SECURITIES AND EXCHANGE COMMISSION
                         Washington, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended September 30, 2003

OR

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

For the transition period from ________to _________

Commission file number:  000-27163



KANA Software, Inc.



|Delaware                                                       | 77-0435679                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

181 Constitution Drive Menlo Park, California     94025

(650) 614-8300







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 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 of
the Exchange Act).   YES [   ] NO [X]

On November 3, 2003, approximately 23,600,990 shares of the Registrant's Common Stock,
$0.001 par value, were outstanding.









KANA Software, Inc.
                                    Form 10-Q
                            Quarter Ended September 30, 2003
                                      Index



|PART I.   FINANCIAL INFORMATION                                                                                                      | Page No.
|------------------------------------------------------------------------------------------------------------------------------------ | --------
|                                                                                                                                     |         
|Item 1.   Financial Statements                                                                                                       |         
|                                                                                                                                     |         
|Condensed Consolidated Balance Sheets at
          
         September 30, 2003 and December 31, 2002                                | 3       
|                                                                                                                                     |         
|Condensed Consolidated Statements of Operations for 
          
         the three and nine months ended September 30, 2003 and 2002 | 4       
|                                                                                                                                     |         
|Condensed Consolidated Statements of Cash Flows for
          
         the three and nine months ended September 30, 2003 and 2002  | 5       
|                                                                                                                                     |         
|Notes to the Condensed Consolidated Financial Statements                                                                             | 6       
|                                                                                                                                     |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                | 16      
|                                                                                                                                     |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                 | 43      
|                                                                                                                                     |         
|Item 4.   Controls and Procedures                                                                                                    | 44      
|                                                                                                                                     |         
|PART II.  OTHER INFORMATION                                                                                                          |         
|                                                                                                                                     |         
|Item 1:  Legal Proceedings                                                                                                           | 44      
|                                                                                                                                     |         
|Item 2:  Changes in Securities and Use of Proceeds                                                                                   | 45      
|                                                                                                                                     |         
|Item 3:  Defaults Upon Senior Securities                                                                                             | 45      
|                                                                                                                                     |         
|Item 4.   Submission of Matters to a Vote of Security Holders                                                                        | 45      
|                                                                                                                                     |         
|Item 5.   Other Information                                                                                                          | 45      
|                                                                                                                                     |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                                           | 45      
|                                                                                                                                     |         
|Signatures                                                                                                                           | 46      
|                                                                                                                                     |         

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Part I: Financial Information

Item 1: Financial Statements

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KANA Software, Inc.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
September 30,  December 31,
                                                                 2003         2002
                                                             -----------  -----------
                                                                    (unaudited)
ASSETS
Current assets:
 Cash and cash equivalents................................  $    22,268  $    21,962
 Short-term investments...................................           --       10,536
 Accounts receivable, net.................................        6,167       10,269
 Prepaid expenses and other current assets................        2,202        3,184
                                                             -----------  -----------
   Total current assets...................................       30,637       45,951
Restricted cash...........................................          457          448
Property and equipment, net...............................       16,784       22,293
Goodwill..................................................        7,448        7,448
Intangible assets, net....................................           --        1,453
Other assets..............................................        2,572        2,957
                                                             -----------  -----------
    Total assets..........................................  $    57,898  $    80,550
                                                             ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Notes payable and capital lease obligations..............  $     3,442  $     3,469
 Accounts payable.........................................        3,287        3,908
 Accrued liabilities......................................       11,228       13,881
 Accrued restructuring....................................        3,539        2,834
 Deferred revenue.........................................       21,070       26,392
                                                             -----------  -----------
  Total current liabilities...............................       42,566       50,484
Accrued restructuring, less current portion...............        5,553        8,114
                                                             -----------  -----------
    Total liabilities.....................................       48,119       58,598
                                                             -----------  -----------
Stockholders' equity:
 Common stock.............................................          196          195
 Additional paid-in capital...............................    4,272,693    4,273,029
 Deferred stock-based compensation........................       (3,001)      (8,602)
 Accumulated other comprehensive income (loss)............          199         (175)
 Accumulated deficit......................................   (4,260,308)  (4,242,495)
                                                             -----------  -----------
    Total stockholders' equity............................        9,779       21,952
                                                             -----------  -----------
    Total liabilities and stockholders' equity............  $    57,898  $    80,550
                                                             ===========  ===========See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.

             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)
Three Months Ended     Nine Months Ended
                                                                         September 30,         September 30
                                                                    --------------------  --------------------
                                                                       2003       2002       2003       2002
                                                                    ---------  ---------  ---------  ---------
                                                                                     (unaudited)
Revenues:
   License........................................................ $   5,083  $   8,784  $  17,617  $  32,222
   Service........................................................     8,750      9,243     26,380     28,138
                                                                    ---------  ---------  ---------  ---------
Total revenues....................................................    13,833     18,027     43,997     60,360
                                                                    ---------  ---------  ---------  ---------
Cost of revenues:
   License........................................................       578        548      2,003      2,569
   Service (excluding stock-based compensation of
        $98, $145, $325 and $754, respectively)...................     2,381      2,762      7,451     26,560
                                                                    ---------  ---------  ---------  ---------
Total cost of revenues............................................     2,959      3,310      9,454     29,129
                                                                    ---------  ---------  ---------  ---------
Gross profit......................................................    10,874     14,717     34,543     31,231
                                                                    ---------  ---------  ---------  ---------
Operating expenses:
   Sales and marketing (excluding stock-based compensation
     of $522, $772, $1,736 and $4,008, respectively)..............     6,854      8,732     22,178     29,432
   Research and development (excluding stock-based compensation
     of $488, $721, $1,622 and $3,741, respectively)..............     4,718      6,389     16,741     19,539
   General and administrative (excluding stock-based compensation
     of $272, $313, $762 and $6,376, respectively)................     1,981      3,458      7,651     10,061
   Amortization of stock-based compensation.......................     1,380      1,951      4,445     14,879
   Amortization of identifiable intangibles.......................        --      1,200      1,453      3,600
   Goodwill impairment............................................        --         --         --     55,000
                                                                    ---------  ---------  ---------  ---------
Total operating expenses..........................................    14,933     21,730     52,468    132,511
                                                                    ---------  ---------  ---------  ---------
Operating loss....................................................    (4,059)    (7,013)   (17,925)  (101,280)
Other income, net.................................................         5        175        112        770
                                                                    ---------  ---------  ---------  ---------
Loss from continuing operations...................................    (4,054)    (6,838)   (17,813)  (100,510)
Gain on disposal of discontinued operation........................        --         --         --        381
Cumulative effect of accounting change related
  to the elimination of negative goodwill.........................        --         --         --      3,901
                                                                    ---------  ---------  ---------  ---------
Net loss.......................................................... $  (4,054) $  (6,838) $ (17,813) $ (96,228)
                                                                    =========  =========  =========  =========
Basic and diluted net loss per share:
  Loss from continuing operations................................. $   (0.17) $   (0.30) $   (0.77) $   (4.52)
  Income from discontinued operation..............................        --         --         --       0.01
  Cumulative effect of accounting change..........................        --         --         --       0.18
                                                                    ---------  ---------  ---------  ---------
  Net loss........................................................ $   (0.17) $   (0.30) $   (0.77) $   (4.33)
                                                                    =========  =========  =========  =========

Shares used in computing basic and
  diluted net loss per share......................................    23,396     22,851     23,220     22,234
                                                                    =========  =========  =========  =========See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
Nine Months Ended
                                                                     September 30,
                                                                 ----------------------
                                                                   2003         2002
                                                                 ---------  -----------
                                                                      (unaudited)
Cash flows from operating activities:
   Net loss.................................................... $ (17,813) $   (96,228)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation..............................................     6,402        6,781
     Amortization of stock-based compensation..................     4,445       14,879
     Amortization of identifiable intangibles..................     1,453        3,600
     Goodwill impairment.......................................        --       55,000
     Elimination of negative goodwill..........................        --       (3,901)
     Other non-cash charges....................................                    212
     Change in allowance for doubtful accounts.................    (2,992)      (1,521)
     Changes in operating assets and liabilities:
         Accounts receivable...................................     7,094        6,148
         Prepaid and other current assets......................       982        1,597
         Other assets..........................................       385          (48)
         Accounts payable and accrued liabilities..............    (3,274)     (10,817)
         Accrued restructuring and merger......................    (1,856)     (17,249)
         Deferred revenue......................................    (5,322)       5,706
                                                                 ---------  -----------
     Net cash used in operating activities.....................   (10,495)     (35,841)
                                                                 ---------  -----------
Cash flows from investing activities:
   Purchases of short-term investments.........................    (1,267)     (23,238)
   Sales of short-term investments.............................    11,803       20,419
   Property and equipment purchases............................      (893)     (11,142)
   Restricted cash.............................................        (9)       7,967
                                                                 ---------  -----------
         Net cash provided by (used in) investing activities...     9,634       (5,994)
                                                                 ---------  -----------
Cash flows from financing activities:
   Payments on capital lease obligations.......................       (27)        (161)
   Net proceeds from issuance of common stock and warrants.....       824       33,413
   Payments on stockholders' notes receivable..................        --          599
                                                                 ---------  -----------
         Net cash provided by financing activities.............       797       33,851
                                                                 ---------  -----------
Effect of exchange rate changes on cash and cash equivalents...       370          167
                                                                 ---------  -----------
Net increase (decrease) in cash and cash equivalents...........       306       (7,817)
Cash and cash equivalents at beginning of period...............    21,962       25,476
                                                                 ---------  -----------
Cash and cash equivalents at end of period..................... $  22,268  $    17,659
                                                                 =========  ===========
Supplemental disclosure of cash flow information:
 Cash paid during the period for interest...................... $     135  $        80
                                                                 =========  ===========
 Cash paid during the period for income taxes.................. $     129  $       329
                                                                 =========  ===========
 Noncash activities:
  Issuance of warrants to non-employees ....................... $      --  $     4,749
                                                                 =========  ===========See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  (unaudited)



Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by KANA Software, Inc. ("KANA" or the "Company"), and reflect all
normal, recurring adjustments that, in the opinion of management, are necessary
for a fair presentation of the interim financial information. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire year
ending December 31, 2003. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted under the Securities and Exchange Commission's ("SEC")
rules and regulations. These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with KANA's
audited consolidated financial statements and notes included in KANA's annual
report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements include the financial statements of
KANA and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The Company believes that its existing cash balances and anticipated cash
flows from operations will be sufficient to meet its anticipated capital
requirements for the next 12 months. However, failure to increase future orders
and revenues beyond the level achieved in the third quarter of 2003 might
require the Company to seek additional capital to meet its working capital needs
during or beyond the next twelve months if the Company is unable to reduce
expenses to the degree necessary to avoid incurring losses. If the Company
has a need for additional capital resources, it may be required to sell
additional equity or debt securities, secure additional lines of credit or
obtain other third party financing. The timing and amount of such capital
requirements cannot be determined at this time and will depend on a number of
factors, including demand for the Company's products and services. There can be
no assurance that such additional financing will be available on satisfactory
terms when needed, if at all. Failure to raise such additional financing,
if needed, may result in the Company not being able to achieve its long-term
business objectives.
Note 2. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 46 ("FIN 46") Consolidation of
Variable Interest Entities. Until this interpretation, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and
applies in the first year or interim period beginning after December 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of this interpretation did not
have a material impact on the Company's results of operations or financial
position. However, changes in the Company's business relationships with various
entities could occur in the future and affect the Company's financial statements
under the requirements of FIN 46.

In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. It is to be implemented
by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. To
date, the impact of the effective provisions of SFAS No. 150 has not had a
material impact on the Company's results of operations, financial position or
cash flows. While the effective date of certain elements of SFAS No. 150 has
been deferred, the adoption of SFAS No. 150 when finalized is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.
Note 3. Stockholders' Equity
(a) Warrants
In September 2000, the Company issued to Accenture 40,000 shares of
common stock and a warrant to purchase up to 72,500 shares of common stock at
$371.25 per share pursuant to a stock and warrant purchase agreement in
connection with its global strategic alliance. The shares of the common stock
issued were fully vested, and the Company recorded a charge of approximately
$14.8 million to be amortized over the four-year term of the agreement. As of
September 30, 2003, 33,997 shares of common stock subject to the warrant were
fully vested and 28,503 had been forfeited, with the remaining 10,000 shares of
common stock subject to the warrant becoming vested upon the achievement of
certain performance goals. The vested portion of the warrant was valued using
the Black-Scholes model with an assumed interest rate of 6.0% and volatility of
100%, which resulted in charges totaling $2.0 million of which $1.0 million is
being amortized over the remaining term of the agreement and $1.0 million was
immediately expensed in the fourth quarter of 2000 as an operating expense. The
Company will incur a charge to stock-based compensation for the unvested portion
of the warrant as performance goals are achieved.
In September 2001, the Company issued to Accenture an additional warrant to
purchase up to 150,000 shares of common stock pursuant to a warrant purchase
agreement in connection with its global strategic alliance. The warrant was
fully vested and exercisable as of September 2001. The warrant was valued using
the Black-Scholes model with an assumed interest rate of 4.9% and volatility of
100%, which resulted in a charge of approximately $946,000 which is being
amortized over the four-year term of the agreement. The warrants were exercised
in March 2002.
In September 2001, the Company issued to a customer a warrant to purchase up
to 5,000 shares of common stock pursuant to a warrant purchase agreement. The
warrant fully vests in September 2006 and has a provision for acceleration of
vesting 1,250 shares annually over four years if certain marketing criteria are
met by the customer. The warrant was valued using the Black-Scholes model with
an assumed interest rate of 4.9% and volatility of 100%, which resulted in a
charge to stock-based compensation of approximately $29,000, which is being
amortized over the five-year term of the agreement as a reduction of
revenue.
In November 2001, the Company issued to two investment funds warrants to
purchase up to 386,118 shares of common stock at $10.00 per share in connection
with a proposed financing which was to have been completed in February 2002 upon
attaining stockholder approval. These warrants were initially exercisable for
193,059 shares. The exercisable warrants were valued using the Black-Scholes
model with an assumed interest rate of 6.0% and volatility of 100%, which
resulted in a charge of approximately $1.0 million to deferred stock-based
compensation. On February 1, 2002, the stockholders voted against the proposed
financing, which resulted in the Company terminating the share purchase
agreement and caused the warrants to become exercisable with respect to all
386,118 shares. The warrants are exercisable for two years from the date the
share purchase agreement was terminated. Using the Black-Scholes model, the
warrants issued in November 2001 that were initially exercisable were re-valued
as of February 1, 2002, and the warrants that became exercisable on February 1,
2002 were valued as of such date, resulting in a charge totaling approximately
$4.7 million which was reflected as amortization of stock-based compensation in
the statement of operations in the first quarter of 2002.
In November 2002, the Company issued to its landlords warrants to purchase up
to 200,000 shares of common stock at $1.61 per share in connection with an
amendment to its existing facility lease. The warrant is exercisable through
November 2003. The warrants were valued using the Black-Scholes model with an
assumed interest rate of 6.0% and volatility of 100%, which
resulted in a charge of approximately $137,000 which was accounted for as
a reduction to the Company's restructuring liability in the fourth quarter of
2002.
(b) Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method in accordance with Accounting
Principles Board 25, Accounting for Stock Issued to Employees. Deferred stock-
based compensation is recorded on the date of grant when the deemed fair value
of the underlying common stock exceeds the exercise price for stock options or
the purchase price for the shares of common stock.
The Company accounts for stock-based compensation arrangements with non-
employees in accordance with Emerging Issues Task Force Abstract No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Accordingly,
unvested options and warrants held by non-employees are subject to revaluation
at each balance sheet date based on the then current fair market value.
Deferred stock-based compensation resulting from option grants to employees,
and warrants issued to non-employees, is amortized on an accelerated basis over
the vesting period of the individual options, generally four years, in
accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans ("FIN 28").
As of September 30, 2003, there was approximately $3.0 million of total
deferred stock-based compensation remaining to be amortized related to warrants
and past employee stock option grants. The Company currently expects
amortization of deferred stock-based compensation in the years ending December
31, 2004 and 2005 to be approximately $1.5 million and $71,000,
respectively.
The following table details, by operating expense, the Company's amortization
of stock-based compensation (in thousands (unaudited)):

