduce direct sales and marketing costs in Japan,
Australia and Latin America by transitioning these markets to an indirect sales
model. This plan was completed during 2003 and resulted in the sale of the
Companys subsidiary located in Japan, the abandonment of leased facilities
in Australia and a reduction in the number of employees by 18. Of the total
employee reduction, most had been engaged in sales and marketing activities. The
sale of the Companys subsidiary located in Japan was completed in July
2003 when the Company sold all of the outstanding capital stock of E.piphany
Software, K.K. (E.piphany Japan) to Braxton Ltd. for approximately
$4.2 million in cash. At the time of the sale, the subsidiary had $4.4 million
in net assets resulting in a charge to other restructuring activities of
approximately $0.2 million. Other expenses associated with the sale of the
entity of $0.1 million resulted in total charges classified as Other
Restructuring Activities of $0.3 million. Due to the continuing
obligations and future cash flows expected under an ongoing distribution
agreement between the parties, the sale of the subsidiary is not considered to
be a discontinued operation in accordance with SFAS No. 144 (SFAS
144), Accounting for the Impairment of Disposal of Long-Lived
Assets.

12

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Adjustments
to lease cost estimates of $2.6 million were recorded primarily to reflect
changes in estimates associated with facilities in New York, Boston and the
United Kingdom.

Nine months
ended September 30, 2004

For
the nine months ended September 30, 2004, the Company recorded adjustments to
previously-recorded restructuring estimates totaling $0.9 million primarily
associated with facilities in Illinois, California, and the United Kingdom.

The
accrued liability of $22.9 million at September 30, 2004 is net of $27.8 million
of estimated sublease income. Of this estimated sublease income, $13.6 million
represents future sublease income due under non-cancelable subleases and $14.2
million represents our estimates of future sublease income on excess facilities
we expect to sublease in the future. In estimating future sublease income under
non-cancelable subleases, the Company evaluates the collectibility of sublease
income. If the Company determines that sublease income is not collectible with
respect to a particular subtenant, the Company estimates the amount of sublease
income that it is likely to generate from a new subtenant.  The Company
then increases the restructuring accrual by an amount equal to the difference
between the initially contracted amount and the estimated sublease income from
the new subtenant. Our ability to generate this amount of sublease income, as
well as our ability to terminate certain lease obligations at the amounts we
have estimated, is highly dependent upon the existing economic conditions,
particularly lease market conditions in certain geographies, at the time we
negotiate the lease termination and sublease arrangements with third parties.
While the amount we have accrued is our best estimate, these estimates are
subject to change and may require periodic adjustment as conditions change
through the implementation period. If macroeconomic conditions, particularly as
they pertain to the commercial real estate market, continue to worsen, we may be
required to increase our estimated cost to exit certain facilities. The current
estimates accrued for abandoned leases, net of anticipated sublease proceeds,
are projected to be paid over their respective lease terms through 2017.

7.   Segment
Information

The
Company is organized and operates as one business segment, which is responsible
for 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.

The
Company classifies revenues based on the country in which the applicable sales
contracts originate. The following table details revenues by country (in
thousands):

|               | Three Months EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|-------------- | ------------------------------- |  | ------------------------------ | ------
|
|Revenues:      |                                 |  |                                |       
|United States  |                                 |  | $                              | 11,015
|United Kingdom |                                 |  |                                | 3,896 
|Rest of World  |                                 |  |                                | 3,027 
|               |                                 |  |                                |       
|Total          |                                 |  | $                              | 17,938
|               |                                 |  |                                |       

8.   Goodwill
and Purchased Intangible Assets

In
the first quarter of 2002, the Company adopted SFAS 142 which states that
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed for impairment annually or more frequently if impairment indicators
arise. The Company completed an annual impairment test during the fourth quarter
of 2003 which did not result in an impairment charge. The Company plans to
complete an annual impairment test during the fourth quarter of 2004. The
Company has not identified events or circumstances during the three or nine
months ended September 30, 2004 which would more likely than not reduce the fair
value of previously recorded intangible assets. Definite lived intangible assets
will continue to be amortized over their estimated useful lives.

13

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

|                     | September 30, 2004 |  | December 31, 2003 |       
|-------------------- | ------------------ |  | ----------------- | ------
|
|Purchased technology |                    |  | $                 | 17,652
|Customer list        |                    |  |                   | 1,332 
|                     |                    |  |                   |       
|Total                |                    |  | $                 | 18,984
|                     |                    |  |                   |       

__________

(1) Gross
carrying amount is presented net of an impairment charge, taken as of September 30, 2001,
and net of accumulated amortization as of that date.

Amortization of
other intangible assets for the three months ended September 30, 2003 was $0.8
million. As of March 31, 2004 these intangible assets were fully amortized.

9.
Comprehensive Loss

Comprehensive
loss consists of net loss plus all other non-owner changes in equity. The
components of comprehensive loss are as follows (in thousands):

|                                                               | Three Months EndedSeptember 30, |  | Nine months endedSeptember 30, |       
|-------------------------------------------------------------- | ------------------------------- |  | ------------------------------ | ------
|
|Net loss                                                       |                                 |  | $                              | (4,298
|Change in unrealized gain on investments                       |                                 | 
|                                                               |                                 |  |                                | 396   
|Change  in  cumulative foreign currency translation adjustment |                                 |  |                                | 167   
|                                                               |                                 |  |                                |       
|Comprehensive loss                                             |                                 |  | $                              | (3,735
|                                                               |                                 |  |                                |       

10.   Subsequent Event - Common Stock Repurchase Program

The
Companys Board of Directors has authorized a stock repurchase program of
up to $30 million of common stock. Stock repurchases under this program may be
made in the open market and through privately negotiated transactions at such
times and in such amounts as management deems appropriate and will be funded
from available working capital. The number of shares to be purchased and the
timing of the purchases will depend on several factors, including the price of
the Companys stock, corporate and regulatory requirements and general
business and market conditions. The stock repurchase program may be limited or
terminated at any time without prior notice.

14

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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
document contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they prove incorrect or never
materialize, could cause our results to differ materially from those expressed
or implied by such forward-looking statements. Such forward-looking statements
include, without limitation, projections of expenses or other financial items;
statements regarding our plans, strategies, and objectives for future
operations, including the timing, execution costs and potential cost-savings of
restructuring plans; statements concerning proposed new products, services,
developments, or the anticipated performance of products or services; statements
regarding our ability to meet our liquidity needs; statements regarding future
economic conditions or performance; statements of belief and any statement of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include, but are not limited to, those discussed
under the heading Risk Factors in this quarterly report and the
risks discussed from time to time in our other public filings. We assume no
obligation to update any forward-looking statements.

Overview

We
were founded in November 1996 and were primarily engaged in research and
development activities until early 1998 when we shipped our first software
product and generated our first revenues from software license, professional
services and maintenance fees. In September 1999 and January 2000, we raised a
total of approximately $426 million through the sale of our common stock in
registered public offerings to fund growth and to acquire complementary
businesses and technologies. During 2000 and 2001, we completed several
acquisitions in exchange for our stock consideration including the acquisitions
of RightPoint Software, Inc., Octane Software, Inc. and Moss Software, Inc.
These acquisitions increased our customer base, increased the number of our
employees and expanded our product suite. As a result of these acquisitions, we
recorded goodwill and purchased intangible assets of approximately $3.3 billion,
representing the difference between the value of the consideration paid in our
stock and the value of the net assets acquired.

