---

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UNITED
STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
D.C. 20549

FORM 10-Q

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

For
the quarterly period ended March 31, 2004

Commission
File Number 000-26881

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

|                         | 
|------------------------ | 
|Delaware                 | 
|                         | 
|(State of incorporation) | 

475
Concar DriveSan Mateo,
California 94402(Address of principal executive offices)

(650)
356-3800(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    YES  xNO o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).    YES  xNO o

The
number of shares outstanding of the registrants common stock, par value
$0.0001 per share, as of April 30, 2004, was 75,966,441.

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E.PIPHANY,
INC.QUARTERLY
REPORT ON FORM 10-QQUARTER ENDED MARCH 31, 2004

TABLE
OF CONTENTS

|        |  | Page No.             
|------- |  | ---------------------
|PART I  |  | FINANCIAL INFORMATION
|Item 1. |  | Financial Statements 

|        |  | Condensed Consolidated Balance Sheets -      As of March 31, 2004 and December 31, 2003           |  | 3  | 
|------- |  | ------------------------------------------------------------------------------------------------- |  | -- | 
|        |  | Condensed Consolidated Statements of Operations -      Three months ended March 31, 2004 and 2003 |  | 4  | 
|        |  | Condensed Consolidated Statements of Cash Flows -      Three months ended March 31, 2004 and 2003 |  | 5  | 
|        |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6  | 
|Item 2. |  | Managements Discussion and Analysis ofFinancial Condition and Results of Operations              |  | 15 | 
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  | 33 | 
|Item 4. |  | Controls and Procedures                                                                           |  | 34 | 

|        |  |                                 
|------- |  | --------------------------------
|PART II |  | OTHER INFORMATION               
|Item 1. |  | Legal Proceedings               
|Item 6. |  | Exhibits and Reports on Form 8-K

|              |  | 
|------------- |  | 
|SIGNATURES    |  | 
|Exhibit Index |  | 

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PART I:   
FINANCIAL INFORMATION

ITEM 1.    FINANCIAL
STATEMENTS

E.PIPHANY,
INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS(in thousands)

|                                                  | March 31,2004 |                | December 31,2003
|------------------------------------------------- | ------------- | -------------- | ----------------
|
|ASSETS                                            |               |                |                 
|Current assets:                                   |               |                |                 
|Cash, cash equivalents and short-term investments |               | $      33,277  |                 
|Short-term investments                            |               | 145,429        |                 
|Accounts receivable, net                          |               | 7,828          |                 
|Prepaid expenses and other assets                 |               | 5,443          |                 
|Short-term restricted cash and investments        |               | 1,920          |                 
|                                                  |               |                |                 
|Total current assets                              |               | 193,897        |                 
|Long-term investments                             |               | 81,827         |                 
|Long-term restricted cash and investments         |               | 6,081          |                 
|Property and equipment, net                       |               | 5,746          |                 
|Goodwill, net                                     |               | 81,499         |                 
|Purchased intangibles, net                        |               |               |                 
|Other assets                                      |               | 670            |                 
|                                                  |               |                |                 
|Total assets                                      |               | $    369,720   |                 
|                                                  |               |                |                 
|LIABILITIES AND STOCKHOLDERS' EQUITY              |              
|Current liabilities:                              |               |                |                 
|Accounts payable                                  |               | $        1,176 |                 
|Accrued compensation                              |               | 6,906          |                 
|Accrued other                                     |               | 6,433          |                 
|Current portion of restructuring costs            |               | 7,221          |                 
|Deferred revenue                                  |               | 17,940         |                 
|                                                  |               |                |                 
|Total current liabilities                         |               | 39,676         |                 
|Restructuring costs, net of current portion       |               | 19,211         |                 
|Other long-term liabilities                       |               | 193            |                 
|                                                  |               |                |                 
|Total liabilities                                 |               | 59,080         |                 
|                                                  |               |                |                 
|Stockholders' equity:                             |               |                |                 
|Common stock                                      |               | 7              |                 
|Additional paid-in capital                        |               | 3,825,183      |                 
|Accumulated other comprehensive loss              |               | (632           | )               
|Accumulated deficit                               |               | (3,513,918     | )               
|                                                  |               |                |                 
|Total stockholders' equity                        |               | 310,640        |                 
|                                                  |               |                |                 
|Total liabilities and stockholders' equity        |               | $    369,720   |                 
|                                                  |               |                |                 

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

3

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E.PIPHANY,
INC.

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

|                                                   | Three Months EndedMarch 31,
|-------------------------------------------------- | ---------------------------
|
|Revenues:                                          |                            
|Product license                                    |                            
|Services                                           |                            
|Maintenance                                        |                            
|                                                   |                            
|                                                   |                            
|                                                   |                            
|Cost of revenues:                                  |                            
|Product license                                    |                            
|Services                                           |                            
|Maintenance                                        |                            
|Amortization of purchased technology               |                            
|                                                   |                            
|                                                   |                            
|                                                   |                            
|Gross profit                                       |                            
|                                                   |                            
|Operating expenses:                                |                            
|Research and development                           |                            
|Sales and marketing                                |                            
|General and administrative                         |                            
|Restructuring charges                              |                            
|Amortization of purchased intangibles              |                            
|Stock-based compensation                           |                            
|                                                   |                            
|Total operating expenses                           |                            
|                                                   |                            
|Loss from operations                               |                            
|                                                   |                            
|Other income, net                                  |                            
|                                                   |                            
|Net loss before provision for taxes                |                            
|                                                   |                            
|Provision for taxes                                |                            
|                                                   |                            
|Net Loss                                           |                            
|                                                   |                            
|Basic and diluted net loss per share               |                            
|                                                   |                            
|Shares  used in  computing  basic and  diluted net |                            
|loss per share                                     |                            
|                                                   |                            

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

4

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E.PIPHANY,
INC.

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

|                                                                            | Three Months EndedMarch 31,
|--------------------------------------------------------------------------- | ---------------------------
|
|Cash flows from operating activities:                                       |                            
|Net loss                                                                    |                            
|Adjustments to reconcile net loss to net cash used in operating activities: |                            
|Depreciation and amortization                                               |                            
|Stock-based compensation                                                    |                            
|Amortization of purchased technology and purchased intangibles              |                            
|Accounts receivable                                                         |                            
|Prepaid expenses and other assets                                           |                            
|Accounts payable                                                            |                            
|Accrued liabilities and compensation                                        |                            
|Restructuring costs                                                         |                            
|Deferred revenue                                                            |                            
|                                                                            |                            
|Net cash used in operating activities                                       |                            
|                                                                            |                            
|Cash flows from investing activities:                                       |                            
|Purchases of property and equipment                                         |                            
|Loss on disposal of fixed assets                                            |                            
|Restricted cash and investments                                             |                            
|Proceeds from maturities of investments                                     |                            
|Purchases of investments                                                    |                            
|                                                                            |                            
|Net cash provided by (used in) investing activities                         |                            
|                                                                            |                            
|Cash flows from financing activities:                                       |                            
|Principal payments on capital lease obligations                             |                            
|Repayments on notes receivable                                              |                            
|Proceeds from sale of common stock, net of repurchases                      |                            
|                                                                            |                            
|Net cash provided by financing activities                                   |                            
|                                                                            |                            
|Effect of foreign exchange translation                                      |                            
|                                                                            |                            
|Net increase (decrease) in cash and cash equivalents                        |                            
|Cash and cash equivalents at beginning of period                            |                            
|                                                                            |                            
|Cash and cash equivalents at end of period                                  |                            
|                                                                            |                            

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

5

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E.PIPHANY,
INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)

1.  Basis of
Presentation

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

The
unaudited condensed consolidated financial statements included herein reflect
all adjustments (which include normal recurring adjustments and restructuring
charges in each of the periods presented) which are, in the opinion of
management, necessary to state fairly the financial position of E.piphany as of
March 31, 2004, the results of its operations for the three months ended March
31, 2004 and 2003, and its cash flows for the three months ended March 31, 2004
and 2003. The results for the three months ended March 31, 2004 are not
necessarily indicative of the results expected for the full fiscal year.