Three Months Ended  Nine Months Ended
                                           September 30,      September 30,
                                           2003    2002       2003     2002
                                         -------  -------   -------  -------
Cost of service ...................... $     98  $   145   $    325  $   754
Sales and marketing ..................      522      772      1,736    4,008
Research and development .............      488      721      1,622    3,741
General and administrative ...........      272      313        762    6,376
                                         -------  -------   -------  -------
Total ................................ $  1,380  $ 1,951   $ 4,445  $ 14,879
                                         =======  =======   =======  =======The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation, Transition and Disclosure". SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based compensation provided for
by SFAS No. 123, "Accounting for Stock Based Compensation". The
following table presents pro forma amounts had the Company adopted SFAS No. 123
and accounted for stock-based compensation using the fair-value based method (in
thousands, except per share amounts (unaudited)):
Three Months Ended        Nine Months Ended
                                                            September 30,              September 30,
                                                       -----------------------    --------------------
                                                         2003          2002         2003       2002
                                                       ---------     ---------    ---------  ---------
As Reported:
  Net loss.........................................  $   (4,054)   $   (6,838)  $  (17,813) $ (96,228)

Compensation expense included in net loss (1)......  $    1,380    $    1,951   $    4,445  $  14,879

Compensation expense if FAS 123 had been adopted ..  $   (3,122)   $   (6,829)  $   (7,501) $ (39,692)

Pro Forma:
  Net loss.........................................  $   (5,796)   $  (11,716)  $  (20,869) $(121,041)

Basic and diluted net loss per share
  As reported......................................  $    (0.17)   $    (0.30)  $    (0.77) $   (4.33)
  Pro forma........................................  $    (0.25)   $    (0.51)  $    (0.90) $   (5.44)

(1) Unearned deferred compensation resulting from employee and non-employee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, in accordance with FIN 28. Accordingly, the stock based
compensation expense noted above is net of the reversal of previously recorded
accelerated stock based compensation expense due to the forfeitures of those
stock options prior to vesting.

Note 4. Net Loss Per Share
Basic net loss per share from continuing operations is computed using the
weighted-average number of outstanding shares of common stock, excluding common
stock subject to repurchase. Diluted net loss per share from continuing
operations is computed using the weighted-average number of outstanding shares
of common stock and, when dilutive, shares of common stock issuable upon
exercise of options and warrants deemed outstanding using the treasury stock
method. The following table presents the calculation of basic and diluted net
loss per share from continuing operations (in thousands, except net loss per
share (unaudited):
Three Months Ended     Nine Months Ended
                                                                   September 30,         September 30
                                                              --------------------  --------------------
                                                                 2003       2002       2003       2002
                                                              ---------  ---------  ---------  ---------
Numerator:
Loss from continuing operations before
  cumulative effect of accounting change ................... $  (4,054) $  (6,838)  $(17,813) $(100,510)
                                                              ---------  ---------  ---------  ---------
Denominator:
Weighted-average shares of common stock outstanding ........    23,396     22,865     23,226     22,253
Less: weighted-average shares subject to repurchase ........        --        (14)        (6)       (19)
                                                              ---------  ---------  ---------  ---------
Denominator for basic and diluted calculation ..............    23,396     22,851     23,220     22,234
                                                              ---------  ---------  ---------  ---------
Basic and diluted net loss per share from continuing
  operations before cumulative effect of accounting change..  $  (0.17)  $  (0.30)  $  (0.77)  $  (4.52)
                                                              =========  =========  =========  =========
All warrants and outstanding stock options have been excluded from the
calculation of diluted net loss per share as all such securities were anti-
dilutive for all periods presented. The total number of shares excluded from the
calculation of diluted net loss per share was (in thousands (unaudited)):
As of September 30,
                                      ----------------------
                                         2003        2002
                                      ---------  -----------
Stock options and warrants ..........    8,798        8,531
Common stock subject to repurchase ..       --           13
                                      ---------  -----------
                                         8,798        8,544
                                      =========  ===========The weighted average exercise price of stock options and warrants outstanding
was $18.23 and $33.59 as of September 30, 2003 and 2002, respectively.
Note 5. Comprehensive Loss
Comprehensive loss is comprised of net loss and foreign currency
translation adjustments. The total changes in comprehensive loss during the
three and nine months ended September 30, 2003 and 2002 were as follows (in
thousands (unaudited)):

Three Months Ended         Nine Months Ended
                                       September 30,              September 30,
                                  ----------------------     ----------------------
                                    2003          2002          2003         2002
                                  -------      ---------     ---------    ---------
Net loss.......................   $(4,054)     $  (6,838)    $ (17,813)   $ (96,228)

Other comprehensive income (loss):

  Foreign currency translation
    adjustments................       (61)          (111)          374        1,101
                                   -------      ---------     ---------    ---------
Net change in other
  comprehensive income (loss)..       (61)          (111)          374        1,101
                                   -------      ---------     ---------    ---------
Comprehensive loss.............   $(4,115)     $  (6,949)    $ (17,439)   $ (95,127)
                                   =======      =========     =========    =========

Note 6. Commitments and Contingencies
Legal Proceedings. In April 2001, Office Depot, Inc. filed a complaint
against KANA in the Circuit Court for the 15th District of the State of Florida
claiming that KANA breached its license agreement with Office Depot. Office
Depot is seeking relief in the form of a refund of license fees and maintenance
fees paid to KANA, attorneys' fees and costs. The Company believes it has
meritorious defenses to these claims and intends to defend the action
vigorously.
The underwriters for KANA's initial public offering, Goldman Sachs & Co.,
Lehman Bros, Hambrecht & Quist LLC, Wit Soundview Capital Corp as well as
KANA and certain former officers of KANA were named as defendants in federal
securities class action lawsuits filed in the United States District Court for
the Southern District of New York. The cases allege violations of various
securities laws by more than 300 issuers of stock, including KANA, and the
underwriters for such issuers, on behalf of a class of plaintiffs who, in the
case of KANA, purchased KANA's stock between September 21, 1999 and December 6,
2000 in connection with KANA's initial public offering. Specifically, the
complaints allege that the underwriter defendants engaged in a scheme concerning
sales of KANA's and other issuers' securities in the initial public offering and
in the aftermarket. In July 2003, KANA decided to join in a settlement
negotiated by representatives of a coalition of issuers named as defendants in
this action and their insurers. Although KANA believes that the plaintiffs'
claims have no merit, it has decided to accept the settlement proposal to avoid
the cost and distraction of continued litigation. Because the settlement will be
funded entirely by KANA's insurers, KANA does not believe that the settlement
will have any effect on its financial condition, results of operations or cash
flows. The proposed settlement agreement is subject to final approval by the
court. Should the court fail to approve the settlement agreement, KANA believes
it has meritorious defenses to these claims and would defend the action
vigorously.
On April 16, 2002, Davox Corporation (now Concerto Software) filed an action
against KANA in the Superior Court, Middlesex, Commonwealth of Massachusetts,
asserting breach of contract, breach of implied covenant of good faith and fair
dealing, unjust enrichment, misrepresentation, and unfair trade practices, in
relation to an OEM Agreement between KANA and Davox under which Davox has paid a
total of approximately $1.6 million in fees. Davox seeks actual and punitive
damages in an amount to be determined at trial, and award of attorneys' fees.
This action is in its early stages and has been re-filed in the Circuit Court of
Cook County, Illinois. The Company believes it has meritorious defenses to these
claims and intends to defend the action vigorously.
Other third parties have from time to time claimed, and others may claim in
the future that KANA has infringed its past, current or future intellectual
property rights. KANA has in the past been forced to litigate such claims. These
claims, whether meritorious or not, could be time-consuming, result in costly
litigation, require expensive changes in KANA's methods of doing business or
could require KANA to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm KANA's business.
The ultimate outcome of any litigation is uncertain, and either unfavorable
or favorable outcomes could have a material negative impact on KANA's results of
operations, consolidated balance sheet and cash flows, due to defense costs,
diversion of management resources and other factors.
Guarantees.  The Company has provided letters of credit that secure
its rental payments at various offices in the United States.  The Company could
be required to perform under these guarantees if it were to default with respect
to any of the terms, provisions, covenants, or conditions of the lease
agreement. These guarantees are renewed annually for successive one-year terms
until the expiration of the related leases on April 30, 2007. The maximum
potential amount of future payments the Company could be required to make under
these letters of credit as of September 30, 2003 is $1.1 million.
Indemnifications.  The Company enters into standard indemnification
agreements in its ordinary course of business. Pursuant to these agreements, the
Company indemnifies, holds harmless, and agrees to reimburse the indemnified
party for losses suffered or incurred by the indemnified party in connection
with any U.S. patent, copyright, or other intellectual property infringement
claim by any third party with respect to the Company's products. The term of
these indemnification agreements is generally perpetual any time after execution
of the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited.
The Company believes the estimated fair value of these agreements is
insignificant. Accordingly, the Company has no liabilities recorded for these
agreements as of September 30, 2003.
As permitted by Delaware law, the Company has agreements whereby it
indemnifies its officers and directors for certain events or occurrences while
the officer is, or was, serving at the Company's request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, the Company
has a director and officer insurance policy that limits its exposure and enables
the Company to recover a portion of any such amounts. As a result of the
Company's insurance policy coverage, the Company believes the estimated fair
value of these indemnification agreements is insignificant.  Accordingly, the
Company has no liabilities recorded for these agreements as of September 30,
2003.
Warranties.  The Company offers warranties on its software products.
To date, there have been no material payments or costs incurred related to
fulfilling these warranty obligations. Accordingly, the Company has no
liabilities recorded for these warranties as of September 30, 2003. The Company
assesses the need for a warranty reserve on a quarterly basis and there can be
no guarantee that a warranty reserve will not become necessary in the
future.
Outsourcing Arrangements. In the first quarter of 2003, the Company began
implementing an outsourcing strategy, which involves subcontracting a
significant portion of its software programming, quality assurance and technical
documentation activities to development partners with staffing in India and
China. As a result of transitioning these activities offshore, the Company
reduced its research and development department by 78 employees during the nine
months ended September 30, 2003. The Company signed contracts with development
partners in 2003, with expected payments in 2003 of approximately $5.2 million,
primarily on a time and materials basis. In addition, a cancellation fee ranging
from $28,000 to $640,000 could be incurred if one agreement is terminated prior
to July 2004.
Note 7. Restructuring costs
In 2001, the Company incurred restructuring charges related to the
reductions in its workforce and costs associated with certain excess leased
facilities and asset impairments.
In November 2002, the Company entered into an amendment to a facility lease.
In connection with this lease amendment, the Company's evaluation of real estate
market conditions relating to this and other excess leased facilities, and
discussions with its other landlords, the Company reduced its associated
restructuring reserve by approximately $9.1 million. This reduction in
restructuring reserve was primarily comprised of a $4.0 million payment made in
connection with the lease amendment, as well as approximately $5.1 million in
cost savings resulting from this amendment that were reflected in the Company's
operating results for the quarter ended December 31, 2002.
As of September 30, 2003, $9.1 million in restructuring liabilities remained
on the Company's unaudited consolidated balance sheet in accrued restructuring
costs. Cash payments for severance and excess leased facilities during the nine
months ended September 30, 2003
totaled $2.1 million. Cash received during the nine months ended
September 30, 2003 from subleases charged to restructuring expense in previous
periods totaled $269,000. The following table provides a summary of
restructuring payments and liabilities during the first nine months of 2003 (in
thousands (unaudited)):
Restructuring                          Restructuring
                       Accrual at               Sublease      Accrual at
                      December 31,   Payments   Payments     September 30,
                          2002         Made     Received         2003
                      ------------   --------  -----------   ------------
Severance..........  $        217  $     (33) $        --   $        184
Facilities.........        10,731     (2,092)         269          8,908
                      ------------   --------  -----------   ------------
Total .............  $     10,948  $  (2,125) $       269   $      9,092
                      ============   ========  ===========   ============If the real estate market continues to decline, additional adjustments to the
reserve may be required, which would result in additional restructuring expenses
in the period in which such determination is made. Likewise, if the real estate
market strengthens, and the Company is able to sublease the properties earlier
or at more favorable rates than projected, or if the Company is otherwise able
to negotiate early termination of obligations on favorable terms, adjustments to
the reserve may be required that would affect the Company's statement of
operations in the period in which such determination is made.
Note 8. Goodwill and Purchased Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with the provisions of SFAS No. 142,
the Company ceased amortizing goodwill as of the beginning of fiscal 2002. In
addition, as part of the adoption of SFAS No. 142, negative goodwill was
eliminated and reported as the cumulative effect of an accounting change. This
accounting change amounted to approximately $3.9 million in the first quarter of
2002. Additionally, SFAS 142 requires goodwill to be tested for impairment under
certain circumstances and written down when impaired, and requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Under the transition
provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002
based upon the Company's analysis at that time. However, during the quarter
ended June 30, 2002, circumstances developed that indicated the goodwill was
likely impaired and the Company performed an impairment analysis as of June 30,
2002. This analysis resulted in a $55.0 million impairment expense to reduce
goodwill. The circumstances that led to the impairment included the lower-than-
previously-expected revenues and net loss for the second quarter of 2002 and the
revision of estimates of the Company's revenues and net loss for subsequent
quarters based upon financial results for the second quarter of 2002 and the
reduction of estimated cash flows for future quarters. The Company used relevant
market data, including the Company's market capitalization during the period
following the revision of estimates, to calculate an estimated fair value and
the resulting goodwill impairment. The estimated fair value was compared to the
corresponding carrying value of goodwill at June 30, 2002, which resulted in a
reduction of goodwill as of June 30, 2002 by $55.0 million. The remaining
goodwill balance as of September 30, 2003 was approximately $7.4 million. The
Company has continued to assess whether potential indicators of impairment of
goodwill have occurred and has determined that no such indicators have arisen
since June 30, 2002.
Purchased intangible assets relate to $14.4 million of existing technology
purchased in connection with the acquisition of Silknet Software, Inc. in April
2000 and are carried at cost less accumulated amortization. Amortization is
computed over the estimated useful lives of the asset, which is three years. The
purchased intangible assets have been fully amortized as of April 2003 and no
amortization expense on purchased intangible assets was incurred during the
three months ended September 30, 2003. The Company reported amortization expense
on purchased intangible assets of $1.2 million for the three months ended
September 30, 2002 and $1.5 million and $3.6 million for the nine months ended
September 30, 2003 and September 30, 2002, respectively.
Note 9. Segment Information
The Company's chief operating decision-maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by geographic region for purposes of making operating
decisions and assessing financial performance. Accordingly, the Company
considers itself to be in a single industry segment, specifically the license,
implementation and support of its software applications. The Company's long-
lived assets are primarily in the United States. The following table provides
geographic information on revenue for the three and nine months ended September
30, 2003 and 2002 (in thousands, (unaudited)):
Three Months Ended       Nine Months Ended
                                           September 30,           September 30,
                                      ----------------------  ---------------------
                                         2003       2002         2003        2002
                                      ---------  -----------  ----------  ---------
United States ...................... $   8,395  $    11,643  $   29,679  $  39,992
United Kingdom......................     3,524        3,651       8,220     12,106
Other (1) ..........................     1,914        2,733       6,098      8,262
                                      ---------  -----------  ----------  ---------
                                     $  13,833       18,027      43,997     60,360
                                      =========  ===========  ==========  =========(1) Represents sales to customers located primarily in Europe, other than
the United Kingdom
During the three and nine months ended September 30, 2003, one customer,
Customer A, represented 13% and 4%, respectively, of total revenues. During the
three and nine months ended September 30, 2002, a second customer, Customer B,
represented 13% and 13%, respectively, of total revenues.
Note 10. Notes Payable
The Company maintains a $5.0 million loan facility, which is
collateralized by all of the Company's assets, bears interest at the bank's
prime rate (4.25% as of September 30, 2003) plus 0.25%, and expires in November
2003 at which time the entire balance under the line of credit will be due.
Total borrowings as of September 30, 2003 were approximately $3.4 million under
this line of credit. The line of credit contains a covenant that requires the
Company to maintain at least a $8.0 million balance in any account with the
bank. In lieu of this minimum balance covenant the Company may also cash-secure
the facility with funds equivalent to 115% of the outstanding debt obligation.
The line of credit also requires that the Company maintain at all times a
minimum of $20.0 million as short-term unrestricted cash and cash equivalents.
In the event that the Company defaults on this agreement, including through a
violation of any of these covenants, the entire balance under the line of credit
will become immediately due and payable. As of September 30, 2003, the Company
was in compliance with all covenants of the line of credit agreement.
Future payments due under the Company's debt and lease obligations as of
September 30, 2003 are as follows (in thousands (unaudited)):