From
the shipment of our first software product in early 1998 through the fourth
quarter of 2000, our revenues increased steadily each quarter due primarily to
the market acceptance and success of our products such as E.piphany Insight and
E.piphany Marketing, as well as the shipment of new products such as E.piphany
Service, which were introduced through a combination of acquisitions and
internal development. Our annual revenues grew to $131 million in 2000 from $19
million in 1999 and $3 million in 1998.

During
2001 and 2002, the worldwide economy weakened and a slowdown in technology
spending by businesses occurred. As a result, our revenues declined from $131
million in 2000 to $129 million in 2001 and to $84 million in 2002. During this
period of economic slowdown, we initiated restructuring plans to reduce our
workforce and consolidate our operating facilities. We also reviewed the impact
of the change in market conditions on the carrying value of our goodwill and
intangible assets. We determined that these assets were impaired and wrote down
their fair value by recording a non-cash charge of $1.7 billion in September
2001. Net losses for the years ended December 31, 2000, 2001 and 2002 were $768
million, $2.6 billion and $72 million, respectively. The net losses in 2000 and
2001 included non-cash impairment and amortization of goodwill and purchased
intangibles of $697 million and $2.5 billion, respectively.

During
2002, we released version 6.0 of our product suite. This release generated an
increase in demand for our product licenses which helped increase revenues in
2003. Our total revenues for 2003 increased to $96 million, an increase of 15%
over 2002, while our product license revenues increased to $44 million in 2003
from $34 million in 2002, an increase of 29% year over year. During 2003, we
continued to focus on cost containment and reduced our annual net loss to $24
million in 2003 from $72 million 2002. The combination of increased revenue and
decreased costs resulted in declining net losses in the first three quarters of
2003 and net income of $0.4 million in the fourth quarter.

During
the first nine months of 2004, we experienced a decline in revenues from the
same period in the prior year due primarily to a decline in revenue in North
America, Latin America and Asia, partially offset by an increase in revenues in
Europe. Although our revenues declined, our net loss improved from the same
period in the prior year as a result of our cost containment activities.

15

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During
the nine months ended September 30, 2003 and 2004, we experienced an increase in
the percentage of license transactions for which integrator partners took
primary responsibility for software implementation. The growth of our business
depends on license revenue growth over time. During the first nine months of
2004, we experienced a decline in license revenue, primarily attributable to
longer than expected sales cycles, lower average selling prices of our license
transactions and continuing weakness in spending in the information technology
market. When a third-party integration partner takes primary responsibility for
the implementation of our software, we generally recognize license revenue at
the time of the sale, provided that all other revenue recognition criteria have
been met as set forth in Note 2 of Notes to the Condensed Consolidated Financial
Statements. As a result, our deferred revenue decreased from $19.2 million as of
December 31, 2003 to $16.8 million as of September 30, 2004. This decrease in
deferred revenue was primarily a result of a decrease in deferred license
revenue. Therefore, quarterly revenues have been more dependent on revenues from
new software license agreements entered into during those quarters. Although we
anticipate this trend to continue into future quarters, this trend may vary in
any given quarter to the extent that certain revenue recognition criteria are
not met on significant license transactions that would require us to defer the
recognition of revenues into future periods.

Sources of
Revenue

We
generate revenues principally from licensing our software products directly to
customers and providing related services including implementation, professional,
maintenance and training services. Through September 30, 2004, 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 the license
fee varies depending on which software products are purchased, the number of
software products purchased and the scope of usage rights. Customers can
subsequently pay additional license fees to expand the right to use previously
licensed software products, or to purchase additional software products. Our
software products are made available to our customers electronically via
Internet download or on compact disk.

Customers
generally require consulting and implementation services, which include
evaluating their business needs, identifying the data sources necessary to meet
these needs and installing the software solution in a manner that fulfills their
requirements. Customers can purchase these services directly from third party
consulting organizations, such as Accenture, BearingPoint (formerly KPMG
Consulting), Cap Gemini, Deloitte Consulting, or IBM. Alternatively, in certain
circumstances, customers can purchase these services directly from us through
our internal professional services organization. Consulting and implementation
services are generally sold to customers on a time and expense basis. We have
historically supplemented the capacity of our internal professional services
organization by subcontracting some of these services to third party consulting
organizations.

Cost of
Revenues and Operating Expenses

Cost
of revenues includes the cost of product license revenues, the cost of services
revenues, the cost of maintenance revenues and the amortization of purchased
technology. Our cost of product license revenues primarily consists of license
fees payable to third parties for technology integrated into our products. Our
cost of services revenues primarily consists of salaries and related expenses
for our professional services, maintenance and training organizations, an
allocation of facilities, information technology and depreciation expenses, as
well as the cost of reimbursable expenses and the cost of subcontracting
professional services from third party consulting organizations that provide
consulting and implementation services to our customers. Cost of revenues also
includes the amortization of purchased technology arising from our acquisitions.
Our operating expenses are classified into three general categories: sales and
marketing, research and development, and general and administrative. We classify
all charges to these operating expense categories based on the nature of the
expenditures. We allocate the costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services based on
headcount. These allocated charges include facilities, information technology,
communications and depreciation expenses.

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.

16

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Critical
Accounting Policies and Estimates

Accounting
policies, methods and estimates are an integral part of the condensed
consolidated financial statements prepared by management and are based upon
managements current judgments. Those judgments are 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 and subject to the exercise of judgment include
revenue recognition policies, allowances for doubtful accounts, the measurement
and recoverability of goodwill and purchased intangible assets, restructuring
accruals for the abandonment of certain leased facilities, and stock-based
compensation. These policies and our practices related to these policies are
described below and in Note 2 of Notes to Condensed Consolidated Financial
Statements.

Revenue
Recognition

We
recognize revenue in accordance with generally accepted accounting principles
which have been prescribed for the software industry and we follow detailed
guidelines discussed in Note 2 of Notes to Condensed Consolidated Financial
Statements. The accounting rules related to revenue recognition are complex and
are affected by interpretations of the rules and an understanding of industry
practices, both of which are subject to change. Consequently, the revenue
recognition accounting rules require management to make significant judgments.

We
do not record revenue on sales transactions when collectibility is in doubt at
the time of sale. Rather, revenue is recognized from these transactions as cash
is collected. The determination of collectibility requires significant judgment.

To
date, when we have been primarily responsible for the implementation of the
software under a customer contract, both product license revenues and service
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). This is based on our assessment that the implementation
services for these arrangements are essential to the functionality of our
software. Throughout most of the year ended December 31, 2003 and the nine
months ended September 30, 2004, third-party consulting organizations have been
primarily responsible for implementation services for the majority of our
license arrangements. Approximately 11% of license revenue was recognized under
SOP 81-1 during the nine months ended September 30, 2004, compared to 31% for
the nine months ended September 30, 2003.

We
estimate the percentage of completion on contracts utilizing hours incurred to
date as a percentage of the total estimated hours to complete the project. The
percentage of completion method of accounting involves an estimation process and
is subject to risks and uncertainties inherent in projecting future events. A
number of internal and external factors can affect our estimates, including the
nature of the services being performed, the complexity of the customers
information technology environment and the utilization and efficiency of our
professional services employees. 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.