Certain
amounts from prior years have been reclassified to conform to current year
presentation.

2.  Summary
of Significant Accounting Policies

Principles
of Consolidation

The
condensed consolidated financial statements include the accounts of E.piphany
and its subsidiaries. As of March 31, 2004, the Company owns 100% of the
outstanding stock of all its subsidiaries. Intercompany accounts and
transactions have been eliminated.

Use of
Estimates in Preparation of Financial Statements

The
condensed consolidated financial statements have been prepared in accordance
with US GAAP. The preparation of these financial statements requires us to
make estimates and assumptions that affect reported assets and liabilities,
disclosure of contingent assets and liabilities as of the date of the financial
statements, and reported expenses during the reporting period. Actual results in
these particular areas could differ from those estimates.

Reclassification

Certain
amounts from prior years have been reclassified to conform to the current year
presentation.

Foreign
Currency Translation

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

6

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

Cash
equivalents consist of highly liquid investments that are readily convertible
into cash. Short-term investments consist of highly liquid securities that the
Company intends to hold for less than one year. Long-term investments consist of
securities that the Company intends to hold for more than one year with maturity
dates of less than two years from the date of purchase. The Company has
classified its short-term and long-term investments as available-for-sale.
Short-term and long-term investments are carried at fair value with unrealized
gains and losses reported, net of tax, as other comprehensive loss in
stockholders equity. Realized gains and losses and declines in value which
are determined to be other than temporary on available-for-sale securities are
included in other income, net and are derived using the specific identification
method for determining the cost of securities and were not significant for the
three month periods ending March 31, 2004 and 2003.

From
time to time, we are required to obtain letters of credit that serve as
collateral for our obligations to third parties under facility lease agreements.
These letters of credit are secured by cash and investments. As of March 31,
2004, we had $8.0 million securing letters of credit, which are classified as
restricted cash and investments in the accompanying Condensed Consolidated
Balance Sheets. The classification of restricted cash and investments as
short-term or long-term is determined based on the termination date of the
underlying lease agreement irrespective of the expiration date of the letter of
credit, as the Company is contractually required to maintain letters of credit
during the lease term.

Accounts
Receivable and Deferred Revenue

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

Allowances
for Doubtful Accounts

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

Fair
Value of Financial Instruments

The
carrying value of the Companys financial instruments, including cash and
cash equivalents, investments, and accounts receivable approximates fair market
value. Financial instruments that subject the Company to concentrations of
credit risk consist primarily of investments in debt securities and trade
accounts receivable. Management believes the financial risks associated with
these financial instruments are not significant. The Company invests its cash
and investments in government agencies, U.S. treasuries, money market
instruments, auction rate securities, taxable municipal bonds and corporate debt
rated A1/P1 or higher.

Concentration
of Credit Risk and Significant Customers

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

7

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Impairment
of Long-Lived Assets and Definite Lived Intangible Assets

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

The
Company adopted Statement of Financial Accounting Standard No. 141
Business Combinations (SFAS 141) and No. 142
Goodwill and Other Intangible Assets (SFAS 142) as of
January 1, 2002. As a result, acquired goodwill and other intangible assets with
indefinite useful lives are no longer amortized, but are subject to impairment
tests on an annual basis, and on an interim basis in certain circumstances. The
Company completed annual impairment tests during the fourth quarter of 2003 and
2002, which did not result in an impairment charge.

Revenue
Recognition

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

Licenses.  
Fees from licenses are recognized as revenue upon contract execution, provided
all delivery obligations have been met, fees are fixed or determinable and
collection is probable. We consider all arrangements with payment terms
extending beyond six months not to be fixed or determinable, and revenue is
recognized as payments become due from the customer, assuming all other revenue
recognition conditions are met. If collection is not considered probable,
revenue is recognized when the fee is collected. The Company uses the residual
method to recognize revenue from a license arrangement with multiple elements
when vendor specific objective evidence of the fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one of the
delivered elements in the arrangement. Vendor specific objective evidence for
undelivered elements is based on normal pricing for those elements when sold
separately. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue. If vendor specific objective evidence does not exist to
allocate the total fee to all undelivered elements of the arrangement, revenue
is deferred until the earlier of the time at which (1) such evidence does exist
for the undelivered elements, or (2) all elements are delivered. We recognize
license fees from resellers as revenue when the above criteria have been met and
the reseller has sold the subject licenses through to the end-user.

When
licenses are sold together with consulting and implementation services, license
fees are recognized upon delivery, provided that (1) the criteria set forth in
the above paragraph have been met, (2) payment of the license fees is not
dependent upon the performance of the consulting or implementation services, and
(3) the services are not essential to the functionality of the software. For
arrangements that do not meet the above criteria, both the product license
revenues and professional services revenues are recognized under the percentage
of completion contract method in accordance with the provisions of Statement of
Position 81-1, Accounting for Performance of Construction Type and Certain
Production Type Contracts (SOP 81-1). To date, when the
Company has been primarily responsible for the implementation of the software,
services have been considered essential to the functionality of the software
products and therefore license and services revenue have been recognized
pursuant to SOP 81-1. The Company follows the percentage of completion method
since reasonably dependable estimates of progress toward completion of a
contract can be made. We estimate the percentage of completion on contracts
utilizing hours incurred to date as a percentage of the total estimated hours to
complete the project. Recognized revenues and profit are subject to revisions as
the contract progresses to completion. Revisions in profit estimates are charged
to income in the period in which the facts that give rise to the revision become
known.

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

8

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

Professional,
Implementation and Training Services.  E.piphany provides consulting,
implementation and training services to its customers. Revenue from such
services is generally recognized as the services are performed, except when such
services are subject to acceptance provisions, as discussed above, and is
included in services revenue in the accompanying consolidated statements of
operations.

Warranties
and Indemnification

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

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

During
the quarter ended September 30, 2003, the Company sold all of the outstanding
capital stock of its Japanese subsidiary, E.piphany Software, K.K.
(E.piphany Japan), to Braxton Ltd. for approximately $4.2 million in
cash. The stock purchase agreement contained customary representations,
warranties and covenants of the parties, including covenants to indemnify each
other in the event of a breach of warranty or representation. Claims under the
indemnification covenants may be submitted within two years from the date of
closing, for a maximum of $0.7 million, and only to the extent that losses
exceed 10% of the purchase price. The fair value of these indemnification
provisions were not material to the Companys financial position, results
of operations or cash flows for the three months ended March 31, 2004.

The
Company indemnifies its directors and officers in their capacity as such. To
date, the Company has not been required to make any payment resulting from these
indemnification obligations. Additionally, the fair value of these
indemnification provisions was not material to the Companys financial
position, results of operations or cash flows for the three months ended March
31, 2004.

Stock-Based
Compensation

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

9

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

|                                                | Three months endedMarch 31,
|----------------------------------------------- | ---------------------------
|
|Net loss, as reported                           |                            
|Add:  Stock-based employee compensation         |                            
|expense included in reported net loss, net of   |                            
|tax effects                                     |                            
|Deduct: Total stock-based employee compensation |                            
|expense determined under fair value based       |                            
|method for all awards, net of tax effects       |                            
|                                                |                            
|Pro forma net loss                              |                            
|                                                |                            
|Loss per share:                                 |                            
|Basic and dilutedas reported                   |                            
|Basic and dilutedpro forma                     |                            

3.  Related
Party Transactions

Roger
Siboni, Chairman of the Board, is currently a member of the board of directors
of two of the Companys customers. Total revenues to E.piphany from these
customers were less than $0.1 million for the three months ended March 31, 2004
and $0.1 million for the three months ended March 31, 2003. The Company had
accounts receivable balances from these customers totaling less than $0.1
million as of March 31, 2004 and zero as of December 31, 2003.