Obligations     Non-
                                               Under     cancelable
                                    Line of    Capital    Operating
   Year Ending December 31,         Credit    Leases (1)  Leases (2)    Total
  --------------------_------      ---------  ----------  ----------  ---------
     2003........................ $   3,427  $       15  $    1,368  $   4,810
     2004........................        --          --       4,733      4,733
     2005........................        --          --       3,850      3,850
     2006........................        --          --       3,546      3,546
     2007........................        --          --       2,959      2,959
     2008 & Thereafter...........        --          --       6,655      6,655
                                   ---------  ----------  ----------  ---------
     Total mimimum lease payments $   3,427  $       15  $   23,111  $  26,553
                                   =========  ==========  ==========  =========(1) Throughout the remainder of 2003, the Company will make interest payments in
relation to the obligations under capital leases; this interest component is
included in the commitment schedule above.
(2) Includes leases previously subject to abandonment and included in accrued
restructuring on the balance sheet, net of scheduled sublease income.Note 11. Discontinued Operations
As of the quarter ended June 30, 2001, the Company adopted a plan to
discontinue the KANA Online business. The Company no longer seeks new business
but continued to service all ongoing contractual obligations it had to its
existing customers through April 2002. The estimated loss on the disposal of
KANA Online was $3.7 million as of June 30, 2001, consisting of an estimated
loss on disposal of the assets of $2.6 million and a provision of $1.1 million
for the anticipated operating losses during the phase-out period. The estimated
loss on disposal was recorded in the second quarter of 2001 and adjusted in the
second quarter of 2002, resulting in a gain of $381,000 in the nine months ended
September 30, 2002. The operation has been presented as a discontinued operation
for all periods presented.
Note 12. Subsequent Event
On November 5, 2003 the Company announced the underwritten public
offering of 4,080,000 shares of its common stock at a price to the public of
$3.00 per share. The common stock was offered by KANA under its shelf
registration statement. The offering closed on November 10, 2003. The
underwriter has a 30-day option to purchase a maximum of 612,000 additional
shares to cover over-allotments of shares, if any. The proceeds from the
offering, net of expenses, will be approximately $11.4 million, and
approximately $13.1 million if the underwriter's over-allotment option is
exercised in full.