Allowances
for Doubtful Accounts

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

17

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Acquisitions,
Goodwill and Purchased Intangible Assets

We
record goodwill and purchased intangible assets when we acquire other companies.
The cost of the acquisition is allocated to the assets and liabilities acquired,
including purchased intangible assets, and the remaining amount is classified as
goodwill. Certain purchased intangible assets such as purchased technology and
customer lists are amortized to cost of revenues and operating expense over
time, while in-process research and development is recorded as a one-time charge
on the acquisition date. Under Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142), which became
effective on July 1, 2001, goodwill arising from transactions occurring
after July 1, 2001 and any existing goodwill as of January 1, 2002 are not
amortized to expense, but rather periodically assessed for impairment. The
allocation of the acquisition cost to purchased intangible assets and goodwill,
therefore, has a significant impact on our operating results. The allocation
process involves an extensive use of estimates and assumptions, including
estimates of future cash flows to be generated by the acquired assets.

As
a result of the adoption of SFAS 142 as of January 1, 2002, we ceased
amortization of approximately $81.5 million of goodwill. We perform impairment
tests annually. We also perform impairment tests when events occur or
circumstances change that would more likely than not reduce the fair value of
previously recorded intangible assets. If the fair value of such assets is
considered to be reduced, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Fair market value is determined by independent valuation experts using, among
other things, discounted future cash flow techniques. Estimating discounted
future cash flows requires significant management judgment concerning revenue,
profitability and discount rates. Differences between forecasted and actual
results as well as changes in the general economic environment could result in
material write-downs of goodwill and purchased intangible assets. In addition,
we have not identified events or circumstances that would more likely than not
reduce the fair value of previously recorded intangible assets during the
quarter ended September 30, 2004.

Restructuring
Charges

As
discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, we
have recorded significant restructuring charges, primarily 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 commercial real estate brokerage firms retained
by us. We review these estimates each reporting period and, to the extent that
market conditions and our assumptions change, adjustments to the restructuring
accrual are recorded. If the real estate market continues to worsen and we are
not able to sublease the properties as early as, or at the rates estimated, the
accrual will be increased, which would result in additional restructuring costs
in the period in which such determination is made. If the real estate market
strengthens and we are able to sublease the properties earlier or at more
favorable rates than projected, the accrual may be decreased, which would
increase net income in the period in which such determination is made. The
accrued liability of $22.9 million at September 30, 2004 is net of $27.8 million
of estimated sublease income. Sublease income is comprised of future minimum
sublease payments as well as the reimbursement of future expected operating
expenses. Of this total sublease income, $13.6 million represents future
sublease income due under non-cancelable subleases and $14.2 million represents
our estimates of future sublease income on excess facilities we expect to
sublease in the future.

Stock-Based
Compensation

We
elect to account for compensation expense related to stock options issued to  employees
in accordance with Accounting Principles Board Opinion No. 25,  Accounting  for
Stock Issued to Employees (APB 25). Under  APB 25, compensation
expense for fixed stock options is based on the difference  between the market value of
our stock and the exercise price of the option on  the date of grant, if any. This
election is available to companies under SFAS  No. 123, Accounting for Stock-Based
Compensation (SFAS  123). Had we elected to apply the fair value method
for valuing stock  options under SFAS 123, our net loss and net loss per share would have
been  substantially higher as discussed in Note 2 of Notes to Condensed Consolidated
Financial Statements. The fair value method of option valuation was applied for
disclosure purposes by utilizing the Black-Scholes option-pricing model. This
option-pricing model is commonly used by companies to calculate the fair value  of
options under SFAS 123 and utilizes certain variables including the exercise  price of
the option, expected life of the option, the market value of the  underlying stock as of
the grant date, the expected volatility of the underlying  stock during the life of the
option,

18

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and a risk-free
interest rate of return.  Although some of these variables are  known at the date of
grant, other variables  are based on estimates of future events.  Changes in these
estimates may have a  material impact on the compensation expense  calculated under the
fair value  method. For example, an increase in the estimated  expected life of the
option or  the stock volatility would increase the fair market value  of the option and
result in an increase to compensation expense calculated under the  fair value  method.

Results of
Operations

Revenues

The
following table sets forth our revenues, expressed both in absolute dollars and
as a percentage of total revenues, for the three and nine months ended September
30, 2004 and 2003 (in thousands, except percentages):

|                | Three months ended September 30, |  | Nine months ended September 30, |       
|--------------- | -------------------------------- |  | ------------------------------- | ------
|
|Revenues:       |                                  |  |                                 |       
|Product license |                                  |  | $                               | 5,691 
|Services        |                                  |  |                                 | 4,853 
|Maintenance     |                                  |  |                                 | 7,394 
|                |                                  |  |                                 |       
|                |                                  |  | $                               | 17,938
|                |                                  |  |                                 |       

The
following table sets forth our revenues by geography, expressed both in absolute
dollars and as a percentage of total revenues, for the three and nine months
ended September 30, 2004 and 2003 (in thousands, except percentages):

|              | Three months ended September 30, |  | Nine months ended September 30, |       
|------------- | -------------------------------- |  | ------------------------------- | ------
|
|North America |                                  |  | $                               | 11,495
|Europe        |                                  |  |                                 | 6,257 
|Rest of world |                                  |  |                                 | 186   
|              |                                  |  |                                 |       
|              |                                  |  | $                               | 17,938
|              |                                  |  |                                 |       

Product
license revenue for the three months ended September 30, 2004 decreased by $4.5
million, or 44%, as compared to product license revenue for the same period in
the prior year. Product license revenue for the nine months ended September 30,
2004 decreased by $9.7 million, or 32%, as compared to product license revenue
for the same period in the prior year. The decrease in product license revenue
for both periods is due primarily to fewer license sales in North America. This
decrease is attributable to longer than expected sales cycles, lower average
selling prices for our licenses, and continued weakness in spending in the IT
market. In addition, product license revenue in markets outside of North America
and Europe decreased as a result of our restructuring plan to reduce sales and
marketing costs by transitioning these regions to an indirect sales model. These
decreases were offset, in part, by increases in product license sales in Europe
for the three and nine month periods ending September 30, 2004.

Services
revenue consists of revenue from professional and training services. Services
revenue for the third quarter of 2004 decreased by $2.3 million, or 32%,
compared to the third quarter of 2003. Services revenue for the nine months
ended September 30, 2004 decreased by $2.3 million, or 13%, over services
revenue for the same period in the prior year. The decrease in both periods was
primarily due to third-party consulting organizations being responsible for
implementation services for the majority of our license arrangements, which led
to a decrease in the number of our professional services employees.

Maintenance
revenue for the third quarter of 2004 increased by $0.6 million, or 9%, over
maintenance revenue for the third quarter of 2003. Maintenance revenue for the
nine months ended September 30, 2004 increased by $1.7 million, or 8%, over
maintenance revenue for the same period in the prior year. The increase in
maintenance revenue was primarily attributable to maintenance contracts sold
with new licenses in addition to maintenance agreement renewals by our existing
installed base.

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Cost of
Revenues

The following table sets forth our cost of revenues and gross profit, both
in absolute dollars and expressed as a percentage of total revenues, for the
three and nine months ended September 30, 2004 and 2003 (in thousands, except
percentages):

|                                              | Three months ended September 30, |  | Nine months ended September 30, |       
|--------------------------------------------- | -------------------------------- |  | ------------------------------- | ------
|
|Cost of revenues:                             |                                  |  |                                 |       
|Product license                               |                                  |  | $                               | 403   
|Services                                      |                                  |  |                                 | 3,806 
|Maintenance                                   |                                  |  |                                 | 1,635 
|Amortization of purchased          technology |                                  |  |                                 |      
|                                              |                                  |  |                                 |       
|Total cost of revenues                        |                                  |  | $                               | 5,844 
|                                              |                                  |  |                                 |       
|Gross profit                                  |                                  |  | $                               | 12,094
|                                              |                                  |  |                                 |       

Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements, and, as a percentage of license
revenues, have not been significant to date. The majority of these fees are
fixed and thus have not decreased in accordance with the decrease in license
revenue for the three and nine months ended September 30, 2004.