In
addition, four of the Companys customers have board members that were also
on the Companys board of directors at the time revenues from contracts
with these customers were recognized. Total revenues to the company from these
customers were $0.4 million for the three months ended March 31, 2004 and $0.1
million for the three months ended March 31, 2003. The Company had accounts
receivable balances from these customers totaling $0.1 million and less than
$0.1 million as of March 31, 2004 and December 31, 2003, respectively.

4.  
Computation of Basic and Diluted Net Loss Per Share

Basic and
diluted net loss per common share has been computed using the weighted average
number of shares of common stock outstanding during the period, less shares
subject to repurchase. The following table presents the calculation of basic and
diluted net loss per share (in thousands, except per share amounts):

|                                                    | Three Months EndedMarch 31,
|--------------------------------------------------- | ---------------------------
|
|Net loss                                            |                            
|                                                    |                            
|Basic and diluted:                                  |                            
|Weighted average shares of common stock outstanding |                            
|Less: Weighted average shares subject to repurchase |                            
|                                                    |                            
|                                                    |                            
|                                                    |                            
|                                                    |                            
|Basic and diluted net loss per common share         |                            
|                                                    |                            

10

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

|                                                                          | Three Months EndedMarch 31,
|------------------------------------------------------------------------- | ---------------------------
|
|Options  excluded due to the exercise price  exceeding the                |                            
|average fair market value of the Company's common                         |                            
|stock during the period                                                   |                            
|Options  for  which the  exercise  price was less than the                |                            
|average fair market value of the Company's common stock during the period |                            
|that were excluded as inclusion would decrease the Company's net loss per |                            
|share                                                                     |                            
|Common shares excluded resulting from common stock                        |                            
|subject to repurchase                                                     |                            
|                                                                          |                            
|Total common stock  equivalents  excluded from diluted net                |                            
|loss per common share                                                     |                            
|                                                                          |                            

5.  
Commitments and Contingencies

Legal
Proceedings

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

The
Company, two of its current officers, one of its former officers and three
underwriters in its initial public offering (IPO) were named as
defendants in a consolidated shareholder lawsuit in the United States
District Court for the Southern District of New York, In re E.piphany,
Inc. Initial Public Offering Securities Litigation,01-CV-6158. 
This is one of a number of actions coordinated for pretrial purposes as In re
Initial Public Offering Securities Litigation, 21 MC 92.  Plaintiffs in
the coordinated proceeding have brought claims under the federal securities laws
against numerous underwriters, companies, and individuals, alleging generally
that defendant underwriters engaged in improper and undisclosed activities
concerning the allocation of shares in the IPOs of more than 300 companies
during the period from late 1998 through 2000.  Specifically, among other
things, the plaintiffs allege that the prospectus pursuant to which shares of
Company common stock were sold in the Companys IPO contained certain false
and misleading statements regarding the practices of the Companys
underwriters with respect to their allocation of shares of common stock in the
Companys IPO to their customers and their receipt of commissions from
those customers related to such allocations, and that such statements and
omissions  caused the Companys post-IPO stock price to be
artificially inflated.The consolidated amended complaint in
the Companys case seeks unspecified damages on behalf of a purported class
of purchasers of the Companys common stock between September 21, 1999 and
December 6, 2000.  The court has appointed a lead plaintiff for the
consolidated action. The underwriter and issuer defendants have filed motions to
dismiss. These motions were denied as to all the underwriter defendants and the
majority of issuer defendants including the Company. The individual defendants
have been dismissed from the action without prejudice pursuant to a tolling
agreement. A proposal has been made for the settlement and release of claims
against the issuer defendants, including the Company. The settlement is subject
to a number of conditions, including approval of the proposed settling parties
and the court. The Company has elected to participate in the settlement. If the
settlement does not occur, and litigation against the Company continues, the
Company believes it has meritorious defenses and intends to defend the case
vigorously.

On
February 28, 2003, a purported securities class action lawsuit entitled Liu
v. Credit Suisse First Boston et al., Civil Action Number 03-20459, was
filed in the United States District Court for the Southern District of Florida.
Among the 166 parties named as defendants were Credit Suisse First Boston and
its personnel, issuers that completed IPOs underwritten by Credit Suisse First
Boston, and certain directors and officers of these issuers, including the
Company and two of its current officers. The complaint alleges that the
defendants violated federal and state laws by, among other things, publishing
false and misleading information regarding the issuers projected financial
performance and revenue potential and by incorrectly pricing issuers IPOs.
The complaint related generally to the ongoing IPO-related litigation currently
pending in the United States District Court for the Southern District of New
York. By court order dated July 16, 2003, the Companys defendants were
dismissed from the litigation.

Several
governmental entities have initiated investigations related to the IPO
allocation practices of Credit Suisse First Boston and other investment banks,
and their personnel. In connection with some of these proceedings, the Company
and several other public companies have been asked to provide information
relevant to these proceedings. In response, the Company has provided information
and is otherwise cooperating with these entities.

11

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Based on
discussions with  these entities, the Company does not believe that it, or any of its
directors  and officers, is the target of any of these investigations.

6.  
Restructuring

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

The
following table summarizes the Companys restructuring accrual as of March
31, 2004 (in thousands):

|                                                  | Severance
      and
      Related
      Charges |        | Impairment
      of property
      andequipment |       | Lease
      Costs |          | Other
      Restructuring
      Activities |       | Total
|------------------------------------------------- | ----------------------------------------------- | ------ | ----------------------------------------------- | ----- | ----------------- | -------- | ------------------------------------------ | ----- | -----
|                                                  |                                                 |        |                                                 |       |                   |          |                                            |       |      
|Accrued
      balance at December 31, 2002        |                                                 | $   26 |                                                 | $    |                   | $ 32,920 |                                            | $    |      
|Charges
      accrued during 2003 - Plan 3        |                                                 | 620    |                                                 | 301   |                   | 122      |                                            | 311   |      
|Adjustments
      to previous estimates - Plan 1  |                                                 |       |                                                 |      |                   | 1,846    |                                            |      |      
|Adjustments
      to previous estimates - Plan 2  |                                                 | (13    | )                                               |      |                   | 689      |                                            |      |      
|Adjustments
      to previous estimates - Plan 3  |                                                 |       |                                                 |      |                   | 52       |                                            |      |      
|Cash
      payments - Plan 1                      |                                                 |       |                                                 |      |                   | (6,580   | )                                          |      |      
|Cash
      payments - Plan 2                      |                                                 |       |                                                 |      |                   | (1,228   | )                                          |      |      
|Cash
      payments - Plan 3                      |                                                 | (633   | )                                               |      |                   | (117     | )                                          | (311  | )    
|Non-cash
      activity - Plan 3                  |                                                 |       |                                                 | (301  | )                 |         |                                            |      |      
|                                                  |                                                 |        |                                                 |       |                   |          |                                            |       |      
|Accrued
      balance at December 31, 2003        |                                                 | $     |                                                 | $    |                   | $ 27,704 |                                            | $    |      
|Adjustments
      to previous estimates - Plan 1  |                                                 |       |                                                 |      |                   | 693      |                                            |      |      
|Adjustments
      to previous estimates - Plan 2  |                                                 |       |                                                 |      |                   | (65      | )                                          |      |      
|Adjustments
      to previous estimates - Plan 3  |                                                 |       |                                                 |      |                   | 8        |                                            |      |      
|Cash
      payments - Plan 1                      |                                                 |       |                                                 |      |                   | (1,690   | )                                          |      |      
|Cash
      payments - Plan 2                      |                                                 |       |                                                 |      |                   | (200     | )                                          |      |      
|Cash
      payments - Plan 3                      |                                                 |       |                                                 |      |                   | (18      | )                                          |      |      
|                                                  |                                                 |        |                                                 |       |                   |          |                                            |       |      
|Accrued
      balance at March 31, 2004           |                                                 |       |                                                 |      |                   | 26,432   |                                            |      |      
|Less:
      current portion                       |                                                 |       |                                                 |      |                   | (7,221   | )                                          |      |      
|                                                  |                                                 |        |                                                 |       |                   |          |                                            |       |      
|Restructuring
      costs, net of current portion |                                                 | $     |                                                 | $    |                   | $ 19,211 |                                            | $    |      
|                                                  |                                                 |        |                                                 |       |                   |          |                                            |       |      