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 and other parts of this report contains forward-looking statements
that are not historical facts but rather are based on current expectations,
estimates and projections about our business and industry, and our beliefs and
assumptions. Words such as "anticipate," "believe,"
"estimate," "expecs," "intend," "plan,"
"will" and variations of these words and similar expressions identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, many of
which are beyond our control, are difficult to predict and could cause actual
results to differ materially from" those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include those
described in "Risk Factors" and elsewhere in this report. Forward-
looking statements that were believed to be true at the time made may ultimately
prove to be incorrect or false. Readers are cautioned not to place undue
reliance on forward-looking statements, which reflect our management's view only
as of the date of this report. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
Overview
We are a leading provider of enterprise Customer Relationship Management
(eCRM) software solutions. These enterprise customer support and communications
applications are built on a Web-architected platform incorporating our KANA eCRM
architecture, which provides users with full access to the applications using a
standard Web browser and without requiring them to install additional software
on their individual computers. Our software helps our customers provide
external-facing customer support, and to better service, market to, and
understand their customers and partners, while improving results and decreasing
costs in contact centers and marketing departments. Our KANA iCARE (Intelligent
Customer Acquisition and Retention for the Enterprise) application suite
combines our KANA eCRM architecture with customer-focused service, marketing and
commerce software applications. These applications enable organizations to
improve customer and partner relationships by allowing them to interact with the
company over the communication channels they prefer, whether by Web contact, e-
mail or telephone.
On June 29, 2001, we completed a merger with Broadbase Software. This
transaction was accounted for using the purchase method of accounting. The
purchase price approximated $101.4 million.
Since 1997, we have incurred substantial costs to develop our products and to
recruit, train and compensate personnel for our engineering, sales, marketing,
client services and administration departments. As a result, we have incurred
substantial losses since inception. For the three and nine months ended
September 30, 2003, we recorded a net loss of $4.1 million and $17.8 million,
respectively. As of September 30, 2003, we had 233 full-time employees, which
represents a decrease from 292 employees at June 30, 2003.
On November 5, 2003 we announced the underwritten public offering of
4,080,000 shares of our common stock at a price to the public of $3.00 per
share. We offered the common stock under our shelf registration statement. The
offering closed on November 10, 2003. The underwriter has a 30-day option to
purchase a maximum of 612,000 additional shares to cover over-allotments of
shares, if any. The proceeds from the offering, net of expenses, will be
approximately $11.4 million, and approximately $13.1 million if the
underwriter's over-allotment option is exercised in full.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and judgments
that affect our reported assets, liabilities, revenues and expenses, and our
related disclosure of contingent assets and liabilities. We continually evaluate
our estimates, including those related to revenue recognition, collectibility of
receivables, goodwill and intangible assets, income taxes, and restructuring. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. This forms the basis
of judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies and the related
judgments and estimates significantly affect the preparation of our unaudited
condensed consolidated financial statements:
Revenue Recognition.  In addition to determining our results of
operations for a given period, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. Revenue recognition rules
for software companies are complex, and various judgments affect the application
of our revenue policy. The amount and timing of our revenue is difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause our operating results to vary significantly from quarter to quarter and
could result in future operating losses.
License revenue is recognized when there is persuasive evidence of an
arrangement, delivery to the customer has occurred, provided the arrangement
does not require significant customization of the software, the fee is fixed or
determinable, and collectibility is reasonably assured.
In software arrangements that include rights to multiple software products
and/or services, we allocate the total arrangement fee using the residual
method, under which revenue is allocated to undelivered elements based on
vendor-specific objective evidence of fair value of such undelivered elements
with the residual amounts of revenue being allocated to the delivered elements.
Elements included in multiple element arrangements primarily consist of software
products, maintenance (which includes customer support services and unspecified
upgrades), or consulting services. Vendor-specific objective evidence for
software products and consulting services is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management if it is probable
that the price, once established, will not change before market introduction.
Vendor-specific objective evidence for maintenance is based on stated
contractual renewal rates. Evaluating whether sufficient and appropriate vendor-
specific objective evidence exists to use in allocating revenue to undelivered
elements, and the interpretation of such evidence to determine the fair value of
undelivered elements is subject to judgment and estimates that affect when and
to what extent we may recognize revenues from a given contractual arrangement.
Probability of collection is based upon assessment of the customer's
financial condition through review of their current financial statements or
publicly-available credit reports. For sales to existing customers, prior
payment history is also considered in assessing probability of collection. We
are required to exercise significant judgment in deciding whether collectibility
is reasonably assured, and such judgments may materially affect the timing of
our revenues and our results of operations.
Revenues from customer support services are recognized ratably over the term
of the contract, typically one year. Consulting revenues are primarily related
to implementation services performed on a time-and-materials basis or, in
certain situations, on a fixed-fee basis, under separate service arrangements.
Implementation services performed under fixed-fee arrangements are generally
recognized on a percentage-of-completion basis. When acceptance is not assured
or an ability to reliably estimate costs is not possible, we use the completed
contract method, whereby revenues and related costs are deferred until all
contractual obligations are met, and acceptance, if required in the contract, is
received. Revenues from training services are recognized as services are
performed.
Collectibility of Receivables. In order to recognize revenue from a
transaction, collectibility must be determined by management to be reasonably
assured. If collectibility is not determined to be reasonably assured, amounts
billed to customers are recorded as deferred revenue. For sales to existing
customers, prior payment history is a factor in assessing probability of
collection.
We make judgments as to our ability to collect outstanding receivables and
provide allowances for receivables that may not be collectible. A considerable
amount of judgment is required to assess the ultimate realization of
receivables. In assessing collectibility, we consider the age of the receivable,
our historical collection experience, current economic trends, and the current
credit-worthiness of each customer. In the future, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected.
Reserve for Loss Contract. We were party to a contract with a customer
that provided for fixed fee payments in exchange for services upon meeting
certain milestone criteria. In order to assess whether a loss reserve was
necessary, we estimated the total expected costs of providing services necessary
to complete the contract and compared these costs to the fees expected to be
received under the contract. Based on analysis we performed in the fourth
quarter of 2000, we expected the costs to complete the project to exceed the
associated fees, and accordingly we recorded a loss reserve of $1.4 million in
the quarter ended December 31, 2000. As a result of our restructuring in the
third quarter of 2001, substantially all of the remaining professional services
required under the contract were being provided by a third party, and we
recorded an additional loss reserve of $6.1 million based upon an analysis of
costs to complete these services. In the second quarter of 2002, we began
discussions with the customer regarding the timing and scope of the project
deliverables, which led to an amendment to the original contract in August 2002.
Based on the amendment and associated negotiations with a third-party integrator
that had been providing implementation services to the customer, we recorded a
charge of approximately $15.6 million to cost of services revenue in the second
quarter of 2002 and in accordance with the terms of the amendment were relieved
from providing any further implementation services under the contract. The
amendment required that we transfer $6.9 million to an escrow account (which
included $5.8 million previously reported as restricted cash) to compensate any
third-party integrator for the continued implementation of the customer's
system. The charge also included $8.5 million of fees which we had paid the
third-party integrator prior to the amendment. During the second quarter of
2002, we received a scheduled payment of $4.0 million associated with the
original agreement which we reported as deferred revenue. The $4.0 million is
being recognized as license revenue as we fulfill our maintenance and training
obligations.
Accounting for Internal Use Software. Internal-use software costs,
including fees paid to third parties to implement the software, are capitalized
beginning when we have determined various factors are present, including among
others, that technology exists to achieve the performance requirements, we have
made a decision as to whether we will purchase the software or develop it
internally and we have authorized funding for the project. Capitalization of
software costs ceases when the software implementation is substantially complete
and is ready for its intended use, and the capitalized costs are amortized over
the software's estimated useful life (generally five years) using the straight-
line method. As of September 30, 2003, we had $11.9 million of capitalized costs
of internal use software, net of $3.3 million accumulated depreciation.
When events or circumstances indicate the carrying value of internal use
software might not be recoverable, we assess the recoverability of these assets
by determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows. The
amount of impairment, if any, is recognized to the extent that the carrying
value exceeds the projected discounted future operating cash flows and is
recognized as a write down of the asset. In addition, if it is no longer
probable that computer software being developed will be placed in service, the
asset will be adjusted to the lower of its carrying value or fair value, if any,
less direct selling costs. Any such adjustment would result in an expense in the
period recorded, which could have a material adverse effect on our consolidated
statement of operations. Based on our assessment as of September 30, 2003, we
determined that no such impairment of internal-use software existed.
Restructuring. During 2001, we recorded significant liabilities in
connection with our restructuring program. These reserves included estimates
pertaining to contractual obligations related to excess leased facilities. We
have worked with external real estate advisors in each of the markets where the
properties are located to help us estimate the amount of the accrual. This
process involves significant judgments regarding these markets. If the real
estate market continues to worsen, additional adjustments to the reserve may be
required, which would result in additional restructuring expenses in the period
in which such determination is made. Likewise, if the real estate market
strengthens, and we are able to sublease the properties earlier or at more
favorable rates than projected, or if we are otherwise able to negotiate early
termination of obligations on favorable terms, adjustments to the reserve may be
required that would increase income in the period in which such determination is
made.
In November 2002, we entered into an amendment to a facility lease. In
connection with this lease amendment, our evaluation of real estate market
conditions relating to this and other excess leased facilities, and discussions
with our other landlords, we reduced our associated restructuring accrual by
approximately $9.1 million. This reduction was primarily comprised of a $4.0
million payment made in connection with the amendment, as well as approximately
$5.1 million in net restructuring cost savings resulting from our evaluation
that were reflected as a reduction in the restructuring accrual in our operating
results for the quarter ended December 31, 2002.
Goodwill and Intangible Assets. Consideration paid in connection with
acquisitions is required to be allocated to the acquired assets, including
identifiable intangible assets, and liabilities acquired.  Acquired assets and
liabilities are recorded based on our estimate of fair value, which requires
significant judgment with respect to future cash flows and discount rates. For
intangible assets other than goodwill, we are required to estimate the useful
life of the asset and recognize its cost as an expense over the useful life. We
use the straight-line method to expense long-lived assets, which results in an
equal amount of expense in each period. Amortization of goodwill ceased as of
January 1, 2002 upon our adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. Instead, we are now required to
test goodwill for impairment under certain circumstances and write down goodwill
when it is impaired. We have determined that the consolidated results of KANA
comprise one reporting unit for the purpose of impairment testing through
September 30, 2003.
We regularly evaluate all potential indicators of impairment of goodwill and
intangible assets. Our judgments regarding the existence of impairment
indicators are based on market conditions, operational performance of our
acquired businesses and identification of reporting units. Future events could
cause us to conclude that impairment indicators exist and that goodwill and
other intangible assets associated with our acquired businesses are
impaired.
Under the transition provisions of SFAS No. 142, there was no goodwill
impairment at January 1, 2002 based upon our analysis completed at that time.
However, during the quarter ended June 30, 2002, circumstances developed that
indicated goodwill was likely impaired and we performed an impairment analysis
as of June 30, 2002. This analysis resulted in a $55.0 million impairment
expense to reduce goodwill. The circumstances that led to the impairment
included the lower-than-previously-expected revenues and net loss for the second
quarter of 2002 and the revision of estimates of our revenues and net loss for
subsequent quarters, based upon financial results for the second quarter of 2002
and the reduction of estimated cash flows in future quarters. We used relevant
market data, including KANA's market capitalization during the period following
the announcement of preliminary results for the second quarter of 2002, to
calculate an estimated fair value and the resulting goodwill impairment. The
estimated fair value was compared to the corresponding carrying value of
goodwill at June 30, 2002, which resulted in a reduction of goodwill as of June
30, 2002 by $55.0 million. The remaining amount of goodwill as of September 30,
2003 was $7.4 million. We have continued to assess whether any potential
indicators of impairment of goodwill have occurred and have determined that no
such indicators have arisen since June 30, 2002. Any further impairment loss
could have a material adverse impact on our financial condition and results of
operations.
Income Taxes. We estimate our income taxes in each of the
jurisdictions in which we operate as part of the process of preparing our
consolidated financial statements. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred revenue, for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities. We then assess the likelihood that our net deferred tax assets will
be recovered from future taxable income and to the extent we believe that
recovery is not likely, we establish a valuation allowance. We concluded that a
full valuation allowance was required for all periods presented. While we have
considered future taxable income in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would be made, increasing our income in the
period in which such determination was made.
Contingencies and Litigation. We are subject to lawsuits and other
claims and proceedings. We assess the likelihood of any adverse judgments or
outcomes to these matters as well as ranges of probable losses. A determination
of the amount of loss contingency required, if any, for these matters are made
after careful analysis of each individual matter. The required loss
contingencies may change in the future as the facts and circumstances of each
matter changes.
Selected Results of Operations Data
The following table sets forth selected data for the indicated periods.
Percentages are expressed as a percentage of total revenues (in thousands).
Three Months Ended               Nine Months Ended
                                                      September 30,                     September 30,
                                              ----------------------------      -----------------------------
                                                   2003           2002               2003             2002
Revenues:                                     ------------   -------------      -------------   -------------
     License..............................   $ 5,083   37 % $ 8,784    49 %    $17,617    40 % $ 32,222   53 %
     Service..............................     8,750   63     9,243    51       26,380    60     28,138   47
                                              ------- ----   ------- -----      ------- -----   -------- ----
Total revenues............................    13,833  100    18,027   100       43,997   100     60,360  100
                                              ------- ----   ------- -----      ------- -----   -------- ----
Cost of revenues:
     License..............................       578    4       548     3        2,003     4      2,569    4
     Service*.............................     2,381   17     2,762    15        7,451    17     26,560   44
                                              ------- ----   ------- -----      ------- -----   -------- ----
Total cost of revenues....................     2,959   21     3,310    18        9,454    21     29,129   48
                                              ------- ----   ------- -----      ------- -----   -------- ----
Gross profit..............................    10,874   79    14,717    82       34,543    79     31,231   52
                                              ------- ----   ------- -----      ------- -----   -------- ----

Selected operating expenses*:
     Sales and marketing..................     6,854   50     8,732    48       22,178    50     29,432   49
     Research and development.............     4,718   34     6,389    35       16,741    38     19,539   32
     General and administrative...........     1,981   14 %   3,458    19 %      7,651    17 %   10,061   17 %


* Excludes amortization of deferred stock based compensation

Three and Nine Months Ended September 30, 2003 and 2002
Revenues
License revenue decreased 42% and 45%, respectively, for the three and
nine months ended September 30, 2003 compared to the same periods in the prior
year. License revenue constituted 37% of total revenues during the three months
ended September 30, 2003, compared to 40% for the same period last year. For the
nine months ended September 30, 2003, license revenues constituted 40% of total
revenues, compared to 53% for the same period last year. These decreases were
the result of fewer license transactions in 2003 compared to 2002. We believe
the slowdown in license sales was primarily due to lengthening sales cycles in
the current uncertain economic environment. We expect that both license and
service revenue in the fourth quarter of 2003 will be lower than they were in
the fourth quarter of 2002. While we are focused on increasing license revenue
throughout the remainder of 2003, we are unable to predict such revenue with any
degree of accuracy as the market for our products is unpredictable and intensely
competitive, and sales of our products are affected by the current economic
environment and corresponding effects it has on corporate information technology
spending.

Our service revenues consist of support service revenue (primarily from
customer support, product maintenance and updates) and professional services
revenue (primarily from consulting and implementation services). Service revenue
decreased 5% for the three months and decreased 6% for the nine months ended
September 30, 2003 compared to the same periods in the prior year. The decreases
resulted primarily from our shift to leverage third party integrators for
providing implementation services to our customers.

Revenues from domestic sales decreased $3.2 million, or 28%, from $11.6
million for the three months ended September 30, 2002 to $8.4 million for the
three months ended September 30, 2003, and decreased by $10.3 million, or 26%,
from $39.9 million for the nine months ended September 30, 2002 to $29.7 million
for the nine months ended September 30, 2003. Revenues from international sales
decreased $1.0 million, or 14%, from $6.4 million for the three months ended
September 30, 2002 to $5.4 million for the three months ended September 30,
2003, and decreased by $6.1 million, or 30%, from $20.4 for  the nine months
ended September 30, 2002 to $14.3 million for the nine months ended September
30, 2003. The decrease in both domestic and international revenues in 2003 was
primarily a result of lengthening sales cycles and decreased information
technology spending experienced worldwide, by both our customers and potential
customers. For the three months ended September 30, 2003, the percentage
decrease in revenue from international sales is lower than the decrease in
revenue from domestic sales due to a relatively large transaction with a
customer in Europe which represented 13% of total revenue during the third
quarter. For the remainder of 2003, we expect international revenue, as a
percentage of overall revenue, to remain relatively consistent with the first
nine months of 2003.
Cost of Revenues
Cost of license revenue consists primarily of third party software
royalties, and to a lesser extent, costs of product packaging and documentation,
and production and delivery costs for shipments to customers. Cost of license
revenue as a percentage of license revenue was 11% for the three months ended
September 30, 2003 compared to 6% for the same period in the prior year. For the
nine months ended September 30, 2003, cost of license revenue as a percentage of
license revenue was 11%, compared to 8% for the same period in the prior year.
The increase in cost of license revenues as a percentage of license revenue in
the 2003 periods compared to the same periods in 2002 was due to the decrease in
license revenue in 2003 while certain royalty expenses remained constant due to
the fixed nature of some of the fees in our royalty agreements with third party
suppliers. Additionally, a greater proportion of sales in 2003 were of our KANA
Response product licenses, which have higher associated royalty rates. We expect
that our cost of license revenue as a percentage of sales will remain relatively
constant through the remainder of 2003, but that it may vary slightly based on
changes in the mix of products we sell.

Cost of service revenue consists primarily of salaries and related expenses
for our customer support, implementation and training services organization and
an allocation of facility costs and system costs incurred in providing customer
support. Cost of service revenue decreased to 27% of service revenue for the
three months ended September 30, 2003 compared to 30% for the same period in the
prior year. This decrease was associated with the change in mix of service
revenues, since maintenance revenue yields a higher gross margin than other
professional service revenues. Maintenance revenue comprised 90% of service
revenues in the three months ended September 30, 2003 compared to 82% for the
same period in the prior year. For the nine months ended September 30, 2003,
cost of service revenue decreased to 28% of service revenue, compared to 94% for
the same period in the prior year. This decrease was primarily due to the $15.6
million charge relating to an amendment executed in August 2002, relating to an
original contract with a customer - see discussion under "-Critical
Accounting Policies-Reserve for Loss Contract". In addition, we experienced
a 61% decrease in implementation and training costs in the 2003 periods
primarily as a result of a 26% year over year decrease in personnel in these
departments. We anticipate that our cost of service revenue as a percentage of
service revenue will be relatively constant for the remainder of 2003.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist
primarily of compensation and related costs for sales and marketing personnel
and promotional expenditures, including public relations, lead-generation
programs and marketing materials. Sales and marketing expenses decreased 22% for
the three months and 25% for the nine months ended September 30, 2003 compared
to the same periods in the prior year. This decrease was attributable primarily
to the lower sales commissions expense associated with the decrease in license
sales during the same periods, as well as a net reduction of sales positions
throughout 2003 as a result of our restructuring activities in prior years and a
reduction in facilities. As of September 30, 2003, we had 77 personnel in sales
and marketing, compared to 112 as of September 30, 2002, a 31% reduction.
We anticipate that sales and marketing expenses will be lower in absolute
dollars for the remainder of 2003 compared to the same period in 2002.
Thereafter, sales and marketing expenses may increase or decrease, depending
primarily on the amount of future revenues and our assessment of market
opportunities and sales channels.
Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors and for enhancement of existing products and quality
assurance activities. Research and development expenses decreased by 26% for the
three months and 14% for the nine months ended September 30, 2003 compared to
the same periods in the prior year. These decreases were
attributable to the transitioning of our software programming, quality assurance
and technical documentation activities to our international third party
development partners beginning in the first quarter of 2003, which resulted in
reductions to research and development headcount. As of September 30, 2003, we
had 50 personnel in research and development, compared to 133 as of September
30, 2002, a 62% reduction.
We anticipate that quarterly research and development expenses will be lower
in absolute dollars for the remainder of 2003 compared to the same period in
2002 as a result of the transitioning of these activities. Thereafter research
and development expenses may increase or decrease, depending primarily on the
amount of future revenues, customer needs, and our assessment of market
demand.
General and Administrative. General and administrative expenses
consist primarily of compensation and related costs for administrative
personnel, bad debt expenses, and legal, accounting and other general corporate
expenses. General and administrative expenses decreased 43% for the three months
and 24% for the nine months ended September 30, 2003 compared to the same
periods in the prior year. These decreases were primarily attributable to a
reduction in general and administrative headcount and $1.2 million net
reductions to bad debt expense during the nine months ended September 30, 2003.
As of September 30, 2003, we had 29 general and administrative personnel,
compared to 65 as of September 30, 2002, a 55% reduction.
We anticipate that general and administrative expenses will remain fairly
consistent in absolute dollars over the next few quarters and thereafter may
increase or decrease, depending primarily on the amount of future revenues and
corporate infrastructure requirements including insurance, professional
services, bad debt expense and other administrative costs.
Restructuring Costs. As of September 30, 2003, $9.1 million in
restructuring liabilities remained on our unaudited condensed consolidated
balance sheet in accrued restructuring costs. Cash payments for severance and
excess leased facilities during the nine months ended September 30, 2003 totaled
$2.1 million. Cash received during the nine months ended September 30, 2003 from
subleases of excess leased facilities totaled $269,000. The following table is a
summary of restructuring payments and liabilities during the first nine months
of 2003 (in thousands):
Restructuring                          Restructuring
                       Accrual at               Sublease      Accrual at
                      December 31,   Payments   Payments     September 30,
                          2002         Made     Received         2003
                      ------------   --------  -----------   ------------
Severance..........  $        217  $     (33) $        --   $        184
Facilities.........        10,731     (2,092)         269          8,908
                      ------------   --------  -----------   ------------
Total .............  $     10,948  $  (2,125) $       269   $      9,092
                      ============   ========  ===========   ============Amortization of Deferred Stock-Based Compensation. We amortize
deferred stock-based compensation on an accelerated basis by charges to
operations over the vesting period of the options, consistent with the method
described in FIN 28. As of September 30, 2003, there was approximately $3.0
million of total deferred stock-based compensation remaining to be amortized
related to warrants and past employee stock option grants.  We will amortize an
additional $1.4 million of deferred stock-based compensation in 2003.  We
currently expect amortization of deferred stock based compensation in the years
ending December 31, 2004 and 2005 to be approximately $1.5 million and $71,000,
respectively. Amortization may be reduced in future periods to the extent
employees are terminated prior to vesting. The following table details, by
operating expense, our amortization of stock-based compensation (in
thousands):
Three Months Ended  Nine Months Ended
                                           September 30,       September 30,
                                            2003    2002      2003     2002
                                         -------  -------   -------  -------
Cost of service ......................   $    98  $   145   $   325  $   754
Sales and marketing ..................       522      772     1,736    4,008
Research and development .............       488      721     1,622    3,741
General and administrative ...........       272      313       762    6,376
                                          -------  -------  -------  -------
Total ................................   $ 1,380  $ 1,951   $ 4,445  $14,879
                                          =======  =======  =======  =======Amortization of Identifiable Intangibles. The amortization of
identifiable intangible assets recorded in the current and prior year relates to
$14.4 million of purchased technology recorded as an intangible asset acquired
in connection with the merger with Silknet. Such amortization was completed in
April 2003.  Therefore, no amortization expense was recorded during the three
months ended September 30, 2003. Amortization of identifiable intangibles for
the three months ended September 30, 2002 was $1.2 million. Amortization for the
nine months ended September 30, 2003 was $1.5 million compared to $3.6 million
in the same period in the prior year.