Cost
of services revenues consists primarily of personnel and related costs of
providing professional services and training services. The decrease in cost of
services revenue for the three and nine months ended September 30, 2004 compared
to the same periods in the prior year was due primarily to a reduction in the
number of internal professional services employees and their related travel
expenses. The decrease was also a result of lower overhead and facilities cost
allocations due primarily to a reduction in rent expense from office lease
expirations. The number of services employees decreased from 87 at September 30,
2003 to 73 at September 30, 2004 as a result of voluntary and other terminations
not related to restructuring plans.

Cost
of maintenance revenues consists primarily of personnel and related costs of
providing customer telephone support services under maintenance agreements. The
increase in the cost of maintenance for the three months ended September 30,
2004 compared to the same period in the prior year is due primarily to
transition costs associated with the move of one of our support centers from
Boston, Massachusetts to the United Kingdom. The decrease in cost of maintenance
revenue for the nine months ended September 30, 2004 compared to the same period
in the prior year was due primarily to lower overhead and facilities cost
allocations.

The
amortization of purchased technology consists of amortization from technology
purchased in the acquisitions of RightPoint, Octane, iLeverage, eClass Direct,
Moss and certain intellectual property assets of Radnet. The decrease in
amortization of purchased technology for the three and nine months ended
September 30, 2004 compared to the same periods in the prior year was due to the
full amortization of RightPoint, Octane and eClass Direct assets during 2003. No
amortization expense was recognized for the quarter ended September 30, 2004
since all purchased technology assets were fully amortized as of March 31, 2004.

Operating
Expenses

Research and
Development

The
following table sets forth our research and development expenses for the three
and nine months ended September 30, 2004 and 2003, expressed both in absolute
dollars and as a percentage of total revenues (in thousands, except
percentages):

|                          | Three months ended September 30, |  | Nine months ended September 30, |      
|------------------------- | -------------------------------- |  | ------------------------------- | -----
|
|Research and  development |                                  |  | $                               | 6,344

Research
and development expenses consist primarily of personnel and related costs  associated
with our product development efforts. The decrease for the three and  nine  months ended
September 30, 2004 as compared to

20

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the same
periods in the  prior year was  due primarily to a reduction in the number of research
and  development employees, as  well as lower overhead and facilities cost  allocations.
The number of research and  development employees decreased from 153  as of September 30,
2003 to 139 September 30,  2004 as a result of voluntary and  other terminations not
related to restructuring plans.

Sales and
Marketing

The
following table sets forth our sales and marketing expenses for the three and
nine months ended September 30, 2004 and 2003, expressed both in absolute
dollars and as a percentage of total revenues (in thousands, except
percentages):

|                    | Three months ended September 30, |  | Nine months ended September 30, |      
|------------------- | -------------------------------- |  | ------------------------------- | -----
|
|Sales and marketing |                                  |  | $                               | 8,285

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. The decrease in these expenses for the three
and nine months ended September 30, 2004 compared to the same periods in the
prior year was primarily due to a reduction in the number of sales and marketing
employees and lower sales commission expense. Sales commission expense was lower
as a result of lower revenues for the three and nine months ended September 30,
2004 as compared to the same periods in the prior year. The decrease was also
due to lower overhead and facilities cost allocations as discussed above, and
lower travel expenses. The number of sales and marketing employees decreased
from 112 as of September 30, 2003 to 102 as of September 30, 2004 as a result of
voluntary and other terminations not related to restructuring plans.

General and
Administrative

The
following table sets forth our general and administrative expenses for the three
and nine months ended September 30, 2004 and 2003, expressed both in absolute
dollars and as a percentage of total revenues (in thousands, except
percentages):

|                           | Three months ended September 30, |  | Nine months ended September 30, |      
|-------------------------- | -------------------------------- |  | ------------------------------- | -----
|
|General and administrative |                                  |  | $                               | 3,120

General
and administrative expenses consist primarily of employee salaries and related
expenses for executive, finance, legal and administrative personnel. The
increase in these expenses for the three and nine months ended September 30,
2004 compared to the same periods in the prior year was primarily due to an
increase in legal, audit and accounting costs offset, in part, by a decrease in
compensation and benefits expenses. Legal expenses increased primarily as a
result of increased litigation costs mainly associated with legal action filed
by us against a private third party to protect our intellectual property rights.
Audit and accounting costs increased primarily as a result of activities
associated with our compliance with the Sarbanes-Oxley Act of 2002. Compensation
and benefits expenses decreased due primarily to a reduction in the average
number of general and administrative employees. The number of general and
administrative employees decreased from 66 as of September 30, 2003 to 57 as of
September 30, 2004 as a result of voluntary and other terminations not related
to restructuring plans.

Restructuring
Charges

The
following table sets forth our restructuring charges for the three and nine
months ended September 30, 2004 and 2003, expressed both in absolute dollars and
as a percentage of total revenues (in thousands, except percentages):

|                                | Three months ended September 30, |  | Nine months ended September 30, |     
|------------------------------- | -------------------------------- |  | ------------------------------- | ----
|
|Restructuring charges (credits) |                                  |  | $                               | (137

21

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In
the quarter ended September 30, 2001, we began restructuring worldwide
operations to reduce costs and improve efficiencies in response to a slower
economic environment. Since that time, operations have been streamlined, sales
models have transitioned to indirect models in certain geographies and
facilities have been abandoned to align our cost structure to current market
conditions. In accordance with applicable accounting literature, specified
activities were deemed the commencement of a separate restructuring plan in the
quarter in which those activities were specifically identified. The first plan
was initiated in the quarter ended September 30, 2001 (Plan 1). The
second plan, initiated during the quarter ended September 30, 2002, consisted of
actions which were primarily supplemental to Plan 1 (Plan 2). The
third plan was initiated during the quarter ended March 31, 2003 (Plan
3). Charges for these plans were based on assumptions and related
estimates that were appropriate for the economic environment that existed at the
time these charges were recorded. However, due to the deterioration of the
commercial real estate market, primarily in the United States and the United
Kingdom, we have made subsequent adjustments to the initial restructuring
charges. No significant adjustments have been made to the initial estimated
severance charges. See Note 6 in Notes to Condensed Consolidated Financial
Statements for more details.

Restructuring
charges (credits) recorded in the three and nine months ended September 30, 2004
relate to changes in estimated lease costs related primarily to facilities
located in Illinois, California, and the United Kingdom. Restructuring charges
recorded in the same periods in the prior year relate to severance and related
charges under Plan 3 and adjustments to previously recorded restructuring
estimates to reflect changes in estimated lease costs related to facilities
located in Boston, Massachusetts.

Other
Income, Net

The
following table sets forth our other income, net for the three and nine months
ended September 30, 2004 and 2003, expressed both in absolute dollars and as a
percentage of total revenues (in thousands, except percentages):

|                  | Three months ended September 30, |  | Nine months ended September 30, |      
|----------------- | -------------------------------- |  | ------------------------------- | -----
|
|Other income, net |                                  |  | $                               | 1,273

Other
income, net consists primarily of interest income on investments. For the nine
months ended September 30, 2003, other income also includes $0.8 million
reflecting the termination of a partner agreement executed in October 1999 by
one of the companies that we acquired. The increase in interest income for the
three months ended September 30, 2004 as compared to the same period last year
is primarily due to higher rates of return on our investments during that
period. The decrease in interest income for the nine months ended September 30,
2004 as compared to the same period last year is primarily due to the inclusion
of the $0.8 million payment for the termination of a partner agreement discussed
above, and also due to a decrease in the average rate of return on our
investments as well as lower average cash and investment balances.