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

12

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Year ended
December 31, 2003

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

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

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

Quarter
ended March 31, 2004

For
the quarter ended March 31, 2004, the Company recorded adjustments to
previously-recorded restructuring estimates totaling $0.6 million primarily
associated with facilities in Chicago, Illinois and San Mateo, California

The
accrued liability of $26.4 million at March 31, 2004 is net of $30.4 million of
estimated sublease income. Of this total sublease income, $15.3 million
represents future sublease income due under non-cancelable subleases and $15.1
million represents our estimates of future sublease income on excess facilities
we expect to sublease in the future. Our ability to generate this amount of
sublease income, as well as our ability to terminate certain lease obligations
at the amounts we have estimated, is highly dependent upon the existing economic
conditions, particularly lease market conditions in certain geographies, at the
time we negotiate the lease termination and sublease arrangements with third
parties. While the amount we have accrued is our best estimate, these estimates
are subject to change and may require periodic adjustment as conditions change
through the implementation period. If macroeconomic conditions, particularly as
they pertain to the commercial real estate market, continue to worsen, we may be
required to increase our estimated cost to exit certain facilities. The current
estimates accrued for abandoned leases, net of anticipated sublease proceeds,
are projected to be paid over their respective lease terms through 2017.

7.  Segment
Information

The
Company is organized and operates as one business segment, which is responsible
for the design, development, marketing and sale of software products and related
services. The Company distributes its products in the United States and in
foreign countries through direct sales personnel and indirect channel partners.

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

|               | Three Months EndedMarch 31,
|-------------- | ---------------------------
|
|Revenues:      |                            
|United States  |                            
|United Kingdom |                            
|Rest of world  |                            
|               |                            
|Total          |                            
|               |                            

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8.  Goodwill
and Purchased Intangible Assets

In
the first quarter of 2002, the Company adopted SFAS 142 which states that
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed for impairment annually or more frequently if impairment indicators
arise. The Company completed a transitional test and an annual impairment test
during the first and fourth quarters of 2003, respectively, which did not result
in an impairment charge. The Company plans to complete an annual impairment test
during the fourth quarter of 2004. Definite lived intangible assets will
continue to be amortized over their estimated useful lives.

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

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

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

Amortization
of other intangible assets for the three months ended March 31, 2004 and 2003
was $0.7 million and $2.0 million, respectively. As of March 31, 2004 these
intangible assets were fully amortized.

9.  Other
Income, Net

Other
income, net consists primarily of interest income from investments.

10.  Income
Taxes

For
the quarters ended March 31, 2004 and 2003, the Company recorded a provision for
income taxes of $46,000 and $28,000, respectively, as a result of withholding
taxes on payments from certain foreign customers.

11.  
Comprehensive Loss

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

|                                         | Three Months EndedMarch 31, |        
|---------------------------------------- | --------------------------- | -------
|
|Net loss                                 |                             | $(4,202
|Change in unrealized gain on investments |                             | 234    
|Change in foreign currency translation   |                             |        
|adjustment                               |                             | (183   
|                                         |                             |        
|Comprehensive loss                       |                             | $(4,151
|                                         |                             |        

14

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

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

Overview

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

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

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

During
2002, we released version 6.0 of our product suite. This release generated an
increase in demand for our product licenses which helped increase revenues in
2003. Our total revenues for 2003 increased to $96 million, an increase of 15%
over 2002, while our product license revenues increased to $44 million in 2003
from $34 million in 2002, an increase of 29% year over year. During 2003, we
continued to focus on cost containment and reduced our annual net loss to $24
million in 2003 from $72 million in the prior year. The combination of increased
revenue and decreased costs resulted in declining net losses in the first three
quarters of the year and net income of $0.4 million in the fourth quarter.
During the first quarter of 2004, we experienced a decline in revenue and
increase in net loss for the quarter. The decline in revenue was due primarily
to a decline to product license sales in North America.

Sources of
Revenue

We
generate revenues principally from licensing our software products directly to
customers and providing related services including implementation, professional,
maintenance and training services. Through March 31,

15

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2004,
substantially all of  our revenues were generated by our direct sales force. Our license
agreements  generally provide that customers pay a software license fee to perpetually
use  one or more software products within specified limits. The amount of the license
fee varies depending on which software products are purchased, the number of  software
products purchased and the scope of usage rights. Customers can  subsequently pay
additional license fees to expand the right to use previously  licensed software
products, or to purchase additional software products. Our  software products are made
available to our customers electronically via  Internet download or on compact disk.

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

Cost of
Revenues and Operating Expenses

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

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

Critical
Accounting Policies and Estimates

Accounting
policies, methods and estimates are an integral part of the consolidated
financial statements prepared by management and are based upon managements
current judgments. Those judgments are based on knowledge and experience with
regard to past and current events and assumptions about future events. Certain
accounting policies, methods and estimates are particularly sensitive because of
their significance to the financial statements and because of the possibility
that future events affecting them may differ markedly from managements
current judgments. While there are a number of accounting policies, methods and
estimates affecting our financial statements, areas that are particularly
significant and subject to the exercise of judgment include revenue recognition
policies, allowances for doubtful accounts, the measurement and recoverability
of goodwill and purchased intangible assets, restructuring accruals for the
abandonment of certain leased facilities, and stock-based compensation. These
policies and our practices related to these policies are described below and in
Note 2 of Notes to Consolidated Financial Statements.

Revenue
Recognition

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

16

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

To
date, when we have been primarily responsible for the implementation of the
software under a customer contract, both product license revenues and service
revenues are recognized under the percentage of completion contract method in
accordance with the provisions of Statement of Position 81-1, Accounting
for Performance of Construction Type and Certain Production-Type Contracts
(SOP 81-1). This is based on our assessment that the implementation
services for these arrangements are essential to the functionality of our
software. Throughout most of the three years ended December 31, 2003 and the
first quarter ended March 31, 2004, third-party consulting organizations have
been primarily responsible for implementation services for the majority of our
license arrangements. This trend reversed temporarily during the second half of
2002 and during this time we were responsible for the implementation on the
majority of contracts. This temporary change resulted in a greater percentage of
revenue being recognized under SOP 81-1 in the second half of 2002 and the first
half of 2003.  Approximately 20% of license revenue was recognized under
SOP 81-1 during the three months ended March 31, 2004, compared to 28% and 24%
for the three months ended March 31, 2003 and for the fiscal year 2003,
respectively.

We
estimate the percentage of completion on contracts utilizing hours incurred to
date as a percentage of the total estimated hours to complete the project. The
percentage of completion method of accounting involves an estimation process and
is subject to risks and uncertainties inherent in projecting future events. A
number of internal and external factors can affect our estimates, including the
nature of the services being performed, the complexity of the customers
information technology environment and the utilization and efficiency of our
professional services employees. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in profit
estimates are charged to income in the period in which the facts that give rise
to the revision become known.