Goodwill Impairment. On January 1, 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets.SFAS No. 142 requires goodwill to
be tested for impairment under certain circumstances and written down when
impaired. SFAS No. 142 requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless these lives are determined to be
indefinite. Under the transition provisions of SFAS No. 142, there was no
goodwill impairment at January 1, 2002 based upon our analysis completed at that
time. However, during the quarter ended June 30, 2002, circumstances developed
that indicated goodwill was likely impaired and we performed an impairment
analysis as of June 30, 2002. This analysis resulted in a $55.0 million
impairment expense to reduce goodwill. The circumstances that led to the
impairment included the lower-than-previously-expected revenues and net loss for
the second quarter of 2002 and the revision of estimates of our revenues and net
loss for subsequent quarters, based upon financial results for the second
quarter of 2002 and the reduction of estimated cash flows in future quarters. We
used relevant market data, including KANA's market capitalization during the
period following the revision of estimates, to calculate an estimated fair value
and the resulting goodwill impairment. The estimated fair value was compared to
the corresponding carrying value of goodwill at June 30, 2002, which resulted in
a reduction of goodwill as of June 30, 2002 by $55.0 million. The remaining
goodwill balance was approximately $7.4 million at September 30, 2003. We have
continued to assess whether any potential indicators of impairment of goodwill
have occurred and have determined that no such indicators have arisen since June
30, 2002. Any further impairment loss could have a material adverse impact on
our financial condition and results of operations.

Other Income, Net

Other income consists primarily of interest income earned on cash and
investments, offset by interest expense primarily relating to our line of
credit. We expect other income to fluctuate in accordance with our cash balances
as well as the prime interest rate.

Provision for Income Taxes

We have incurred operating losses for all periods from inception through
September 30, 2003, and therefore have not recorded a provision for income
taxes. We have recorded a valuation allowance for the full amount of our gross
deferred tax assets, as the future realization of the tax benefit is unlikely to
occur.

Cumulative Effect of Accounting Change

As part of the adoption of SFAS No. 142, negative goodwill was eliminated and
reported as the cumulative effect of an accounting change. This accounting
change amounted to approximately $3.9 million in the nine months ended September
30, 2002.

Liquidity and Capital Resources
As of September 30, 2003, we had $22.3 million in cash, cash equivalents
and short-term investments, compared to $32.5 million at December 31, 2002. As
of September 30, 2003, we had a negative working capital of $11.9 million,
compared to negative $4.5 million as of December 31, 2002. On November 5, 2003
we announced the underwritten public offering of 4,080,000 shares of our common
stock at a price to the public of $3.00 per share under our shelf registration
statement. The offering closes on November 10, 2003. The
underwriter has a 30-day option to purchase a maximum of 612,000 additional
shares to cover over-allotments of shares, if any. The proceeds from the
offering, net of expenses, will be approximately $11.4 million, and
approximately $13.1 million if the underwriter's over-allotment option is
exercised in full.
Our operating activities used $10.5 million of cash for the nine months ended
September 30, 2003, which included a $17.8 million net loss from continuing
operations offset by non-cash charges of $6.4 million in depreciation, $4.4
million in amortization of deferred stock-based compensation and $1.5 million in
amortization of identifiable intangibles. Operating activities also included
$1.9 million in net payments relating to restructuring liabilities. Other
working capital changes totaled a net $3.1 million, resulting primarily from a
$7.1 million decrease in accounts receivable, offset by a $2.9 million reduction
in the allowance for doubtful accounts, $5.3 million reduction in deferred
revenue and $3.3 million reduction in accounts payable and accrued
liabilities.
Our investing activities provided $9.6 million of cash for the nine months
ended September 30, 2003, resulting from $11.7 million of maturities of short-
term investments, offset by $1.2 million of purchases of short-term investments
and $0.9 million of property and equipment purchases. Upon maturity of our
investments, we transferred the funds to cash and cash equivalents.
Our financing activities provided $0.8 million in cash for the nine months
ended September 30, 2003, primarily due to net proceeds of approximately $0.8
million from the issuance of common stock pursuant to our employee incentive
plans. We also have a line of credit totaling $5.0 million, which is
collateralized by all of our assets, bears interest at the bank's prime rate
(4.25% as of September 30, 2003) plus 0.25%, and expires in November 2003 at
which time the entire balance under the line of credit will be due. Total
borrowings as of September 30, 2003 were approximately $3.4 million under this
line of credit. The line of credit contains a covenant that requires us to
maintain at least a $8.0 million balance in any account with the bank. In lieu
of this minimum balance covenant we may also cash-secure the facility with funds
equivalent to 115% of the outstanding debt obligation. The line of credit also
requires that we maintain at all times a minimum of $20.0 million as short-term
unrestricted cash and cash equivalents. If we default under this line of credit,
including through a violation of any of these covenants, the entire balance
under the line of credit will become immediately due and payable. As of
September 30, 2003, we were in compliance with all covenants of the line of
credit agreement.
Future payments due under our non-cancelable debt and lease obligations as of
September 30, 2003 are as follows (in thousands):
Obligations     Non-
                                               Under     cancelable
                                    Line of    Capital    Operating
   Year Ending December 31,         Credit    Leases (1)  Leases (2)    Total
  ---------------------------      ---------  ----------  ----------  ---------
     2003........................ $   3,427  $       15  $    1,368  $   4,810
     2004........................        --          --       4,733      4,733
     2005........................        --          --       3,850      3,850
     2006........................        --          --       3,546      3,546
     2007........................        --          --       2,959      2,959
     2008 & Thereafter...........        --          --       6,655      6,655
                                   ---------  ----------  ----------  ---------
     Total mimimum lease payments $   3,427  $       15  $   23,111  $  26,553
                                   =========  ==========  ==========  =========Throughout the remainder of 2003, we will make interest payments in relation
to the obligations under capital leases; this interest component is included in
the commitment schedule above.

Includes leases previously subject to abandonment and included in the
restructuring charge.In addition to those described in the table above, our significant expected
cash outflows through the remainder of 2003 include approximately $0.8 million
in payments relating to accrued restructuring costs and approximately $0.4
million of expenditures on property and equipment.
In the first quarter of 2003, we began implementing an outsourcing strategy,
which involves subcontracting a significant portion of our software programming,
quality assurance and technical documentation activities to development partners
with staffing in India and China. As a result of transitioning these activities
offshore, we reduced our research and development department by 78 employees
during the nine months ended September 30, 2003. We signed contracts with these
development partners in 2003, with expected payments in 2003 of approximately
$5.2 million, primarily on a time and materials basis. In addition, a
cancellation fee ranging from $28,000 to $640,000 could be incurred if one
agreement is terminated prior to July 2004.While we believe that our existing
cash balances and anticipated cash flows from operations will be sufficient to
meet our anticipated capital requirements for the next 12 months, failure to
increase future orders and revenues beyond the level achieved in the second and
third quarters of 2003 would likely require us to seek additional capital to
meet our working capital needs during or beyond the next 12 months if we are
unable to reduce expenses to the degree necessary to avoid incurring losses. If
we have a need for additional capital resources, we may be required to sell
additional equity or debt securities, secure additional lines of credit or
obtain other third party financing. The timing and amount of such capital
requirements cannot be determined at this time and will depend on a number of
factors, including demand for our products and services, general economic
conditions and customer purchasing and payment patterns, many of which are
beyond our control. There can be no assurance that additional financing
will be available on satisfactory terms when needed, if at all. To the extent
that additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of such securities would result in
additional dilution to our shareholders. In addition, such securities may be
sold at a discount from the market price of our common stock, and may include
rights, preferences or privileges senior to those of our common stock. Failure
to raise such additional financing, if needed, may result in us not being able
to achieve our long-term business objectives.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 46 ("FIN 46") Consolidation of
Variable Interest Entities. Until this interpretation, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and
applies in the first year or interim period beginning after December 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of this interpretation did not
have a material impact on our results of operations or financial position.
However, changes in our business relationships with various entities could occur
in the future and affect our financial statements under the requirements of FIN
46.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer.  This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. It is to be implemented
by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption.  To
date, the impact of the effective provisions of SFAS No. 150 has not had a
material impact on our results of operations, financial position or cash flows.
While the effective date of certain elements of SFAS No. 150 has been deferred,
the adoption of SFAS No. 150 when finalized is not expected to have a material
impact on our financial position, results of operations or cash flows.
RISKS ASSOCIATED WITH KANA'S BUSINESS AND FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to
period. The price of our common stock will fluctuate in the future, and an
investment in our common stock is subject to a variety of risks, including but
not limited to the specific risks identified below. The risks described below
are not the only ones facing our company. Additional risks not presently known
to us, or that we currently deem immaterial, may become important factors that
impair our business operations. Inevitably, some investors in our securities
will experience gains while others will experience losses depending on the
prices at which they purchase and sell securities. Prospective and existing
investors are strongly urged to carefully consider the various cautionary
statements and risks set forth in this report and our other public filings.

Risks Related to Our Business

Our quarterly revenues and operating results may fluctuate in future
periods and we may fail to meet the expectations of investors and public market
analysts, which could cause the price of our common stock to decline.

Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. As a result, we believe
that period-to-period comparisons of our operating results may not be meaningful
and you should not rely on these comparisons as an indication of our future
performance. If quarterly revenues or operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could decline substantially. Factors that might cause quarterly
fluctuations in our operating results include the factors described under the
other subheadings of this "Risks Factors" section, as well as:

the evolving and varying demand for our customer communication software
products and services;
budget and spending decisions by information technology departments of our
customers;
our ability to manage our expenses;
the timing of new releases of our products;
changes in our pricing policies or those of our competitors;
the timing of execution of large contracts that materially affect our
operating results;
uncertainty regarding the timing of the implementation cycle for our
products;
changes in the level of sales of professional services as compared to
product licenses;
the mix of sales channels through which our products and services are sold;
the mix of our domestic and international sales;
costs related to the development and customization of our products;
our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;
decisions by customers and potential customers to delay purchasing our
products;
modifications to accounting principles or policies governing our financial
statements;
non-recurring accounting charges, such as those resulting from the write-off
of intangible assets such as goodwill;
consolidation and anticipated consolidation in our industry; and
economic and political conditions, both global and specific to our customers
or our industry.Customers' decisions to purchase our products and services are discretionary
and subject to their internal budgets and purchasing processes. Due to the
continuing slowdown in the general economy, we believe that many existing and
potential customers are reassessing or reducing their planned technology and
software investments and deferring purchasing decisions, requiring additional
evaluations and levels of internal approval for software investment and
lengthening their purchase cycles. Further delays or reductions in business
spending for information technology could have a material adverse effect on our
revenues and operating results. As a result, there is increased uncertainty with
respect to our expected revenues.
Our failure to complete our expected sales in any given quarter could
materially harm our operating results because of the relatively large size of
many of our orders.