Provision
for Taxes

The
following table sets forth our provision for taxes for the three and nine months
ended September 30, 2004 and 2003, expressed both in absolute dollars and as a
percentage of total revenues (in thousands, except percentages):

|                    | Three months ended September 30, |  | Nine months ended September 30, |   
|------------------- | -------------------------------- |  | ------------------------------- | --
|
|Provision for taxes |                                  |  | $                               | 53

Provision
for taxes consists of withholding taxes due on payments from certain foreign
customers.

Liquidity
and Capital Resources

Cash Flow

As
of September 30, 2004, our primary sources of liquidity consisted of $147.3
million in cash, cash equivalents and short-term investments and $107.5 million
in long-term investments for a total of $254.8 million in unrestricted cash and
investments. Long-term investments generally consist of securities that we
intend to hold for more than one year with maturity dates of less than two years
from the date of purchase.

22

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Net
cash used in operating activities totaled $12.9 million and $24.5 million for
the nine months ended September 30, 2004 and 2003, respectively. The decrease in
cash used in operations is primarily due to a reduction in our net loss during
these periods. Our net loss decreased primarily due to a reduction of employees
and lower overhead and facilities costs. The decrease in cash used in operations
was also attributable to higher collection activity of our accounts receivable
during the nine months ended September 30, 2004 as compared to the same period
last year.

We
expect to incur significant operating expenses, particularly research and
development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. We anticipate that such operating expenses
will comprise a material expenditure of our current cash resources. As a result,
our net operating cash flows will depend on the level of future revenues and our
ability to effectively manage costs.

Net
cash used in investing activities for the nine months ended September 30, 2004
and September 30, 2003 totaled $1.9 million and $18.2 million, respectively, due
primarily to the purchase of investments. Investments purchased are primarily
comprised of government sponsored enterprises, auction rate municipal securities
and corporate debt securities with maturities which do not exceed 24 months.

Net
cash provided by financing activities totaled $6.0 million and $3.5 million for
the nine months ended September 30, 2004 and 2003, respectively. Cash provided
by financing activities for each period resulted primarily from the receipt of
proceeds from the issuance of common stock pursuant to the exercise of stock
options and our employee stock purchase plan. The increase in cash proceeds
during the nine months ended September 30, 2004 compared to the same period in
the prior year is due to an increase in stock option exercises during the first
quarter of 2004.

Common Stock
Repurchase Program

Our
Board of Directors has authorized a stock repurchase program of up to $30
million of common stock. Stock repurchases under this program may be made in the
open market and through privately negotiated transactions at such times and in
such amounts as management deems appropriate and will be funded from available
working capital. The number of shares to be purchased and the timing of the
purchases will depend on several factors, including the price of
E.piphanys stock, corporate and regulatory requirements and general
business and market conditions. The stock repurchase program may be limited or
terminated at any time without prior notice.

Restricted
Cash and Investments

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 and cash equivalents and are
recorded as restricted cash in the balance sheet. As of September 30, 2004, we
had $6.9 million of restricted cash and investments, $1.2 million of which are
classified as short-term and relate to facility lease agreements that have
expiration dates within 12 months, and $5.7 million of which are classified as
long-term and relate to facility lease agreements that have expiration dates
greater than twelve months from September 30, 2004.

Contractual
Obligations

Our
contractual obligations as of September 30, 2004 are comprised of operating
leases, purchase obligations and long-term liabilities. Our purchase obligations
and long-term liabilities have not changed materially since December 31, 2003.

Operating
Leases. We lease certain facilities under operating lease agreements which
expire at various dates through 2017. In addition, we receive sublease income
from non-cancelable subleases of excess facilities. Future minimum lease
payments due and receivable under these leases as of September 30, 2004 were as
follows (in thousands):

|Year Ending December 31, |  | OperatingLeases Due |   | SubleaseIncomeReceivable |  | Total,Net
|------------------------ |  | ------------------- | - | ------------------------ |  | ---------
|
|2004                     |  |                     | $ | 2,736                    |  | $        
|2005                     |  |                     |   | 9,326                    |  |          
|2006                     |  |                     |   | 6,454                    |  |          
|2007                     |  |                     |   | 6,493                    |  |          
|2008                     |  |                     |   | 6,587                    |  |          
|2009 and thereafter      |  |                     |   | 23,258                   |  |          
|                         |  |                     |   |                          |  |          
|                         |  |                     | $ | 54,854                   |  | $        
|                         |  |                     |   |                          |  |          

23

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Net
operating lease commitments shown above include $29.0 million of operating lease
commitments under leases for abandoned facilities which are recorded as
restructuring costs in the accompanying balance sheet as of September 30, 2004.
We do not have commercial commitments under lines of credit, standby lines of
credit, guarantees, standby repurchase obligations or other such arrangements.

We
believe that our cash, cash equivalents and investment balances will be
sufficient to meet our anticipated liquidity needs for working capital and
capital expenditures for the next 12 months and the foreseeable future. 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 liquidate our long-term investments, issue 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.

Off-Balance
Sheet Arrangements

We
generally agree to indemnify our customers against legal claims that our
software products infringe certain third-party intellectual property rights and
account for our indemnification obligations under SFAS No. 5. In the event of
such a claim, we are generally obligated to defend our customer against the
claim and to either settle the claim at our expense or pay damages that the
customer is legally required to pay to the third-party claimant. In addition, in
the event of an infringement, we agree to modify or replace the infringing
product, or, if those options are not reasonably possible, to refund the cost of
the software, as pro-rated over a five-year period. To date, we have not been
required to make any payment resulting from infringement claims asserted against
our customers. As such, we have not provided for an infringement accrual as of
December 31, 2003 or September 30, 2004 and have not deferred revenue
recognition on license agreements which provide for a pro-rated refund over a
five-year period.

During
the quarter ended September 30, 2003, we sold all of the outstanding capital
stock of our Japanese subsidiary, E.piphany Software, K.K. (E.piphany
Japan), to Braxton Ltd. for approximately $4.2 million in cash. The stock
purchase agreement contained customary representations, warranties and covenants
of the parties, including covenants to indemnify each other in the event of a
breach of warranty or representation. Claims under the indemnification covenants
may be submitted within two years from the date of closing, for a maximum of
$0.7 million, and only to the extent that losses exceed 10% of the purchase
price. The fair value of these indemnification provisions were not material to
our financial position, results of operations or cash flows for the three months
ended September 30, 2004.

We
indemnify our directors and officers in their capacity as such. To date, we have
not been required to make any payment resulting from these indemnification
obligations. Additionally, the fair value of these indemnification provisions
was not material to our financial position, results of operations or cash flows
for the quarter ended September 30, 2004.

Related
Party and Other Transactions

Roger
Siboni, Chairman of the Board, is currently a member of the board of directors
of two of our customers. Total revenues to E.piphany from these customers were
less than $0.1 million for both the three and nine months ended September 30,
2004, respectively, and $0.1 million for both the three and nine months ended
September 30, 2003, respectively. We had no accounts receivable balances from
these customers as of September 30, 2004 and December 31, 2003, respectively.