Allowances
for Doubtful Accounts

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

Acquisitions,
Goodwill and Purchased Intangible Assets

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

As a result of the adoption of SFAS 142 as of January 1, 2002, we ceased  amortization of  approximately  $81.8
million of  goodwill.  In lieu of  amortization,  we were  required to perform a  transitional  impairment  test of
goodwill.  We  perform  impairment  tests  annually.  We  also  perform  impairment  tests  when  events  occur  or
circumstances  change  that would more  likely  than not reduce the fair value of  previously  recorded  intangible
assets.  If the fair  value of such  assets is  considered  to be  reduced,  the  impairment  to be  recognized  is
measured  by the amount by which the  carrying  amount of the asset  exceeds  its fair  market  value.  Fair market

17

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value is determined by  independent  valuation  experts  using,  among other  things,  discounted  future cash flow
techniques.  Estimating  discounted future cash flows requires significant  management judgment concerning revenue,
profitability  and discount  rates.  Differences  between  forecasted  and actual results as well as changes in the
general economic  environment  could result in material  write-downs of goodwill and purchased  intangible  assets.
We performed the transitional  impairment test on January 1, 2002 and annual  impairment tests on December 31, 2002
and 2003. We determined  that no impairment  existed at those times.  In addition,  we have not  identified  events
or circumstances  that would more likely than not reduce the fair value of previously  recorded  intangible  assets
during the period ended March 31, 2004.

Restructuring
Charges

As
discussed in Note 6 of Notes to Consolidated Financial Statements, we have
recorded significant restructuring charges, primarily in connection with our
abandonment of certain leased facilities. The lease abandonment costs were
estimated to include remaining lease liabilities and brokerage fees offset by
estimated sublease income. Estimates related to sublease costs and income are
based on assumptions regarding the period required to sublease the facilities
and the likely sublease rates. These estimates are based on market trend
information analyses provided by commercial real estate brokerage firms retained
by us. We review these estimates each reporting period and, to the extent that
market conditions and our assumptions change, adjustments to the restructuring
accrual are recorded. If the real estate market continues to worsen and we are
not able to sublease the properties as early as, or at the rates estimated, the
accrual will be increased, which would result in additional restructuring costs
in the period in which such determination is made. If the real estate market
strengthens and we are able to sublease the properties earlier or at more
favorable rates than projected, the accrual may be decreased, which would
increase net income in the period in which such determination is made. The
accrued liability of $26.4 million at March 31, 2004 is net of $30.4 million of
estimated sublease income. Sublease income is comprised of future minimum
sublease payments as well as the reimbursement of future expected operating
expenses. Of this total sublease income, $15.3 million represents future
sublease income due under non-cancelable subleases and $15.1 million represents
our estimates of future sublease income on excess facilities we expect to
sublease in the future.

Stock-Based
Compensation

We
elect to account for compensation expense related to stock options issued to
employees in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Under
APB 25, compensation expense for fixed stock options is based on the difference
between the market value of our stock and the exercise price of the option on
the date of grant, if any. This election is available to companies under SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS
123). Had we elected to apply the fair value method for valuing stock
options under SFAS 123, our net loss and net loss per share would have been
substantially higher as discussed in Note 2 of Notes to Consolidated Financial
Statements. The fair value method of option valuation was applied for disclosure
purposes by utilizing the Black-Scholes option-pricing model. This
option-pricing model is commonly used by companies to calculate the fair value
of options under SFAS 123 and utilizes certain variables including the exercise
price of the option, expected life of the option, the market value of the
underlying stock as of the grant date, the expected volatility of the underlying
stock during the life of the option, and a risk-free interest rate of return.
Although some of these variables are known at the date of grant, other variables
are based on estimates of future events. Changes in these estimates may have a
material impact on the compensation expense calculated under the fair value
method. For example, an increase in the estimated expected life of the option or
the stock volatility would increase the fair market value of the option and
result in an increase to compensation expense calculated under the fair value
method.

Results of
Operations

Revenues

The
following table sets forth our revenues, both in absolute dollars and expressed
as a percentage of total revenues, for the three months ended March 31, 2004 and
2003 (in thousands, except percentages):

|                | Three Months Ended March 31, |         
|--------------- | ---------------------------- | --------
|
|Revenues:       |                              |         
|Product license |                              | $  7,106
|Services        |                              | 5,535   
|Maintenance     |                              | 7,588   
|                |                              |         
|                |                              | $20,229 
|                |                              |         

18

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The
following table sets forth our revenues by geography, both in absolute dollars
and expressed as a percentage of total revenues, for the three months ended
March 31, 2004 and 2003 (in thousands, except percentages):

|              | Three Months Ended March 31, |        
|------------- | ---------------------------- | -------
|
|North America |                              | $14,640
|Europe        |                              | 5,403  
|Rest of world |                              | 186    
|              |                              |        
|              |                              | $20,229
|              |                              |        

Product
license revenue for the three months ended March 31, 2004 decreased by $3.3
million, or 32%, over product license revenue for the same period in the prior
year. As a percentage of total revenues, product license revenue decreased to
35% in 2004 from 46% in 2003. The decrease in product license revenue is due
primarily to fewer license sales in North America. In addition, product license
revenue in markets outside of North America and Europe decreased as a result of
our restructuring plan to reduce sales and marketing costs by transitioning
these regions to an indirect sales model.

Services
revenue consists of revenue from professional and training services. Services
revenue for the first quarter of 2004 increased by $0.4 million, or 8%, over the
first quarter of 2003. The increase was primarily due to an increase in the
demand for implementation services provided directly to customers in Europe.

Maintenance
revenue for the first quarter of 2004 increased by $0.6 million, or 8%, over
maintenance revenue for the first quarter of 2003. The increase in maintenance
revenue was primarily attributable to maintenance contracts sold with new
licenses in addition to maintenance agreement renewals by our existing installed
base.

The
relative amount of license revenue as compared to services revenue has varied
historically depending on the extent to which third-party consulting
organizations have been engaged directly by customers to provide professional
services, the nature of products licensed, the complexity of our customers
information technology environment, the resources allocated by customers to
implementation projects and the scope of licensed rights. Services revenue has
substantially lower margins than product license revenue. This is especially
true when we are required to subcontract with consulting organizations to
supplement our internal professional services organization. To the extent that
services revenue becomes a greater percentage of our total revenues, our overall
gross margins will decline.

Cost of
Revenues

The following table sets forth our cost of revenues and gross profit, both
in absolute dollars and expressed as a percentage of total revenues, for the
three months ended March 31, 2004 and 2003 (in thousands, except percentages):

|                                     | Three Months Ended March 31, |          
|------------------------------------ | ---------------------------- | ---------
|
|Cost of revenues:                    |                              |          
|Product license                      |                              | $     415
|Services                             |                              | 4,498    
|Maintenance                          |                              | 1,276    
|Amortization of purchased technology |                              | 679      
|                                     |                              |          
|                                     |                              | 6,868    
|                                     |                              |          
|Gross profit                         |                              | $13,361  
|                                     |                              |          

Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements, and, as a percentage of license
revenues, have not been significant to date.

19

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Cost
of services revenues consists primarily of personnel and related costs of
providing professional services and training services. The decrease in cost of
services revenue was due primarily to a reduction in the number of internal
professional services employees and their related travel expenses. The decrease
was also a result of lower overhead and facilities costs. The number of services
employees decreased from 135 at March 31, 2003 to 114 at March 31, 2004. Of this
total reduction, 3 related to the restructuring of our operations during 2003
and the remainder related to voluntary and other terminations.

Cost
of maintenance revenues consists primarily of personnel and related costs of
providing customer telephone support services under maintenance agreements. The
decrease in cost of maintenance revenue was due primarily to lower overhead and
facilities costs as well as a reduction in the number of customer support
employees.

The
amortization of purchased technology consists of amortization from technology
purchased in the acquisitions of RightPoint, Octane, iLeverage, eClass Direct,
Moss and certain intellectual property assets of Radnet. The decrease in
amortization of purchased technology for the first quarter of 2004 as compared
to the same period in the prior year was due to the full amortization of
RightPoint, Octane and eClass Direct assets during 2003. Purchased technology
assets were fully amortized as of March 31, 2004.