Our quarterly revenues are especially subject to fluctuation because they
depend on the completion of relatively large orders for our products and related
services. The average size of our license transactions is generally large
relative to our total revenue in any quarter, particularly as we have focused on
larger enterprise customers and on licensing our more comprehensive integrated
products and have involved system integrators in our sales process. For example,
during the nine months ended September 30, 2003, one customer, IBM, represented
9% of our total revenues. During the nine months ended September 30, 2002, IBM
represented 13% of our total revenues.This dependence on large orders
makes our net revenue and operating results more likely to vary from quarter to
quarter, and more difficult to predict, because the loss of any particular large
order is significant. As a result, our operating results could suffer if any
large orders are delayed or canceled in any future period. In addition, large
orders, and orders obtained through the activities of system integrators, often
have longer sales cycles, increasing the difficulty of predicting future
revenues. We expect the concentration of revenues among fewer customers to
continue in the future.
Contributing to the risk that anticipated sales may not occur on the
expected time frame, if at all, our sales cycle is subject to a number of
significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which we have little or no control. Consequently, if
sales expected from a specific customer in a particular quarter are not realized
in that quarter, we are unlikely to be able to generate revenue from alternate
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of a typical order, a lost or delayed sale could result in
revenues that are lower than expected. Moreover, to the extent that significant
sales occur earlier than anticipated, revenues for subsequent quarters may be
lower than expected. Consequently, we face difficulty predicting the quarter in
which sales to expected customers will occur, which contributes to the
uncertainty of our future operating results. In recent periods, we have
experienced increases in the length of a typical sales cycle. This trend may add
to the uncertainty of our future operating results and reduce our ability to
anticipate our future revenues.
We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle.

The long sales cycle for our products may cause license revenue and operating
results to vary significantly from period to period. To date, the sales cycle
for our products has taken anywhere from 3 to 12 months. Furthermore, selling
our products in conjunction with our systems integrators who are proposing their
implementation services of our products can involve a particularly long sales
cycle, as it typically takes more time for the prospective customer to evaluate
proposals from multiple vendors. Consequently, we face difficulty predicting the
quarter in which expected sales will actually occur. This contributes to
fluctuations in our future operating results. Our sales cycle has required pre-
purchase evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to prospective customers regarding the use and benefits of
our products. Many of our customers evaluate our software slowly and
deliberately, depending on the specific technical capabilities of the customer,
the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products. The present economic downturn
has led to a significant increase in the time required for this process and if
the downturn continues, the sales cycle for our products may become even longer
and we may require more resources to complete sales.
Our expenses are generally fixed and we will not be able to reduce these
expenses quickly if we fail to meet our revenue forecasts.

Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our forecast is based, in part, upon our
expectations regarding future revenue levels. As a result, if total revenues for
a particular quarter are below expectations, we could not proportionately reduce
operating expenses for that quarter. Accordingly, such a revenue shortfall would
have a disproportionate effect on our expected operating results for that
quarter.

If we fail to generate sufficient revenues to support our business and
require additional financing, failure to obtain such financing would affect our
ability to maintain our operations and to grow our business, and the terms of
any financing we obtain may impair the rights of our existing stockholders.

In the future, we may be required to seek additional financing to fund our
operations or growth. Our operating activities used $42.2 million of cash in
2002 and $10.5 million of cash in the nine months ended September 30, 2003.
Failure to increase future orders and revenues beyond the level achieved in the
second and third quarters of 2003 would likely require us to seek additional
capital to meet our working capital needs if we are unable to reduce expenses to
the degree necessary to avoid incurring losses. Factors such as the commercial
success of our existing products and services, the timing and success of any new
products and services, the progress of our research and development efforts, our
results of operations, the status of competitive products and services, and the
timing and success of potential strategic alliances or potential opportunities
to acquire or sell technologies or assets may require us to seek additional
funding sooner than we expect. In the event that we require additional cash, we
may not be able to secure additional financing on terms that are acceptable to
us, especially in the uncertain market climate, and we may not be successful in
implementing or negotiating such other arrangements to improve our cash
position. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders would
be reduced and the securities we issue might have rights, preferences and
privileges senior to those of our current stockholders. If adequate funds were
not available on acceptable terms, our ability to achieve or sustain positive
cash flows, maintain current operations, fund any potential expansion, take
advantage of unanticipated opportunities, develop or enhance products or
services, or otherwise respond to competitive pressures would be significantly
limited.

Because we have a limited operating history, there is limited information
upon which you can evaluate our business.

We first recorded revenue in February 1998 and our revenue mix and operating
structure have changed substantially since then. Thus, we have a limited
operating history upon which you can evaluate our business and prospects. Due to
our limited operating history and significant changes in our business over the
past four years, it is difficult or impossible to predict our future results of
operations. For example, we cannot accurately forecast operating expenses based
on our historical results (or those of similar companies) because historical
results are limited and reflect different products, costs and business models,
and we forecast expenses in part on future revenue projections based on a number
of assumptions. Moreover, due to our limited operating history and evolving
product offerings, our insights into trends that may emerge and affect our
business are limited.
We have a history of losses and may not be able to generate sufficient
revenue to achieve and maintain profitability.

Since we began operations in 1997, our revenues have not been sufficient
to support our operations, and we have incurred substantial operating losses in
every quarter. As of September 30, 2003, our accumulated deficit was
approximately $4.3 billion, which includes approximately $2.7 billion related to
goodwill impairment charges. Our history of losses has previously caused some of
our potential customers to question our viability, which has in turn hampered
our ability to sell some of our products. Additionally, our revenue has been
affected by the increasingly uncertain economic conditions both generally and in
our market. As a result of these conditions, we have experienced and expect to
continue to experience difficulties in collecting outstanding receivables from
our customers and attracting new customers, which means that we may continue to
experience losses, even if sales of our products and services grow.

We continue to commit a substantial investment of resources to sales and
marketing, developing new products and enhancements, and expanding our
operations domestically and internationally, and we will need to increase our
revenue to achieve profitability and positive cash flows. Our expectations as to
when we can achieve positive cash flows, and as to our future cash balances, are
subject to a number of assumptions, including assumptions regarding improvements
in general economic conditions and customer purchasing and payment patterns,
many of which are beyond our control.

We rely on marketing, technology and distribution relationships for the
sale, installation and support of our products that may generally be terminated
at any time, and if our current and future relationships are not successful, our
growth might be limited.

We rely on marketing and technology relationships with a variety of companies
that, among other things, generate leads for the sale of our products and
provide our customers with implementation and ongoing support. These include
relationships with:

systems integrators and consulting firms;
vendors of e-commerce and Internet software;
vendors of software designed for customer relationship management or for
management of organizations' operational information;
vendors of key technology and platforms; and
demographic data providers.If we cannot maintain successful marketing and technology relationships or if
we fail to enter into additional such relationships, we could have difficulty
expanding the sales of our products and our growth might be limited. While some
of these companies do not resell or distribute our products, we believe that
many of our direct sales are the result of leads generated by vendors of e-
business and enterprise software and we expect to continue relying heavily on
sales from these relationships in future periods. Our marketing and technology
relationships are generally not documented in writing, or are governed by
agreements that can be terminated by either party with little or no prior
notice.

A significant percentage of our revenues depends on the efforts of systems
integrators, or "SI's", and their recommendations of our products, and
we expect an increasing percentage of our revenues to be derived from our
relationships with SIs that market and sell our products. If SIs do not
successfully market our products, our operating results will be materially
harmed. In addition, many of our direct sales are to customers that will be
relying on SIs to implement our products, and if SIs are not familiar with our
technology or able to successfully implement our products, our operating results
will be materially harmed. We expect to continue building our network of SIs and
other indirect sales channels and, if this strategy is successful, our
dependence on the efforts of these third parties for revenue growth and customer
service will increase. Our reliance on third parties for these functions will
reduce our control over such activities and reduce our ability to perform such
functions internally. If we come to rely primarily on a single SI that
subsequently terminates its relationship with us, becomes insolvent or is
acquired by another company with which we have no relationship, or decides not
to provide implementation services related to our products, we may not be able
to internally generate sufficient revenue or increase the revenues generated by
our other SI relationships to offset the resulting lost revenues. Furthermore,
SIs typically suggest our solution in combination with other products and
services, some of which may compete with our solution. SIs are not required to
promote any fixed quantities of our products, are not bound to promotel our
products exclusively, and may act as indirect sales channels for our
competitors. If these companies choose not to promote our products or if they
develop, market or recommend software applications that compete with our
products, our business will be harmed.

In addition, we rely on distributors, value-added resellers, systems
integrators, consultants and other third-party resellers to recommend our
products and to install these products. Our reduction in the size of our
professional services team in 2001 increased our customers' reliance on third
parties for product installations and support. If the companies providing these
services fail to implement our products successfully for our customers, we might
be unable to complete implementation on the schedule required by the customers
and we may have increased customer dissatisfaction or difficulty making future
sales as a result. We might not be able to maintain these relationships and
enter into additional relationships that will provide timely and cost-effective
customer support and service. If we cannot maintain successful relationships
with our indirect sales channel partners, we might have difficulty expanding the
sales of our products and our growth could be limited. In addition, if such
third parties do not provide the support our customers need, we may be required
to hire subcontractors to provide these professional services. Increased use of
subcontractors would harm our margins because it costs us more to hire
subcontractors to perform these services than to provide the services
ourselves.

If our international development partners do not provide us with adequate
support, our ability to respond to competition and customer demands would be
impaired, and our results of operations would be harmed.

In the first quarter of 2003, we began subcontracting a significant portion
of our software programming, quality assurance and technical documentation
activities to development partners with staffing in India and China. We have
little prior experience in outsourcing our product development work, and we
cannot be sure that this strategy will succeed or that it will not cause us
difficulties in responding to development challenges we may face. The operations
of these partners are based outside the U.S. and therefore subject to risks
distinct from those that face U.S.-based operations. For example, military
action or political upheaval in the host countries could force these partners to
terminate the services they are providing to us or to close their operations
entirely. If these partners fail, for any reason, to provide adequate and timely
product enhancements, updates and fixes to us, our ability to respond to
customer or competitive demands would be harmed and we would lose sales
opportunities and customers. In addition, the loss of research and development
personnel associated with this strategy will cause us to lose internal
expertise, reducing our ability to respond to these demands independently if the
partners fail to perform as required. As a result of the first phase of the
strategy, in the nine months ended September 30, 2003, we reduced the size of
our research and development department by 78 employees. We have estimated our
operating costs for the year making various assumptions about the amount that we
will need to pay our development partners. Based on our limited history of
working with these partners, we cannot be sure that our cost estimates will
prove correct. Unanticipated increases in our operating expenses in any given
quarter would increase our net losses and could require us to obtain additional
financing sooner than expected.
The reductions in workforce may adversely affect the morale and performance
of our personnel and our ability to hire new personnel.

In connection with our effort to streamline operations, reduce costs and
bring our staffing and cost structure in line with industry standards, we
restructured our organization in 2001, an effort that included substantial
reductions in our workforce. In addition, we have substantially reduced our
headcount in the first nine months of 2003 from a total of 365 KANA employees as
of December 31, 2002 to 233 as of September 30, 2003. The majority of this
reduction was the result of our decision to shift a significant portion of our
software programming, quality assurance and technical documentation activities
to international development partners in early 2003. We reduced the size of our
research and development department by 78 employees in the nine months ended
September 30, 2003. We may choose to transfer additional positions to these
development partners in future quarters. There have been and may continue to be
substantial costs associated with the workforce reductions, including severance
and other employee-related costs, and our outsourcing plan may yield
unanticipated consequences, such as an inability to release products within
expected timeframes. For example, many of the employees who were terminated
possessed specific knowledge or expertise that may prove to have been important
to our operation. As a result of these staff reductions, our ability to respond
to unexpected challenges may be impaired and we may be unable to take advantage
of new opportunities. Personnel reductions may also subject us to the risk of
litigation, which may adversely impact our ability to conduct our operations and
may cause us to incur significant expense.

We may be unable to hire and retain the skilled personnel necessary to
develop and grow our business.

Our reductions in force and salary levels may reduce employee morale and may
create concern among existing employees about job security, which could lead to
increased turnover and reduce our ability to meet the needs of our current and
future customers. As a result of the reductions in force, we may also need to
increase our staff to support new customers and the expanding needs of our
existing customers. Because our stock price declined drastically in recent
years, and has not experienced any sustained recovery from the decline, stock-
based compensation, including options to purchase our common stock, may have
diminished effectiveness as employee hiring and retention devices. If we are
unable to retain qualified personnel, we could face disruptions to operations,
loss of key information, expertise or know-how and unanticipated additional
recruitment and training costs. If employee turnover increases, our ability to
provide client service and execute our strategy would be negatively
affected.

For example, our ability to increase revenues in the future depends
considerably upon our success in recruiting, training and retaining effective
direct sales personnel and the success of our direct sales force. We might not
be successful in these efforts. Our products and services require sophisticated
sales efforts. We have experienced significant turnover in our sales force,
including the departure of our Vice President of Sales in October 2003.
Furthermore, there is a shortage of sales personnel with the requisite
qualifications, and competition for such qualified personnel is intense in our
industry. Also, it may take a new salesperson a number of months to become a
productive member of our sales force. Our business will be harmed if we fail to
hire or retain qualified sales personnel, or if newly hired salespeople fail to
develop the necessary sales skills or develop these skills more slowly than
anticipated.
We face substantial competition and may not be able to compete
effectively.

The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. From time to time, some of our
competitors have reduced the prices of their products and services
(substantially in certain cases) in order to obtain new customers. Competitive
pressures could make it difficult for us to acquire and retain customers and
could require us to reduce the price of our products.

Our customers' requirements and the technology available to satisfy those
requirements are continually changing. Therefore, we must be able to respond to
these changes in order to remain competitive. If our international development
partners do not adequately perform the software programming, quality assurance
and technical documentation activities we outsourced, we may not be able to
respond to such changes as quickly or effectively. Changes in our products may
also make it more difficult for our sales force to sell effectively. In
addition, changes in customers' demand for the specific products, product
features and services of other companies' may result in our products becoming
uncompetitive. We expect the intensity of competition to increase in the future.
Increased competition may result in price reductions, reduced gross margins and
loss of market share. We may not be able to compete successfully against current
and future competitors, and competitive pressures may seriously harm our
business.