In
addition, three of our customers have board members that were also on our board  of
directors at the time revenues from contracts with these customers were  recognized.
Total revenues to us from these customers were $1.4 million and $2.0  million for the
three and nine months ended September 30, 2004 and $0.1 million  and $0.2 million for the
three and nine months ended September 30, 2003,  respectively. We had accounts receivable
balances from

24

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these customers
totaling  $1.3 million as of September 30, 2004 and less  than $0.1  million as of
December  31, 2003, respectively.

25

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RISK
FACTORS

An
investment in our common stock is very risky. You should carefully consider the
risks discussed below, together with all of the other information included in
this Quarterly Report on Form 10-Q before investing in E.piphany. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected, the trading price of our
common stock could decline, and you may lose all or part of your investment.

We
have a history of losses, may incur losses in the future and may not be able to
sustain profitability.

We
incurred net losses of $4.3 million for the quarter ended September 30, 2004,
$24.2 million for the year ended December 31, 2003, $71.7 million for the year
ended December 31, 2002 and $2.6 billion for the year ended December 31, 2001.
We had an accumulated deficit of $3.5 billion as of September 30, 2004. We may
incur losses in the foreseeable future. These losses may be substantial and we
may not be able to achieve or sustain profitability. Our operating results will
be harmed if our revenues do not keep pace with our expenses or are not
sufficient for us to achieve profitability. Although we achieved profitability
in the quarter ended December 31, 2003, it cannot be certain that we will again
achieve profitability on a quarterly basis or ever achieve profitability on an
annual basis.

Our
revenues may be harmed if general and industry specific economic conditions do
not improve or worsen.

Our
revenues are dependent on the health of the economy and the growth of our
customers and potential future customers. If the economic conditions in the United States
or in other territories or markets in which we do a substantial portion of business worsen, or do not substantially
improve, our customers may 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.

Competition
from other software vendors could adversely affect our ability to sell our
products and services 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 of our products and services, any of which could harm our
business. We compete principally with vendors of traditional customer
relationship management software, enterprise resource planning software and data
analysis and marketing software. Our competitors include, among others,
companies such as Chordiant, NCR, Oracle, PeopleSoft, SAP AG, SAS Institute,
Siebel Systems and Unica.

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, have more
established relationships with key system integrators and/or have greater name
recognition than we do. In addition, some large companies have and will continue
to attempt to build capabilities into their products that are similar to the
capabilities of our products. Some of our competitors products may be more
effective than our products at performing particular functions or be more
customized for customers particular needs. Even if these functions are
more limited than those provided by our products, our competitors software
products could discourage potential customers from purchasing our products.
Further, our competitors may be able to respond more quickly than we can to
changes in customer requirements.

We
have recently experienced price erosion with respect to particular 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 continue to make strategic acquisitions or
establish cooperative relationships among themselves or with other software
vendors. This may increase the capability of their products and reduce or
eliminate the need for our software products. Our competitors may also establish
or strengthen cooperative relationships with our current or future distributors,
partners or other parties with whom we have relationships, thereby limiting our
ability to sell through these channels, reducing the promotion of our products
and limiting the number of personnel available to implement our software.

26

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

Although
no single customer accounted for more than 10% of total revenues for the quarter
ended September 30, 2004 or for the year ended December 31, 2003, a few large
license transactions may from time to time account for a substantial amount of
our license revenues. For example, for the quarter ended March 31, 2002,
revenues from one customer accounted for 12% of total revenues. For the quarter
ended December 31, 2002, revenues from one customer accounted for 17% of total
revenues. If a customer or potential customer cancels or does not enter into a
large transaction that we may anticipate in a certain quarter, or delays the
transaction beyond the end of the quarter, our financial results in that quarter
may be materially adversely affected. Our business model has and continues to
evolve to include each quarter more operational CRM transactions which are often
more complex, larger in size and have less predictable sales cycles.  As a
result, our financial results for a particular quarter may be more susceptible
to an adverse affect by the delay or cancellation of one or more large
transactions.

Variations
in quarterly operating results may cause our operating results to fall below the
expectations of market analysts and investors and our stock price to decline.

We
expect our quarterly operating results to fluctuate. We believe, therefore, that
quarter-to-quarter comparisons of our operating results may not be a good
indication of our future performance, and you should not rely on them to predict
our future performance or the future performance of our stock price. Our
short-term expense levels are relatively fixed and are based on our expectations
of future revenues. As a result, a reduction in revenues in a quarter may harm
our operating results for that quarter. Our quarterly revenues 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:

| |  | customers'
decisions to defer or cancel orders or implementations, particularly large orders or
implementations,
|- |  | ----------------------------------------------------------------------------------------------------------------

| |  | 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,
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 us or our competitors,
|- |  | ------------------------------------------------------------------------

| |  | software
defects and other product quality problems,
|- |  | ----------------------------------------------------

| |  | 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 costs,
|- |  | ----------------------------------------------------------------------------------------------

| |  | changes
in accounting, legal and regulatory requirements, and
|- |  | -------------------------------------------------------------

| |  | our
ability to hire, train and retain qualified engineering, professional services,
training, sales and other personnel.
|- |  | ------------------------------------------------------------------------------------------------------------------------

27

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

It
typically takes us between six and twelve months to complete a sale of our
products, but it can take us longer. It is difficult, therefore, to predict if,
and the quarter in which, a particular sale will occur and to plan expenditures
accordingly. The period between initial contact with a potential customer and
such customers 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,
|- |  | ----------------------------------------------------------------------------------------------------------------------------

| |  | many
of our potential customers are large organizations, which may require a  long time to
make decisions, and
|- |  | --------------------------------------------------------------------------------------------------------------

| |  | our
customers focus on Sarbanes-Oxley Section 404 compliance activities.
|- |  | -------------------------------------------------------------------------

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 cycles lengthen when economic
conditions worsen and spending on information technology declines. If our sales
cycles unexpectedly lengthen in general, or for one or more large orders, our
revenues could be adversely affected.

In
addition, some customers receive the right to perform acceptance testing after
the sale of our products with respect to some or all of the products licensed.
If these customers do not accept the products or otherwise terminate their
customer agreements, our revenues could be adversely affected.

Also,
some customers elect to initially license our products on a preliminary or
proof of concept basis to enable them to evaluate the extent to
which such products meet their specific needs within their technical
environment. Our customers election to license our products on this basis
could delay or place at risk our receipt of revenue with respect to such
transactions.

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

In
order to grow our business, we must generate, retain and strengthen  relationships  with
third parties. To date, we have established relationships  with several companies,
including consulting organizations and system  integrators that implement our software,
including Accenture, BearingPoint  (formerly KPMG Consulting), Cap Gemini, Deloitte
Consulting, and IBM; resellers,  including Accenture, EDS, Harte-Hanks and
Hewlett-Packard; hardware and software  technology partners, including BEA Systems, IBM
and Sun Microsystems, as well as  outsourcing or application services providers that use
our software products to  provide hosted services to their customers over the internet,
including  Harte-Hanks. 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. Our contracts,  however, do not typically
require these third parties to devote substantial  resources to

28

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promoting,
selling or  supporting our products. We, therefore, have  little control over the actions
of these  third parties. We cannot provide  assurances that we can generate and maintain
relationships that offset the  significant time and effort that are necessary to develop
these relationships.  In addition, our pricing policies and contract terms with our
distribution  partners are designed to support each partner with a minimum level of
channel  conflict. If we fail to minimize channel conflicts between our direct sales
force and our channel partners, or among our channel partners, our operating  results and
financial condition could be harmed. We currently receive  substantially all of our
revenues from direct sales, but plan to increase sales  through indirect sales channels
in the future. If we are not able to establish  or maintain effective indirect sales
channels, our ability to grow may be  limited and our operating results and financial
condition could be harmed.