Operating
Expenses

Research and
Development

The
following table sets forth our research and development expenses for the three
months ended March 31, 2004 and 2003, expressed both in absolute dollars and as
a percentage of total revenues (in thousands, except percentages):

|                         | Three Months Ended March 31, |       
|------------------------ | ---------------------------- | ------
|
|Research and development |                              | $6,673

Research
and development expenses consist primarily of personnel and related costs
associated with our product development efforts. The decrease for the three
months ended March 31, 2004 as compared to the same period in the prior year was
due primarily to a reduction in the number of research and development employees
and lower overhead and facilities costs. The number of research and development
employees decreased from 168 as of March 31, 2003 to 142 March 31, 2004 as a
result of voluntary and other terminations not related to restructuring plans.

Sales and
Marketing

The
following table sets forth our sales and marketing expenses for the three months
ended March 31, 2004 and 2003, expressed both in absolute dollars and as a
percentage of total revenues (in thousands, except percentages):

|                    | Three Months Ended March 31, |       
|------------------- | ---------------------------- | ------
|
|Sales and marketing |                              | $8,431

Sales
and marketing expenses consist primarily of employee salaries, benefits and
commissions, and the costs of trade shows, seminars, promotional materials and
other sales and marketing programs. The decrease in these expenses was primarily
due to a reduction in the number of sales and marketing employees and lower
sales commission expense. Sales commission expense was lower as a result of
lower revenues for the period ended March 31, 2004 as compared to the same
period in the prior year. The decrease was also due to lower overhead and
facilities costs as a result of our restructuring plans, lower spending on sales
and marketing programs and lower travel expenses. The number of sales and
marketing employees decreased from 148 as of March 31, 2003 to 112 as of March
31, 2004. Of the total reduction, 8 related to the restructuring of our
operations and the remainder related to voluntary and other terminations.

20

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General and
Administrative

The
following table sets forth our general and administrative expenses for the three
months ended March 31, 2004 and 2003, expressed both in absolute dollars and as
a percentage of total revenues (in thousands, except percentages):

|                           | Three Months Ended March 31, |       
|-------------------------- | ---------------------------- | ------
|
|General and administrative |                              | $2,705

General
and administrative expenses consist primarily of employee salaries and related
expenses for executive, finance, legal and administrative personnel. The
increase in these expenses was primarily due to an increase in legal, audit and
accounting costs offset, in part, by a decrease in compensation and benefits due
to a reduction in the number of general and administrative employees. In
addition, overhead and facilities costs decreased compared to the prior year.
Audit and accounting costs increased primarily as a result of activities
associated with the Companys compliance with the Sarbanes-Oxley Act of
2002. The number of general and administrative employees decreased from 62 as of
March 31, 2003 to 57 at March 31, 2004. Of this reduction, 3 related to the
restructuring of our operations and the remainder related to voluntary and other
terminations.

Restructuring
Charges

The
following table sets forth our restructuring charges for the three months ended
March 31, 2004 and 2003, expressed both in absolute dollars and as a percentage
of total revenues (in thousands, except percentages):

|                      | Three Months Ended March 31, |     
|--------------------- | ---------------------------- | ----
|
|Restructuring charges |                              | $636

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

Restructuring
charges recorded in the three months ended March 31, 2004 relate to changes in
estimated lease costs related primarily to facilities located in Chicago,
Illinois and San Mateo, California. Restructuring charges recorded in the same
period in the prior year relate to severance and related charges under Plan 3
and adjustments to previously recorded restructuring estimates to reflect
changes in estimated lease costs related to facilities located in Boston,
Massachusetts.

Other
Income, Net

The
following table sets forth our other income, net for the three months ended
March 31, 2004 and 2003, expressed both in absolute dollars and as a percentage
of total revenues (in thousands, except percentages):

|                  | Three Months Ended March 31, |     
|----------------- | ---------------------------- | ----
|
|Other income, net |                              | $928

Other
income, net consists primarily of interest income on investments. For the three
months ended March 31, 2003, other income also includes $0.8 million reflecting
the termination of a partner agreement executed in October 1999 by one of the
companies that we acquired. The decrease in interest income for the three months
ended March 31, 2004 as compared to the same period in the prior year is
primarily due to a decrease in the average rate of return on our investments as
well as lower average cash and investment balances.

21

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Provision
for Taxes

The
following table sets forth our provision for taxes for the three months ended
March 31, 2004 and 2003, expressed both in absolute dollars and as a percentage
of total revenues (in thousands, except percentages):

|                    | Three Months Ended March 31, |    
|------------------- | ---------------------------- | ---
|
|Provision for taxes |                              | $46

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

Liquidity
and Capital Resources

Cash Flow

As
of March 31, 2004, our primary sources of liquidity consisted of $178.7 million
in cash, cash equivalents and short-term investments and $81.8 million in
long-term investments for a total of $260.5 million in cash and investments.
Long-term investments generally consist of securities that we intend to hold for
more than one year with maturity dates of less than two years from the date of
purchase.

Net
cash used in operating activities totaled $4.9 million and $10.4 million for the
three months ended March 31, 2004 and 2003, respectively. The decrease in cash
used in operations is primarily due to a reduction in our net loss during these
periods. Our net loss decreased primarily due to a reduction of employees and
lower overhead and facilities costs. The decrease in cash used in operations was
also attributable to higher collection activity of our accounts receivable
during the quarter ended March 31, 2004 as compared to the same period last
year.

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

Net
cash provided by investing activities for the quarter ended March 31, 2004
totaled $5.0 million due primarily to the net movement from investments to cash
and cash equivalents. Net cash used in investing activities of $17.0 million for
the quarter ended March 31, 2003 was due primarily to the purchase of
investments. Investments purchased are primarily comprised of government
sponsored enterprises, auction rate municipal securities and corporate debt
securities with maturities which do not exceed 24 months.

Net
cash provided by financing activities totaled $2.8 million and $0.4 million for
the quarters ended March 31, 2004 and 2003, respectively. Cash provided by
financing activities for each period resulted primarily from the receipt of
proceeds from the issuance of common stock pursuant to the exercise of stock
options. These proceeds increased for the three months ended March 31, 2004 over
the same period in the prior year.

Restricted
Cash and Investments

From
time to time, we are required to obtain letters of credit that serve as
collateral for our obligations to third parties under facility lease agreements.
These letters of credit are secured by cash and cash equivalents and are
recorded as restricted cash in the balance sheet. As of March 31, 2004, we had
$8.0 million of restricted cash and investments, $1.9 million of which are
classified as short-term and relate to facility lease agreements that have
expiration dates within 12 months, and $6.1 million of which are classified as
long-term and relate to facility lease agreements that have expiration dates
greater than twelve months from March 31, 2004.

22

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Contractual
Obligations

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

Operating
Leases. We lease certain facilities under operating lease agreements which
expire at various dates through 2017. In addition, we receive sublease income
from non-cancelable subleases of excess facilities. Future minimum lease
payments due and receivable under these leases as of March 31, 2004 were as
follows (in thousands):

|Year
Ending December 31,  | Operating
      Leases Due |           | Sublease
      Income
      Receivable |          | Total,
      Net
|------------------------- | -------------------------- | --------- | -------------------------------------- | -------- | ----------------
|                          |                            |           |                                        |          |                 
|2004                      |                            | $   8,785 |                                        | $(2,055  | )               
|2005                      |                            | 9,161     |                                        | (2,320   | )               
|2006                      |                            | 6,333     |                                        | (1,532   | )               
|2007                      |                            | 6,348     |                                        | (1,398   | )               
|2008                      |                            | 6,441     |                                        | (1,246   | )               
|2009
      and thereafter |                            | 22,171    |                                        | (4,334   | )               
|                          |                            |           |                                        |          |                 
|                          |                            | $ 59,239  |                                        | $(12,885 | )               
|                          |                            |           |                                        |          |                 

Net
operating lease commitments shown above include $31.3 million of operating lease
commitments under leases for abandoned facilities which are recorded as
restructuring costs in the accompanying balance sheet as of March 31, 2004. We
do not have commercial commitments under lines of credit, standby lines of
credit, guarantees, standby repurchase obligations or other such arrangements.