Our competitors vary in size and in the scope and breadth of products and
services offered. We currently face competition for our products from systems
designed by in-house and third-party development efforts. We expect that these
systems will continue to be a major source of competition for the foreseeable
future. Our primary competitors for eCRM platforms are larger, more established
companies such as Siebel Systems, Inc. and PeopleSoft, Inc., and to a lesser
extent, Oracle and SAP. We also face competition from E.piphany, Inc., Chordiant
Software, Inc., Primus Knowledge Solutions, and Astute, Inc. with respect to
specific applications we offer. We may face increased competition upon
introduction of new products or upgrades from competitors, or if we expand our
product line through acquisition of complementary businesses or otherwise. As we
have combined and enhanced our product lines to offer a more comprehensive e-
business software solution, we are increasingly competing with large,
established providers of customer management and communication solutions as well
as other competitors. Our combined product line may not be sufficient to
successfully compete with the product offerings available from these companies,
which could slow our growth and harm our business.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. We may lose potential customers to competitors for various reasons,
including the ability or willingness of competitors to offer lower prices and
other incentives that we cannot match. It is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. We also expect that competition will increase as a result of recent
industry consolidations, as well as anticipated future consolidations.
If we fail to respond to changing customer preferences in our market, demand
for our products and our ability to enhance our revenues will suffer.

If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we might be unable to attract new customers. The development of
proprietary technology and necessary service enhancements entails significant
technical and business risks and requires substantial expenditures and lead-
time. In addition, if our international development partners fail to provide the
development support we need, our products and product documentation could fall
behind those produced by our competitors, causing us to lose customers and
sales. We might not be successful in marketing and supporting recently released
versions of our products, or developing and marketing other product enhancements
and new products that respond to technological advances and market changes, on a
timely or cost-effective basis. In addition, even if these products are
developed and released, they might not achieve market acceptance. We have
experienced delays in releasing new products and product enhancements in the
past and could experience similar delays in the future. These delays or problems
in the installation or implementation of our new releases could cause us to lose
customers.
Failure to develop new products or enhancements to existing products on a
timely basis would hurt our sales and damage our reputation.

To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-business
customer interactions needs. Our ability to deliver competitive products may be
negatively affected by the diversion of resources to development of our suite of
products, and responding to changes in competitive products and in the demands
of our customers. If we experience product delays in the future, we may
face:

customer dissatisfaction;
cancellation of orders and license agreements;
negative publicity;
loss of revenues;
slower market acceptance; and
legal action by customers.Furthermore, delays in bringing new products or enhancements to market can
result, for example, from potential difficulties with managing outsourced
research and development, including overseeing such activities occurring in
India and China or from loss of institutional knowledge through reductions in
force, or the existence of defects in new products or their enhancements. The
challenges of developing new products and enhancements require us to commit a
substantial investment of resources, and we might not be able to develop or
introduce new products on a timely or cost-effective basis, or at all, which
could be exploited by our competitors and lead potential customers to choose
alternative products.
Our stock price has been highly volatile and has experienced a significant
decline, and may continue to be volatile and decline.

The trading price of our common stock has fluctuated widely in the past and
is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control, such as:

variations in our actual and anticipated operating results;
changes in our earnings estimates by analysts;
the volatility inherent in stock prices within the emerging sector within
which we conduct business;
and the volume of trading in our common stock, including sales of
substantial amounts of common stock issued upon the exercise of outstanding
options and warrants.In addition, the stock market, particularly the Nasdaq National Market, has
experienced extreme price and volume fluctuations that have affected the market
prices of many technology and computer software companies, particularly
Internet-related companies. Such fluctuations have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our common stock.
In the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. Securities class action litigation could result in
substantial costs and a diversion of our management's attention and
resources.

Since becoming a publicly-traded security listed on Nasdaq in September 1999,
our common stock has reached a closing high of $1,698.10 per share and closing
low of $0.65 per share. The last reported sale price of our shares on November
11, 2003 was $3.22 per share. Under Nasdaq's listing maintenance standards, if
the closing bid price of our common stock is under $1.00 per share for 30
consecutive trading days, Nasdaq may choose to notify us that it may delist our
common stock from the Nasdaq National Market. If the closing bid price of our
common stock did not thereafter regain compliance for a minimum of 10
consecutive trading days during the 180 days following notification by Nasdaq,
Nasdaq could delist our common stock from trading on the Nasdaq National Market.
There can be no assurance that our common stock will remain eligible for trading
on the Nasdaq National Market. If our stock were delisted, the ability of our
stockholders to sell any of our common stock at all would be severely, if not
completely, limited, causing our stock price to continue to decline.

On November 5, 2003, we announced the underwritten public offering of
4,080,000 shares of its common stock at a price to the public of $3.00 per
share. Prior to this announcement, we
received e-mails from one of our largest stockholders indicating that the
stockholder intended to sell its holdings if we proceeded with our offering of
common stock at a price per share below $3.50. It is unclear what action, if
any, this stockholder may take in response to our completion of this offering.
If the stockholder sells a substantial number of shares, the market price of our
common stock could fall. In addition, it is possible that the disclosed
intention of this stockholder could have an adverse impact on the market price
for our common stock.
Our business depends on the acceptance of our products and services, and it
is uncertain whether the market will accept our products and services.

Our ability to achieve increased revenue depends on overall demand for
Internet-based enterprise management software and related services, and in
particular for customer-relationship applications. Our expectations regarding
the size and growth of the market for these applications are based on
assumptions that both companies and their customers will increasingly elect to
communicate via the Internet and, consequently, that companies using the
Internet for such communication will demand real-time sales and customer service
technology and related services.  If our assumptions regarding the demand for
Internet-based enterprise management applications prove incorrect, our product
sales, and our overall revenues, will not grow as we anticipate.

The demand for of our products also depends in part on the widespread
adoption and use of these products by customer support personnel. Some of our
customers who have made initial purchases of this software have deferred or
suspended implementation of these products due to slower than expected rates of
internal adoption by customer support personnel. If more customers decide to
defer or suspend implementation of these products in the future, our ability to
increase our revenue from these customers through additional licenses or
maintenance agreements will also be impaired, and our financial position could
be seriously harmed.
We depend on increased business from new customers, and if we fail to grow
our customer base or generate repeat business, our operating results could be
harmed.

Our business model generally depends on the sale of our products to new
customers as well as on expanded use of our products within our customers'
organizations. If we fail to grow our customer base or generate repeat and
expanded business from our current and future customers, our business and
operating results will be seriously harmed. In some cases, our customers
initially make a limited purchase of our products and services for pilot
programs. These customers may not purchase additional licenses to expand their
use of our products. If these customers do not successfully develop and deploy
initial applications based on our products, they may choose not to purchase
deployment licenses or additional development licenses. In addition, as we
introduce new versions of our products or new product lines, our current
customers might not require the functionality of our new products and might not
ultimately license these products.

Furthermore, because the total amount of maintenance and support fees we
receive in any period depends in large part on the size and number of licenses
that we have previously sold, any downturn in our software license revenue would
negatively affect our future services revenue. Also, if customers elect not to
renew their maintenance agreements, our services revenue could decline
significantly. Some of our customers are Internet-based companies, which have
been forced to significantly reduce their operations in light of limited access
to sources of financing and the current economic slowdown. If customers were
unable to pay for their current products or are unwilling to purchase additional
products, our revenues would decline.
Our failure to manage multiple technologies and technological change could
reduce demand for our products.

Rapidly changing technology and operating systems, changes in customer
requirements, and evolving industry standards might impede market acceptance of
our products. Our products are designed based upon currently prevailing
technology to work on a variety of hardware and software platforms used by our
customers. However, our software may not operate correctly on evolving versions
of hardware and software platforms, programming languages, database environments
and other systems that our customers use. If new technologies emerge that are
incompatible with our products, or if competing products emerge that are based
on new technologies or new industry standards and that perform better or cost
less than our products, our key products could become obsolete and our existing
and potential customers could seek alternatives to our products. We must
constantly modify and improve our products to keep pace with changes made to
these platforms and to database systems and other back-office applications and
Internet-related applications. For example, our analytics products were designed
to work with databases such as Oracle and Microsoft SQL Server. Any changes to
those databases, or increasing popularity of other databases, could require us
to modify our analytics products, and could cause us to delay releasing future
products and enhancements. Furthermore, software adapters are necessary to
integrate our analytics products with other systems and data sources used by our
customers. We must develop and update these adapters to reflect changes to these
systems and data sources in order to maintain the functionality provided by our
products. As a result, uncertainties related to the timing and nature of new
product announcements, introductions or modifications by vendors of operating
systems, databases, customer relationship management software, web servers and
other enterprise and Internet-based applications could delay our product
development, increase our product development expense or cause customers to
delay evaluation, purchase and deployment of our analytics products.
Furthermore, if our international development partners fail to respond
adequately when adaptation of our products is required, our ability to respond
would be hampered even if such uncertainties were eliminated. If we fail to
modify or improve our products in response to evolving industry standards, our
products could rapidly become obsolete.
Failure to license necessary third party software incorporated in our
products could cause delays or reductions in our sales.

We license third party software that we incorporate into our products. These
licenses may not continue to be available on commercially reasonable terms or at
all. Some of this technology would be difficult to replace. The loss of any such
license could result in delays or reductions of our applications until we
identify, license and integrate or develop equivalent software. If we are
required to enter into license agreements with third parties for replacement
technology, we could face higher royalty payments and our products may lose
certain attributes or features. In the future, we might need to license other
software to enhance our products and meet evolving customer needs. If we are
unable to do this, we could experience reduced demand for our products.
Our pending patents may never be issued and, even if issued, may provide
little protection.

Our success and ability to compete depend to a significant degree upon the
protection of our software and other proprietary technology rights. We regard
the protection of patentable inventions as important to our future
opportunities. We currently have three issued U.S. patents and multiple U.S.
patent applications pending relating to our software. None of our technology is
patented outside of the United States. It is possible that:

our pending patent applications may not result in the issuance of patents;
any issued patents may not be broad enough to protect our proprietary
rights;
any issued patents could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others from
exploiting the inventions claimed in those patents;
current and future competitors may independently develop similar technology,
duplicate our products or design around any of our patents; and
effective patent protection may not be available in every country in which
we do business.We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property.

We also rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. However, despite
the precautions that we have taken:

laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies;
current federal laws that prohibit software copying provide only limited
protection from software "pirates," and effective trademark, copyright and trade
secret protection may be unavailable or limited in foreign countries;
other companies may claim common law trademark rights based upon state or
foreign laws that precede the federal registration of our marks; and
policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the extent of
this unauthorized use.Also, the laws of other countries in which we market our products may offer
little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which would significantly harm our business.
We may become involved in litigation over proprietary rights, which could be
costly and time consuming.

Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject to
third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Some of our
competitors in the market for customer communications software may have filed or
may intend to file patent applications covering aspects of their technology that
they may claim our technology infringes. Such competitors could make a claim of
infringement against us with respect to our products and technology. Third
parties may currently have, or may eventually be issued, patents upon which our
current or future products or technology infringe. Any of these third parties
might make a claim of infringement against us. For example, from time to time,
we have been contacted by  companies that have asked us to evaluate the need for
a license of certain patents. Although to date no company has filed any patent
infringement claims against us, we cannot assure you that no such claims will be
filed. Other companies may also have pending patent applications (which are
typically confidential until the patent or patents, if any, are issued) that
cover technologies we incorporate in our products.

Many of our software license agreements require us to indemnify our customers
from any claim or finding of intellectual property infringement. We periodically
receive notices from customers regarding patent license inquiries they have
received which may or may not implicate our indemnity obligations. Any
litigation, brought by others, or us could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement might
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements, which might not be
available on acceptable terms, or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or
license the infringed or similar technology on a timely and cost-effective
basis, our business could be significantly harmed.
We may face higher costs and lost sales if our software contains errors.

We face the possibility of higher costs as a result of the complexity of our
products and the potential for undetected errors. Due to the mission- critical
nature of many of our products and services, errors are of particular concern.
In the past, we have discovered software errors in some of our products after
their introduction. We have only a few "beta" customers that test new features
and functionality of our software before we make these features and
functionalities generally available to our customers. If we are not able to
detect and correct errors in our products or releases before commencing
commercial shipments, we could face:

loss of or delay in revenues expected from the new product and an immediate
and significant loss of market share;
loss of existing customers that upgrade to the new product and of new
customers;
failure to achieve market acceptance;
diversion of development resources;
injury to our reputation;
increased service and warranty costs;
legal actions by customers; and
increased insurance costs.We may face liability claims that could result in unexpected costs and
damages to our reputation.

Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, some domestic and
international jurisdictions may not enforce these contractual limitations on
liability. We may be subject to claims based on errors in our software or
mistakes in performing our services including claims relating to damages to our
customers' internal systems. A product liability claim could divert the
attention of management and key personnel, could be expensive to defend and
could result in adverse settlements and judgments.
Our international operations expose us to additional risks.

Sales outside North America represented 33% of our total revenues in the nine
months ended September 30, 2003 and 34% of our total revenues in the nine months
ended September 30, 2002. We have established offices in the United Kingdom,
Germany, Japan, the Netherlands, France, Belgium, Hong Kong and South Korea.
Sales outside North America could increase as a percentage of total revenues as
we attempt to expand our international operations. Any expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources, as well as
additional support personnel. For any such expansion, we will also need to,
among other things expand our international sales channel management and support
organizations and develop relationships with international service providers and
additional distributors and system integrators. In addition, if international
operations become a larger part of our business, we could encounter, on average,
greater difficulty with collecting accounts receivable, longer sales cycles and
collection periods, greater seasonal reductions in business activity and
increases in our tax rates. Furthermore, products must be localized, or
customized to meet the needs of local users, before they can be sold in
particular foreign countries. Developing localized versions of our products for
foreign markets is difficult and can take longer than we anticipate. Our
investments in establishing facilities in other countries may not produce
desired levels of revenues.
International laws and regulations may expose us to potential costs and
litigation.