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

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

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

When
we provide consulting and implementation services to our customers, we do so
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
organization, or from outside consulting organizations. When we are primarily
responsible for implementation services, we generally recognize software license
revenue 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, the recognition of revenue from
such transactions will be delayed. In addition, our ability to sell software,
and accordingly our revenues, will be harmed. We may be required to increase our
use of subcontractors to help meet our implementation and service obligations,
which would result in lower gross margins. In addition, we may be unable to
negotiate agreements with subcontractors to provide a sufficient amount 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.

Many
of 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
released version 6.5 of our suite of products in November 2003. Our products are
complex and may contain currently unknown errors, defects or failures,
particularly since many are new and recently released. In the past, we have
discovered software errors in our products after introduction. We may not be
able to detect and correct errors before releasing our products commercially. If
our commercial products contain errors, we may be required to:

| |  | expend
significant resources to locate, correct or work around the error,
|- |  | -------------------------------------------------------------------------

29

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| |  | 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.

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 damages 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
revenue.

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

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, in
part, 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,
|- |  | ------------------------------------------------------------------------

| |  | use
alternative methods to solve the same or similar business problems, or
|- |  | --------------------------------------------------------------------------

| |  | attribute
less priority to customer relationship management products relative to  other enterprise
software products and services.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------

Doing
business abroad exposes us to greater management, intellectual property and
other risks and our development, marketing and sales activities in international
markets may require us to incur significant additional expenses.

We
market and sell our products and services abroad. Our revenue from the sale of
our products and services outside of the United States accounted for 39% of our
total revenues for the quarter ended September 30, 2004. 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,
|- |  | ----------------------------

| |  | changes
in a specific countrys or regions political or economic conditions,
|- |  | -----------------------------------------------------------------------------

30

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| |  | limited
experience and greater difficulty in managing certain foreign  operations,
|- |  | ----------------------------------------------------------------------------------

| |  | the
complexity and cost of developing and maintaining international versions of  our
products, and
|- |  | --------------------------------------------------------------------------------------------------

| |  | fluctuating
exchange rates.
|- |  | ---------------------------

Our
international business operations require a significant amount of attention from
our management and substantial financial resources. As of September 30, 2004, we
had 75 employees located in Europe and Canada.

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 are not successful in achieving these goals, we may not
gain market acceptance of our products and we may be unable to attract new
customers. We may also lose existing customers to whom we seek to sell
additional software products and services. To achieve increased market
acceptance of our products, we must, among other things, continue to:

| |  | introduce
new and improved customer relationship management software products,
|- |  | ------------------------------------------------------------------------------

| |  | improve
the effectiveness and performance of our software, particularly in  implementations
involving very large databases and large numbers of simultaneous  users,
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | enhance
the flexibility and configurability of our software to enable our  customers to better
address their needs at a lower cost of deployment and  maintenance,
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | enhance
our softwares ease of use and administration,
|- |  | ------------------------------------------------------

| |  | develop
software for vertical markets,
|- |  | --------------------------------------

| |  | improve
our softwares ability to extract data from existing software  systems, and
|- |  | -----------------------------------------------------------------------------------

| |  | adapt
to rapidly evolving computer operating system and database standards and  Internet
technology.
|- |  | ----------------------------------------------------------------------------------------------------

We
may not be successful in developing and marketing new or improved products. If
we are not successful, we may lose sales to competitors and our revenues will be
harmed.

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.

We
have made a strategic decision to base our product architecture on the J2EE
family of technologies. This capability affords our customers greater
flexibility in the deployment of our software products. Although J2EE is a
widely adopted industry standard, a competing technology from Microsoft called
..NET seeks to challenge J2EE as an enterprise IT architecture. If .NET gains
competitive advantage over J2EE in the marketplace at large, we may be
competitively disadvantaged, and may need to re-engineer our products to adopt
the .NET architecture.

If
we fail to successfully develop and maintain products compatible with currently  popular
operating systems, database versions or programming standards, we may  lose sales  and
revenues. In addition, users access our products on their network  through standard
Internet browsers such as Microsoft Internet Explorer. If we  fail to obtain access to
developer versions of any of these software products,  we may be unable to build and
enhance our products on schedule. After  installation, our products interface directly
with a variety of other enterprise  applications, including

31

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systems from
Oracle,  PeopleSoft, Siebel Systems and SAP,  running on a variety of computer operating
systems.  If we fail to enhance our  software to interface with new versions of these
products, we  may lose potential  and existing customers. If we lose customers, our
revenues and  profitability may  be harmed.

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

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

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 integrate acquired technologies and
employees, our business and operating results will be harmed. To successfully
integrate acquired technologies and employees, 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 appropriate personnel,
|- |  | -------------------------------------------

| |  | effectively
integrate business units in diverse geographic locations,
|- |  | ---------------------------------------------------------------------

| |  | 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, consumption of cash,
one-time write-offs, impairment charges, amortization expenses related to other
intangible assets and assumption of contingent liabilities.

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

We
cannot assure you that other companies 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 our technology.

From
time to time, patent holders contact us for the purpose of licensing to us  various
intellectual property rights that they claim we infringe. We cannot  assure you that the
holder of such 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 or result in infringement claims against our  licensees,
giving rise to an obligation by us to indemnify and hold our  licensees harmless against
such claims. Further, in the event of a successful  infringement claim, 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 limiting or prohibiting the
distribution or use of our  products. A successful claim of patent or other

32

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intellectual
property  infringement against us would have an immediate material adverse effect on our
business and financial condition.

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

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

In
addition, we typically charge for our software based on the number of users that
are authorized to use the software or by restricting other rights, such as the
number of servers. Customers that have licenses to use our products could allow
unauthorized use of our software. Unauthorized use of our software is difficult
to detect and, to the extent that our software is used without authorization, we
may lose potential license fees.

The
loss of key personnel, or 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, our
ability to advance our business could be affected. 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 is bound by an employment agreement and we do not
maintain key person insurance on any of our employees. We would also be harmed
if one or more of our officers or key employees decided to join a competitor or
otherwise compete with us.

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

Our
Senior Vice President, World Wide Field Operations, recently resigned from
employment. We have initiated a search for his replacement. If we are not able
to employ a qualified individual to serve in this position within a reasonable
period of time, our revenues may be harmed.

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

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

33

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identifying
information or limits companies from marketing directly to particular  individuals
through certain means. Any such legislation could limit the  usefulness of  our software
products in such jurisdictions, which could impair  our ability to license  our software.

While
we believe that we currently have effective internal controls over financial
reporting, the applicable rules and principles are new and
unprecedented, and in many cases rely upon subjective judgment; therefore, we do not yet
know if we will be able to issue an unqualified management report or receive an
unqualified attestation report from our independent auditor under
Section 404 of the Sarbanes-Oxley Act of 2002.

We
are evaluating our internal controls over financial reporting in order to enable
management to report on, and our independent auditor to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. The rules and principles that govern managements
control report and our independent auditors attestation thereto are new
and unprecedented and rely in many cases upon the subjective judgment of
management and our independent auditor. If our testing reveals one or more
material weaknesses, which we do not currently anticipate, we may not be able to
issue an unqualified management report or receive an unqualified attestation
report from our independent auditor. In addition, if we have one or more
material weaknesses, we may incur additional expenses and divert significant
management time to remediate these material weaknesses. While we anticipate
being able to comply with all aspects of Section 404 in a satisfactory and
timely fashion, we cannot be certain as to the timing or satisfactory completion
of our evaluation, testing and remediation activities, or the impact of the same
on our operations. If we are not able to implement the requirements of
Section 404 in a satisfactory or timely manner, we may not be able to issue
an unqualified management report or receive an unqualified attestation report
from our independent auditor, which could harm our business and adversely affect
the market price of our common stock.