We
believe that our cash, cash equivalents and investment balances will be
sufficient to meet our anticipated liquidity needs for working capital and
capital expenditures for at least 12 months. If we require additional capital
resources to grow our business internally or to acquire complementary
technologies and businesses at any time in the future, we may seek to liquidate
our long-term investments, issue additional equity or debt securities or secure
a bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. We cannot
assure you that any financing arrangements will be available in amounts or on
terms acceptable to us in the future.

Off-Balance
Sheet Arrangements

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

During
the quarter ended September 30, 2003, we sold all of the outstanding capital
stock of our Japanese subsidiary, E.piphany Software, K.K. (E.piphany
Japan), to Braxton Ltd. for approximately $4.2 million in cash. The stock
purchase agreement contained customary representations, warranties and covenants
of the parties, including covenants to indemnify each other in the event of a
breach of warranty or representation. Claims under the indemnification covenants
may be submitted within two years from the date of closing, for a maximum of
$0.7 million, and only to the extent that losses exceed 10% of the purchase
price. The fair value of these indemnification provisions were not material to
our financial position, results of operations or cash flows for the three months
ended March 31, 2004.

We
indemnify our directors and officers in their capacity as such. To date, we have
not been required to make any payment resulting from these indemnification
obligations. Additionally, the fair value of these indemnification provisions
was not material to our financial position, results of operations or cash flows
for the quarter ended March 31, 2004.

23

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Recent
Accounting Pronouncements

Consolidation
of Variable Interest Entities

In
January 2003, the Financial Accounting Standards Board issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN
46), which was amended by FIN 46R issued in December 2003. This
interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities (VIEs) that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) for which
the equity investors lack an essential characteristic of a controlling financial
interest. This interpretation applies immediately to VIEs created after January
31, 2003. It also applies in the first fiscal year or interim period ending
after March 15, 2004, to VIEs created before February 1, 2003 in which an
enterprise holds a variable interest. FIN 46 requires disclosure of VIEs in
financial statements issued after January 31, 2003 if it is reasonably possible
that as of the transition date: (1) we are the primary beneficiary of an
existing VIE that will require consolidation or, (2) we hold a significant
variable interest in, or have significant involvement with, an existing VIE. As
of and for the period ended March 31, 2004, we have not held an interest in any
entity that requires disclosure or consolidation under FIN 46.

Related
Party and Other Transactions

Mr.
Siboni is currently a member of the board of directors of two of the
Companys customers. Total revenues to E.piphany from these customers were
less than $0.1 million for the three months ended March 31, 2004 and $0.1
million for the three months ended March 31, 2003. The Company had accounts
receivable balances from these customers totaling less than $0.1 million as of
March 31, 2004 and December 31, 2003.

In
addition, four of the Companys customers have board members or executive
officers that were also on the Companys board of directors at the time
revenues from contracts with these customers were recognized. Total revenues to
the company from these customers were $0.4 million for the three months ended
March 31, 2004 and $0.1 million for the three months ended March 31, 2003. The
Company had accounts receivable balances from these customers totaling $0.1
million and less than $0.1 million as of March 31, 2004 and December 31, 2003,
respectively.

24

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RISK
FACTORS

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

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

We
incurred net losses of $4.2 million for the quarter ended March 31, 2004, $24.2
million for the year ended December 31, 2003, $71.7 million for the year ended
December 31, 2002 and $2.6 billion for the year ended December 31, 2001. We had
an accumulated deficit of $3.5 billion as of March 31, 2004. We may incur losses
in the foreseeable future. These losses may be substantial and we may not be
able to achieve or sustain profitability. Our operating results will be harmed
if our revenues do not keep pace with our expenses or are not sufficient for us
to achieve profitability. Although we achieved profitability in the quarter
ended December 31, 2003, it cannot be certain that we will again achieve or
increase profitability on a quarterly or annual basis.

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

Our
revenues are dependent on the health of the economy and the growth of our
customers and potential future customers. If the economies in the United States
or in other territories in which we do business worsen, or do not substantially
improve, our customers may delay or reduce their spending on customer
relationship management software. When economic conditions weaken, sales cycles
for software products tend to lengthen and companies information
technology budgets tend to be reduced. When this happens, our revenues suffer
and our stock price may decline.

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

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

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

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

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

25

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

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

|· |  | varying
size, timing and contractual terms of orders for our products and  services,
|- |  | ------------------------------------------------------------------------------------

|· |  | our
ability to timely complete our service obligations related to product sales,
|- |  | --------------------------------------------------------------------------------

|· |  | changes
in the mix of revenue attributable to higher-margin product license revenue as  opposed
to substantially lower-margin service revenue,
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|· |  | customers decisions
to defer or cancel orders or implementations,  particularly large orders or
implementations, from one quarter to the next,
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|· |  | changes
in demand for our software or for enterprise software generally,
|- |  | ------------------------------------------------------------------------

|· |  | reductions
in the rate at which opportunities in our pipeline convert into binding license
agreements,
|- |  | ------------------------------------------------------------------------------------------------------

|· |  | announcements
or introductions of new products by us or our competitors,
|- |  | ------------------------------------------------------------------------

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

|· |  | our
ability to release new, competitive products on a timely basis,
|- |  | -------------------------------------------------------------------

|· |  | any
increase in our need to supplement our professional services organization by
subcontracting to more expensive consulting organizations to help provide  implementation
services when our own capacity is constrained,
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· |  | restructuring
and other non-recurring costs, including severance and lease  abandonment costs,
|- |  | ----------------------------------------------------------------------------------------------

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

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

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

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

26

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

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

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

When
we provide consulting and implementation services to our customers, we do so
either directly through our internal professional services organization or
indirectly through subcontractors we hire to perform these services on our
behalf. Because our margins on service revenues are less than our margins on
license revenues, our overall margins decline when we provide these services to
customers. This is particularly true if we hire subcontractors to perform these
services because it costs us more to hire subcontractors to perform these
services than to provide the services ourselves.

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

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

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

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

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

| |  delay
introduction of new products or commercial shipment of products, or
| | ---------------------------------------------------------------------------

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

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

Because
our software products are used for important decision-making processes and
enable our customers to interact with their customers, product defects may also
give rise to liability claims. Although our license agreements

27

---

with customers
typically contain provisions designed to limit our exposure, some courts may not  enforce
all or part of these limitations. Although we have not experienced any  such liability
claims to date, we may encounter these claims in the future.  Liability claims, whether
or not successful, could:

| | 
divert the attention of our management and key personnel from our business,
| | -----------------------------------------------------------------------------

| |  be
expensive to defend, and
| | -----------------------------

| | 
result in large damages awards.
| | ---------------------------------

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

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

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

| | 
the complex nature of our products,
| | -------------------------------------

| |  our
need to educate potential customers about the uses and benefits of our products,
| | --------------------------------------------------------------------------------------

| | 
the purchase of our products requires a significant investment of resources by a
customer,
| | --------------------------------------------------------------------------------------------

| | 
our customers have budget cycles which affect the timing of purchases,
| | ------------------------------------------------------------------------

| |  uncertainty
regarding future economic conditions,
| | ---------------------------------------------------

| | 
many of our potential customers require competitive evaluation and internal
approval before purchasing our products,
| | ----------------------------------------------------------------------------------------------------------------------

| | 
potential customers delay purchases due to announcements or planned
introductions of new products by us or our competitors, and
| | ---------------------------------------------------------------------------------------------------------------------------------

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

The
delay or failure to complete sales in a particular quarter could reduce our
revenues in that quarter, as well as subsequent quarters over which revenues for
the sale would likely be recognized. Our sales cycles lengthen when economic
conditions worsen and spending on information technology declines. If our sales
cycles unexpectedly lengthen in general, or for one or more large orders, our
revenues could be adversely affected.