Our international operations increase our exposure to international laws and
regulations. If we cannot comply with foreign laws and regulations, which are
often complex and subject to variation and unexpected changes, we could incur
unexpected costs and potential litigation. For example, the governments of
foreign countries might attempt to regulate our products and services or levy
sales or other taxes relating to our activities. In addition, foreign countries
may impose tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers, any of which could make it more difficult for us
to conduct our business. The European Union has enacted its own privacy
regulations that may result in limits on the collection and use of certain user
information, which, if applied to the sale of our products and services, could
negatively impact our results of operations.
We may suffer foreign exchange rate losses.

Our international revenues and expenses are denominated in local currency.
Therefore, a weakening of other currencies compared to the U.S. dollar could
make our products less competitive in foreign markets and could negatively
affect our operating results and cash flows. We have not yet experienced, but
may in the future experience, significant foreign currency transaction losses,
especially because we do not engage in currency hedging. As the international
component of our revenues grows, our results of operations will become more
sensitive to foreign exchange rate fluctuations.
If we acquire companies, products or technologies, we may face risks
associated with those acquisitions.

If we are presented with appropriate opportunities, we may make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
acquire another company, we will likely face risks, uncertainties and
disruptions associated with the integration process, including, among other
things, difficulties in the integration of the operations, technologies and
services of the acquired company, the diversion of our management's attention
from other business concerns and the potential loss of key employees of the
acquired businesses. If we fail to successfully integrate other companies that
we may acquire, our business could be harmed. Furthermore, we may have to incur
debt or issue equity securities to pay for any additional future acquisitions or
investments, the issuance of which could be dilutive to our existing
stockholders or us. In addition, our operating results may suffer because of
acquisition-related costs or amortization expenses or charges relating to
acquired goodwill and other intangible assets.
The role of acquisitions in our future growth may be limited, which could
seriously harm our continued operations.

In the past, acquisitions have been an important part of the growth strategy
for us. To gain access to key technologies, new products and broader customer
bases, we have acquired companies in exchange for shares of our common stock.
Because the recent trading prices of our common stock have been significantly
lower than in the past, the role of acquisitions in our growth may be
substantially limited. If we are unable to acquire companies in exchange for our
common stock, we may not have access to new customers, needed technological
advances or new products and enhancements to existing products. This would
substantially impair our ability to respond to market opportunities.
We have adopted anti-takeover defenses that could delay or prevent an
acquisition of the company.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Without any further vote or action on the part of the
stockholders, the board of directors has the authority to determine the price,
rights, preferences, privileges and restrictions of the preferred stock. This
preferred stock, if issued, might have preference over and harm the rights of
the holders of common stock. Although the issuance of this preferred stock will
provide us with flexibility in connection with possible acquisitions and other
corporate purposes, this issuance may make it more difficult for a third party
to acquire a majority of our outstanding voting stock. We currently have no
plans to issue preferred stock.

Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase us. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are removable by the affirmative vote of
at least 66 2/3% of all classes of voting stock. These factors may further delay
or prevent a change of control of us.

Risks Related to Our Industry

If the Internet and Web-based communications fail to grow and be accepted as
media of communication, demand for our products and services will decline.

We sell our products and services primarily to organizations that receive
large volumes of e-mail and Web-based communications. Consequently, our future
revenues and profits, if any, substantially depend upon the continued acceptance
and use of the Internet and e-mail, which are evolving as media of
communication. Rapid growth in the use of the Internet and e-mail is a recent
phenomenon and may not continue. As a result, a broad base of enterprises that
use e-mail as a primary means of communication may not develop or be maintained.
In addition, the market may not accept recently introduced products and services
that process e-mail, including our products and services. Moreover, companies
that have already invested significant resources in other methods of
communications with customers, such as call centers, may be reluctant to adopt a
new strategy that may limit or compete with their existing investments.

Consumers and businesses might reject the Internet as a viable commercial
medium, or be slow to adopt it, for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
concerns about the security of transactions and confidential information and
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased governmental regulation, could cause the Internet to lose
its viability as a commercial medium. If these or any other factors cause use of
the Internet for business to decline or develop more slowly than expected,
demand for our products and services will be reduced. Even if the required
infrastructure, standards, protocols or complementary products, services or
facilities are developed, we might incur substantial expenses adapting our
products to changing or emerging technologies.
Future regulation of the Internet may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing business.

State, federal and foreign regulators could adopt laws and regulations that
impose additional burdens on companies that conduct business online. These laws
and regulations could discourage communication by e-mail or other web-based
communications, particularly targeted e-mail of the type facilitated by our
products, which could reduce demand for our products and services.

The growth and development of the market for online services may prompt calls
for more stringent consumer protection laws or laws that may inhibit the use of
Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or otherwise
harm our business. Any new legislation or regulations, application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or application of existing laws and regulations to the Internet and
other online services could increase our costs and harm our growth.

The imposition of sales and other taxes on products sold by our customers
over the Internet could have a negative effect on online commerce and the demand
for our products and services.

The imposition of new sales or other taxes could limit the growth of Internet
commerce generally and, as a result, the demand for our products and services.
Federal legislation limited the imposition of state and local taxes on Internet-
related sales until November 1, 2003. Congress is currently considering whether
to approve a permanent extension of the limits. However, they may choose not to
pass the new legislation, in which case state and local governments would be
free to impose taxes on electronically purchased goods. We believe that most
companies that sell products over the Internet do not currently collect sales or
other taxes on shipments of their products into states or foreign countries
where they are not physically present. However, one or more states or foreign
countries may seek to impose sales or other tax collection obligations on out-
of-jurisdiction companies that engage in e-commerce within their jurisdiction. A
successful assertion by one or more states or foreign countries that companies
that engage in e-commerce within their jurisdiction should collect sales or
other taxes on the sale of their products over the Internet, even though not
physically in the state or country, could indirectly reduce demand for our
products.
Privacy concerns relating to the Internet are increasing, which could result
in legislation that negatively affects our business in reduced sales of our
products.

Businesses using our products capture information regarding their customers
when those customers contact them on-line with customer service inquiries.
Privacy concerns could cause visitors to resist providing the personal data
necessary to allow our customers to use our software products most effectively.
More importantly, even the perception of privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of our products. In addition,
legislative or regulatory requirements may heighten these concerns if businesses
must notify Web site users that the data captured after visiting certain Web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. If consumer privacy concerns are not adequately
resolved, our business could be harmed. Government regulation that limits our
customers' use of this information could reduce the demand for our products. A
number of jurisdictions have adopted, or are considering adopting, laws that
restrict the use of customer information from Internet applications. The
European Union has required that its member states adopt legislation that
imposes restrictions on the collection and use of personal data, and that limits
the transfer of personally-identifiable data to countries that do not impose
equivalent restrictions. In the United States, the Childrens' Online Privacy
Protection Act was enacted in October 1998. This legislation directs the Federal
Trade Commission to regulate the collection of data from children on commercial
websites. In addition, the Federal Trade Commission has investigated the privacy
practices of businesses that collect information on the Internet. These and
other privacy-related initiatives could reduce demand for some of the Internet
applications with which our products operate, and could restrict the use of
these products in some e-commerce applications. This could, in turn, reduce
demand for these products.
Our security could be breached, which could damage our reputation and deter
customers from using our services.
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Computer break-ins could jeopardize the security of information stored in
and transmitted through our computer systems and network, which could adversely
affect our ability to retain or attract customers, damage our reputation and
subject us to litigation. We have been in the past, and could be in the future,
subject to denial of service, vandalism and other attacks on our systems by
Internet hackers. Although we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage and
failures, these security measures may fail. Our insurance coverage in certain
circumstances may be insufficient to cover losses that may result from such
events.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We develop products in the United States and sell these products in North
America, Europe, Asia, Australia and Latin America. In the nine months ended
September 30, 2003, revenues from customers outside of the United States
approximated 33% of total revenues. Generally, our sales are made in local
currency. As a result, our financial results and cash flows could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. We do not currently use derivative instruments to
hedge against foreign exchange risk.
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. The primary objective of our investment activities
is to preserve principal while at the same time maximizing yields without
significantly increasing risk. We do not consider our cash equivalents to be
subject to interest rate risk due to their short maturities.
We are exposed to market risk from fluctuations in foreign currency exchange
rates, principally from the exchange rate between the US dollar and the Euro and
British pound. We manage exposure to variability in foreign currency exchange
rates primarily through the use of natural hedges, as both liabilities and
assets are denominated in the local currency. However, different durations in
our funding obligations and assets may expose us to the risk of foreign exchange
rate fluctuations. We have not entered into any derivative instrument
transactions to manage this risk. Based on our overall foreign currency rate
exposure at September 30, 2003, we do not believe that a hypothetical 10% change
in foreign currency rates would materially adversely affect our financial
position.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures.  Regulations
under the Securities Exchange Act of 1934 require public companies, including
our company, to maintain "disclosure controls and procedures," which
are defined to mean a company's controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Our Chief Executive Officer and our Chief Financial Officer,
based on their evaluation of our disclosure controls and procedures as of the
end of the period covered by this report, concluded that our disclosure controls
and procedures were effective for this purpose.
Changes in Internal Control Over Financial Reporting.  Regulations
under the Securities Exchange Act of 1934 require public companies, including
our company, to evaluate any change in our "internal control over financial
reporting," which is defined as a process to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles in the United States.  In connection with their evaluation
of our disclosure controls and procedures as of the end of the period covered by
this report, our Chief Executive Officer and Chief Financial Officer did not
identify any change in our internal control over financial reporting during the
three-month period ended September 30, 2003 that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

Part II: Other Information
Item 1. Legal Proceedings.
In April 2001, Office Depot, Inc. filed a complaint against KANA in the
Circuit Court for the 15th District of the State of Florida claiming that KANA
breached its license agreement with Office Depot. Office Depot is seeking relief
in the form of a refund of license fees and maintenance fees paid to KANA,
attorneys' fees and costs. We believe we have meritorious defenses to these
claims and intend to defend the action vigorously.
The underwriters for our initial public offering, Goldman Sachs & Co.,
Lehman Bros, Hambrecht & Quist LLC, Wit Soundview Capital Corp as well as
KANA and certain current and former officers of KANA were named as defendants in
federal securities class action lawsuits filed in the United States District
Court for the Southern District of New York. The cases allege violations of
various securities laws by more than 300 issuers of stock, including KANA, and
the underwriters for such issuers, on behalf of a class of plaintiffs who, in
the case of KANA, purchased KANA's stock between September 21, 1999 and December
6, 2000 in connection with our initial public offering. Specifically, the
complaints allege that the underwriter defendants engaged in a scheme concerning
sales of KANA's and other issuers' securities in the initial public offering and
in the aftermarket. In July 2003, we decided to join in a settlement negotiated
by representatives of a coalition of issuers named as defendants in this action
and their insurers. Although we believe that the plaintiffs' claims have no
merit, we have decided to accept the settlement proposal to avoid the cost and
distraction of continued litigation. Because the settlement will be funded
entirely by KANA's insurers, we do not believe that the settlement will have any
effect on our financial condition, results of operation or cash flows. The
proposed settlement agreement is subject to final approval by the court. Should
the court fail to approve the settlement agreement, we believe we have
meritorious defenses to these claims and would defend the action vigorously.
On April 16, 2002, Davox Corporation (now Concerto Software) filed an action
against KANA in the Superior Court, Middlesex, Commonwealth of Massachusetts,
asserting breach of contract, breach of implied covenant of good faith and fair
dealing, unjust enrichment, misrepresentation, and unfair trade practices, in
relation to an OEM Agreement between KANA and Davox under which Davox has paid a
total of approximately $1.6 million in fees. Davox seeks actual and punitive
damages in an amount to be determined at trial, and award of attorneys' fees.
This action is in its early stages and has been re-filed in the Circuit Court of
Cook County, Illinois. We believe we have meritorious defenses to these claims
and intend to defend the action vigorously.
Other third parties have from time to time claimed, and others may claim in
the future that we have infringed their past, current or future intellectual
property rights. We have in the past been forced to litigate such claims. These
claims, whether meritorious or not, could be time-consuming, result in costly
litigation, require expensive changes in our methods of doing business or could
require us to enter into costly royalty or licensing agreements, if available.
As a result, these claims could harm our business.
The ultimate outcome of any litigation is uncertain, and either unfavorable
or favorable outcomes could have a material negative impact on our results of
operations, consolidated balance sheet and cash flows, due to defense costs,
diversion of management resources and other factors.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-
K.

| | (a) | Exhibits:
| | --- | ---------

|              |                                                                                                                                                  | Incorporated by
Reference |         
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | --------
|ExhibitNumber | Exhibit Description                                                                                                                              | Form                      | File No.
|              |                                                                                                                                                  |                           |         
|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          | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.* |                           |         
|32.2          | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.* |                           |         
|10.1          | Change of Control and Retention Agreement with Chuck Bay dated
as of August 27, 2003                                                             |                           |         
|10.2          | Change of Control and Retention Agreement with Tom Doyle dated
as of August 27, 2003                                                             |                           |         

* These certifications accompany KANA's quarterly report on Form 10-Q; they
are not deemed "filed" with the Securities and Exchange Commission and
are not to be incorporated by reference in any filing of KANA under the
Securities Act of 1933, or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.



| | (b) | Reports on Form 8-K:
| | --- | --------------------

On July 23, 2003, we filed a Current Report on Form 8-K reporting our
issuance of a press release announcing our preliminary financial results for the
three and six months ended June 30, 2003 and certain other items, and furnishing
such press release as an exhibit to such Current Report.





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.



|November 12, 2003 | KANA Software, Inc.                                                                                      
|----------------- | ---------------------------------------------------------------------------------------------------------
|                  |                                                                                                          
|                  | /s/ Chuck Bay
Chuck Bay
Chairman of the Board and Chief Executive Officer, 
(Principal Executive Officer)
|                  |                                                                                                          
|                  | /s/ John Huyett
John Huyett
Chief Financial Officer
(Principal Financial and Accounting Officer)