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

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

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

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

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
following discusses our exposure to market risk related to changes in foreign
currency exchange rates and interest rates. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results could vary materially as a result of a number of factors including those
set forth in the Risk Factors section of this quarterly report on Form 10-Q.

34

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Foreign
Currency Exchange Rate Risk

The
majority of our operations are based in the United States and, accordingly, the
majority of our transactions are denominated in U.S. dollars. We do have
foreign-based operations, however, where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. As of September 30, 2004, we had international
operations in Asia, Australia, Europe, Canada and Latin America and conduct
transactions in the local currency of each location. Historically, 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. The impact to our cash and
investment balances has therefore not been material. 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 our operating results in any period. To date, we have not
entered into any foreign exchange hedges or other derivative financial
instruments. We will continue to evaluate our exposure to foreign currency
exchange rate risk on a regular basis.

Interest
Rate Risk

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

As
of September 30, 2004, we held $21.6 million in cash and cash equivalents
consisting of highly liquid short-term investments having original maturity
dates of no more than 90 days. Declines of interest rates over time would reduce
our interest income from our highly liquid short-term investments. Based upon
our balance of cash and cash equivalents, a decrease in interest rates of 100
basis points would cause a corresponding decrease in our annual interest income
by $0.2 million. Due to the nature of our highly liquid cash equivalents, a
change in interest rates would not materially change the fair market value of
our cash, cash equivalents and restricted cash.

As
of September 30, 2004, we held $233.2 million in short-term and long-term
investments, all of which consisted of taxable fixed income securities having
original maturity dates between three months and two years. A decline in
interest rates over time would reduce our interest income from our short-term
investments and long-term investments. A decrease in interest rates of 100 basis
points would cause a corresponding decrease in our annual interest income of
approximately $2.3 million. An increase in interest rates over time would cause
the fair market value of our portfolio to decline. An immediate and uniform
increase in interest rates of 100 basis points would cause the fair market value
of these items to decrease by approximately $1.8 million. Alternatively, a
decrease in interest rates over time would cause the fair market value of our
portfolio to increase. An immediate and uniform decrease in interest rates of
100 basis points would cause the fair market value of these items to increase by
approximately $1.8 million.

As
of September 30, 2004, we did not have any outstanding debt.

The
following summarizes our investments, weighted average yields and expected
maturity dates as of September 30, 2004 (in thousands, except interest rates):

|                            | 2004 |  | 2005 |        | 2006 |   | Thereafter |   | Total |       
|--------------------------- | ---- |  | ---- | ------ | ---- | - | ---------- | - | ----- | ------
|Commercial paper            |      |  | $    |       |      | $ |           |   | $     |      
|Weighted average yield      |      |  |      |       |      |   |           |   |       |      
|Corporate bonds             |      |  | $    | 3,017  |      | $ | 36,662     |   | $     | 17,438
|Weighted average yield      |      |  |      | 1.70   | %    |   | 1.86       | % |       | 2.26  
|Government notes/bonds (1)  |      |  | $    | 5,153  |      | $ | 43,635     |   | $     | 57,895
|Weighted average yield      |      |  |      | 2.32   | %    |   | 2.13       | % |       | 2.34  
|Auction rate securities (2) |      |  | $    | 67,700 |      | $ | 1,700      |   | $     |      
|Weighted average yield      |      |  |      | 1.90   | %    |   | 2.40       | % |       |      
|                            |      |  |      |        |      |   |            |   |       |       
|Total investment securities |      |  | $    | 75,870 |      | $ | 81,997     |   | $     | 75,333
|                            |      |  |      |        |      |   |            |   |       |       

__________

|(1) |  | Government
notes/bonds  consists  primarily of government  sponsored  enterprises  and includes,  to
a lesser  extent,  investments  in taxable  municipal bonds.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Auction
rate securities consist primarily of taxable municipal bonds having reset dates of less
than 45 days.  A significant portion of our  short-term investments consist of these
instruments as they typically provide a higher rate of return than money market funds
while maintaining  a low level of risk and a high degree of liquidity.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

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ITEM 4.   CONTROLS AND PROCEDURES

Evaluation
of Disclosure Controls and Procedures

Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this quarterly report on Form 10-Q (the Evaluation Date). Based
on this evaluation, our principal executive officer and principal financial
officer concluded as of the Evaluation Date that our disclosure controls and
procedures were effective such that the material information required to be
included in our Securities and Exchange Commission (SEC) reports is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms related to E.piphany, including our consolidated
subsidiaries.

Changes in
Internal Control Over Financial Reporting

In
addition, there was no change in our internal control over financial reporting
that occurred during the period covered by this quarterly report on Form 10-Q
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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 Note 5 of Notes to Condensed Consolidated Financial
Statements. 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.

36

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ITEM 6.   EXHIBITS

|Number |     | Exhibit Title |                                                                                                                                                                       
|------ | --- | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    | (1) |               | Restated Certificate of Incorporation of the Registrant.                                                                                                              
|3.2    | (2) |               | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                      
|3.3    | (3) |               | Amended and Restated Bylaws of the Registrant.                                                                                                                        
|4.1    | (1) |               | Form of Stock Certificate                                                                                                                                             
|31.1   |     |               | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|31.2   |     |               | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|32.1   |     |               | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

__________

(1)
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.

(2)
Incorporated by reference to the Registrant's annual report on Form 10-K for the year
ended December 31, 2002 (Registration No. 000-27183)  filed with the Securities and
Exchange Commission on March 27, 2003.

(3)
Incorporated by reference to the Registrant's  quarterly report on Form 10-Q for the
quarter ended September 30, 2002  (Registration  No.  000-27183) filed with the
Securities and Exchange Commission on November 13, 2002.

37

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SIGNATURES

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

E.PIPHANY,
INC.

|DATE: |  |  | November 8, 2004 |  |  | SIGNATURE: |  |  | /s/ Karen A. RichardsonKaren A. Richardson Chief Executive Officer |  |  |  |  | 
|----- |  |  | ---------------- |  |  | ---------- |  |  | ------------------------------------------------------------------ |  |  |  |  | 
|      |  |  |                  |  |  |            |  |  |                                                                    |  |  |  |  | 
|DATE: |  |  | November 8, 2004 |  |  | SIGNATURE: |  |  | /s/ Kevin J. YeamanKevin J. YeamanChief Financial Officer          |  |  |  |  | 

38

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EXHIBIT
INDEX

|Number |     | Exhibit Title |                                                                                                                                                                       
|------ | --- | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|3.1    | (1) |               | Restated Certificate of Incorporation of the Registrant.                                                                                                              
|3.2    | (2) |               | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                      
|3.3    | (3) |               | Amended and Restated Bylaws of the Registrant.                                                                                                                        
|4.1    | (1) |               | Form of Stock Certificate.                                                                                                                                            
|31.1   |     |               | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|31.2   |     |               | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   
|32.1   |     |               | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.

|(1) |  | 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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated
by reference to the Registrant's  annual report on Form 10-K for the year ended December
31, 2002  (Registration  No.  000-27183)  filed with the Securities and Exchange
Commission on March 27, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated
by reference to the  Registrant's  quarterly  report on Form 10-Q for the quarter  ended
September 30, 2002  (Registration  No.  000-27183) filed with the Securities and Exchange
Commission on November 13, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

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