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

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

28

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

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

| | 
not understand or see the benefits of using these products,
| | -------------------------------------------------------------

| |  not
achieve favorable results using these products,
| | -----------------------------------------------------

| | 
experience technical difficulty in implementing or using these products,
| | --------------------------------------------------------------------------

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

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

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

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

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

We
market and sell our products and services abroad. Our revenue from the sale of
our products and services outside of the United States accounted for 29% percent
of our total revenues for the quarter ended March 31, 2004. Doing business
internationally involves greater expense and many additional risks and
challenges, particularly:

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

| |  differing
intellectual property rights,
| | -----------------------------------------

| | 
differing labor regulations,
| | ------------------------------

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

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

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

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

29

---

Our
international business operations require a significant amount of attention from
our management and substantial financial resources. As of March 31, 2004, we had
63 employees located in Europe and Canada.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

30

---

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

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

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

In
addition to the acquisitions that we have already completed, we may acquire or
make investments in other complementary companies, services and technologies in
the future. If we fail to successfully integrate acquired technologies and
employees, our business and operating results will be harmed. To successfully
integrate acquired technologies and employees, we must:

| | 
properly evaluate the business, personnel and technology of the company to be
acquired,
| | -----------------------------------------------------------------------------------------

| | 
accurately forecast the financial impact of the transaction, including
accounting charges and transaction expenses,
| | ---------------------------------------------------------------------------------------------------------------------

| | 
integrate and retain appropriate personnel,
| | ---------------------------------------------

| |  geographic
complexity,
| | ------------------------

| | 
combine potentially different corporate cultures,
| | ---------------------------------------------------

| |  effectively
integrate products, research and development, sales, marketing and support
operations, and
| | --------------------------------------------------------------------------------------------------------

| | 
maintain focus on our day-to-day operations.
| | ----------------------------------------------

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

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

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

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

31

---

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

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

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

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

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

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

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

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

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

32

---

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

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

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign
Currency Exchange Rate Risk

The
majority of our operations are based in the United States and, accordingly, the
majority of our transactions are denominated in U.S. dollars. We do have
foreign-based operations, however, where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. As of March 31, 2004, we had international
operations in Asia, Australia, Europe, Canada and Latin America and conduct
transactions in the local currency of each location. Historically, our exposure
to fluctuations in the relative value of other currencies has been limited
because substantially all of our assets are denominated in U.S. dollars, and
those assets which are not denominated in U.S. dollars have generally been
denominated in historically stable currencies. The impact to our cash and
investment balances has therefore not been material. Currency transaction gains
or losses, derived on monetary assets and liabilities stated in a currency other
than the functional currency, are recognized in current operations and have not
been significant to our operating results in any period. To date, we have not
entered into any foreign exchange hedges or other derivative financial
instruments. We will continue to evaluate our exposure to foreign currency
exchange rate risk on a regular basis.

Interest
Rate Risk

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

As
of March 31, 2004, we held $35.2 million in cash, cash equivalents and
restricted cash consisting of highly liquid short-term investments having
original maturity dates of no more than 90 days. Declines of interest rates over
time would reduce our interest income from our highly liquid short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 100 basis points would cause a corresponding decrease in our
annual interest income by $0.4 million. Due to the nature of our highly liquid
cash equivalents, a change in interest rates would not materially change the
fair market value of our cash, cash equivalents and restricted cash.

33

---

As
of March 31, 2004, we held $227.3 million in short-term investments and
long-term investments, each of which consisted of taxable fixed income
securities having original maturity dates between three months and two years. A
decline in interest rates over time would reduce our interest income from our
short-term investments and long-term investments. A decrease in interest rates
of 100 basis points would cause a corresponding decrease in our annual interest
income of approximately $2.3 million. An increase in interest rates over time
would cause the fair market value of our portfolio to decline. An immediate and
uniform increase in interest rates of 100 basis points would cause the fair
market value of these items to decrease by approximately $2.0 million.

As
of March 31, 2004, we did not have any outstanding debt.

The
following summarizes our investments, weighted average yields and expected
maturity dates as of March 31, 2004 (in thousands, except interest rates):

|                            | 2004 | 2005       | 2006 | Thereafter | Total
|--------------------------- | ---- | ---------- | ---- | ---------- | -----
|Commercial paper            |      | $    1,650 |      | $         |      
|                           
|Weighted average yield      |      | 1.18%      |      |           |      
|                           
|Corporate bonds             |      | $  18,338  |      | $30,800    |      
|                           
|Weighted average yield      |      | 2.04%      |      | 1.79%      |      
|                            |      |            |      |            |      
|                            |      |            |      |            |      
|                           
|Government notes/bonds (1)  |      | $  27,382  |      | $40,452    |      
|                           
|Weighted average yield      |      | 1.91%      |      | 1.90%      |      
|                           
|Auction rate securities (2) |      | $  86,250  |      | $         |      
|                           
|Weighted average yield      |      | 1.11%      |      |           |      
|                            |      |            |      |            |      
|                           
|Total investment securities |      | $133,620   |      | $71,252    |      
|                            |      |            |      |            |      

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

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

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation
of Disclosure Controls and Procedures

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

34

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Changes in
Internal Control Over Financial Reporting

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

PART II: OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

As
of the date hereof, there is no material litigation pending against us other
than as disclosed in Note 5 of Notes to Consolidated Financial Statements. From
time to time, we may become a party to litigation and subject to claims incident
to the ordinary course of our business. Although the results of litigation and
claims cannot be predicted with certainty, we believe that the final outcome of
such matters will not have a material adverse effect on our business, results of
operations or financial condition

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

|(a)    |     | Exhibits.                                                                                                                                                                             | 
|------ | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Number |     | Exhibit Title                                                                                                                                                                         | 
|3.1    | (1) | Restated Certificate of Incorporation of the Registrant.                                                                                                                              | 
|3.2    | (2) | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                                      | 
|3.3    | (3) | Amended and Restated Bylaws of the Registrant.                                                                                                                                        | 
|4.1    | (1) | Form of Stock Certificate                                                                                                                                                             | 
|10.1   |     | Employment and Non-Competition Agreement dated March 14, 2000 (as amended on May 31, 2000) between Andrew Sherman and the Registrant.                                                 | 
|31.1   |     | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   | 
|31.2   |     | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   | 
|32.1   |     | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002. | 

__________

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

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

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

(b)    
Reports on Form 8-K.

A
report on Form 8-K containing our earnings release for the year ended December
31, 2003 was furnished to the SEC on January 29, 2004.

35

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SIGNATURES

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

E.PIPHANY,
INC.

|DATE:   May 10, 2004 |  |  |  | SIGNATURE: |  | /s/ Karen A. Richardson                    | 
|-------------------- |  |  |  | ---------- |  | ------------------------------------------ | 
|                     |  |  |  |           
|                     |  |  |  |            |  | Karen A. RichardsonChief Executive Officer | 

|DATE:   May 10, 2004 |  |  |  | SIGNATURE: |  | /s/ Kevin J. Yeaman                    | 
|-------------------- |  |  |  | ---------- |  | -------------------------------------- | 
|                     |  |  |  |           
|                     |  |  |  |            |  | Kevin J. YeamanChief Financial Officer | 

36

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EXHIBIT
INDEX

|Number |     | Exhibit Title                                                                                                                                                           | 
|------ | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|3.1    | (1) | Restated Certificate of Incorporation of the Registrant.                                                                                                                | 
|3.2    | (2) | Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.                                                        | 
|3.3    | (3) | Amended and Restated Bylaws of the Registrant.                                                                                                                          | 
|4.1    | (1) | Form of Stock Certificate.                                                                                                                                              | 
|10.1   |     | Employment and Non-Competition Agreement dated March 14, 2000 (as amended on May 31, 2000) between Andrew Sherman and the Registrant.                                   | 
|31.1   |     | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     | 
|31.2   |     | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     | 
|32.1   |     | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. | 

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

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

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

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