E PIPHANY INC, 10-Q, 2000-05-08

E PIPHANY INC
10-Q, 2000-05-08
BUSINESS SERVICES, NEC

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10 - Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

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

Commission File Number 0-26881

E.PIPHANY, INC.
---------------
(Exact Name as Registrant specified in its charter)

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

1900 SOUTH NORFOLK STREET, SUITE 310
SAN MATEO, CALIFORNIA 94403
---------------------------
(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

The number of shares outstanding of the registrant's common stock, par
value $.0001 per share, as of March 31, 2000, was 32,357,766.

<PAGE> 2

E.PIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2000

TABLE OF CONTENTS

PAGE NO.
- --------------------------------------------------------------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets - 3
As of March 31, 2000 and December 31, 1999

Condensed Consolidated Statements of Operations - 4
Three months ended March 31, 2000 and 1999

Condensed Consolidated Statements of Cash Flows - 5
Three months ended March 31, 2000 and 1999

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk 33

- --------------------------------------------------------------------------------
PART II OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds 35

Item 4. Submission of Matters to a Vote of Securities Holders 35

Item 6. Exhibits and reports on Form 8-K 36

- --------------------------------------------------------------------------------
SIGNATURES 38

- --------------------------------------------------------------------------------
</TABLE>

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<PAGE> 3

E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)

DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 58,084 $ 401,268
Short-term investments ................................ 22,926 23,452
Accounts receivable, net .............................. 5,502 9,317
Prepaid expenses and other assets ..................... 2,959 3,438
-------- ---------
Total current assets ............................... 89,471 437,475
Property and equipment, net ............................. 3,932 6,696
Goodwill and purchased intangibles ...................... -- 439,375
Other assets ............................................ .183 320
-------- ---------
Total assets ....................................... $ 93,586 $ 883,866
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations .......... $ 237 $ 458
Current portion of notes payable ...................... 894 --
Trade accounts payable ................................ 650 948
Accrued merger costs .................................. -- 7,795
Accrued compensation .................................. 3,504 5,102
Accrued other ......................................... 2,192 6,411
Deferred revenue ...................................... 3,643 3,617
-------- ---------
Total current liabilities .......................... 11,120 24,331
Capital lease obligations, net of current portion ....... 399
790
Notes payable, net of current portion ................... 7,425 --
-------- ---------
Total liabilities .................................. 18,944 25,121
-------- ---------
Stockholders' equity:
Common stock .......................................... 5 5
Additional paid-in capital ............................ 113,636 965,197
Warrants to purchase preferred stock .................. 143 143
Note receivable ....................................... (640) (1,640)
Accumulated and other comprehensive income ............ (31) 4
Deferred compensation ................................. (2,602) (2,125)
Accumulated deficit ................................... (35,869) (102,839)
-------- ---------
Total stockholders' equity ......................... 74,642 858,745
-------- ---------
Total liabilities and stockholders' equity ......... $ 93,586 $ 883,866
======== =========
</TABLE>

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

3
<PAGE> 4

E.PIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues:
Product license ............................................................ $ 1,136 $ 8,268
Services ................................................................... 758 6,147
-------- --------
Total revenues .......................................................... 1,894 14,415
-------- --------
Cost of revenues:
Product license ............................................................ 5 109
Services ................................................................... 827 6,020
-------- --------
Total cost of revenues .................................................. 832 6,129
-------- --------
Gross profit ............................................................ 1,062 8,286
-------- --------
Operating expenses:
Research and development ................................................... 1,294 3,758
Sales and marketing ........................................................ 2,763 11,212
General and administrative ................................................. 456 2,257
In-process research and development charge ................................. -- 22,000
Amortization of goodwill and purchased intangibles ......................... -- 39,943
Stock-based compensation ................................................... 603 477
-------- --------
Total operating expenses ................................................ 5,116 79,647
-------- --------
Loss from operations .................................................... (4,054) (71,361)
Other income (expense), net .................................................. 95 4,393
-------- --------
Net loss ................................................................ $ (3,959) $(66,968)
======== ========
Basic and diluted net loss per share ......................................... $ (0.84) $ (2.35)
======== ========
Shares used in computing basic and diluted net loss per share ................ 4,733 28,452
======== ========
Pro forma basic and diluted net loss per share ............................... $ (0.26) $ (2.35)
======== ========
Shares used in computing pro forma basic and diluted net loss per share ...... 15,355 28,452
======== ========
</TABLE>

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)

THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $ (3,959) $ (66,968)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ............................... 128 467
Allowance for doubtful accounts ............................. -- 250
Noncash compensation expense ................................ 602 477
In-process research and development charge .................. -- 22,000
Amortization of goodwill and purchased intangibles .......... -- 39,943
Changes in operating assets and liabilities, net of
effect of RightPoint acquisition:
Accounts receivable ....................................... (49) (2,652)
Prepaid expenses and other assets ......................... 67 (416)
Trade accounts payable .................................... (68) (5,002)
Accrued liabilities ....................................... (10) 8,373
Deferred revenue .......................................... 134 (680)
--------- ---------
Net cash used in operating activities .................. (3,155) (4,208)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ............................ (476) (2,414)
Cash acquired in RightPoint acquisition ........................ -- 1,613
Purchases and sales of investments, net ........................ -- (491)
--------- ---------
Net cash used in investing activities .................. (476) (1,292)
--------- ---------
Cash flows from financing activities:
Borrowings ..................................................... 3,000 --
Repayments on line of credit ................................... (31) (8,319)
Principal payments on capital lease obligations ................ (5) (68)
Proceeds from secondary offering, net .......................... -- 356,361
Repurchase of common stock ..................................... -- (5)
Repayments on notes receivable ................................. -- 185
Repayments of short-swing profits .............................. -- 193
Proceeds from sale of common stock ............................. 69 337
--------- ---------
Net cash provided by financing activities .............. 3,033 348,684
--------- ---------
Net increase (decrease) in cash and cash equivalents ............. (598) 343,184
Cash and cash equivalents at beginning of period ................. 13,595 58,084
--------- ---------
Cash and cash equivalents at end of period ....................... $ 12,997 $ 401,268
========= =========
Non-cash transactions:
Equipment acquired under capital lease ......................... $ 99 $ --
========= =========
</TABLE>

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 the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three month period ended March 31, 2000. The results for the three month period
ended March 31, 2000 are not necessarily indicative of the results expected for
the full fiscal year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's subsidiaries is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at the
current exchange rate as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of stockholders' equity, which
through March 31, 2000 have not been material. Foreign currency transaction
gains and losses are included in other income (expense) and as of March 31, 2000
these transactions have not been material.

3. COMPREHENSIVE INCOME (LOSS)

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which E.piphany adopted beginning on January 1, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS No.
130 is to report a measure of all changes in equity of an enterprise that
results from transactions and other economic events of the period other than
transactions with shareholders ("comprehensive income"). Comprehensive income is
the total of net income and all other non-owner changes in equity. For the three
months ended March 31, 1999, and the three months ended March 31, 2000,
E.piphany's comprehensive income (loss) did not differ materially from reported
net loss.

4. COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND
DILUTED NET LOSS PER SHARE

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

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operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock (using the if-converted method)
from the original date of issuance.

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

THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
Net loss ........................................................ $ (3,959) $(66,968)
======== ========
Basic and diluted:
Weighted average shares of common stock outstanding ........... 8,987 31,729
Less: Weighted average shares subject to repurchase ............. (4,254) (3,277)
-------- --------
Weighted average shares used in computing basic and diluted
net loss per common share ..................................... 4,733 28,452
Basic and diluted net loss per common share ................... $ (0.84) $ (2.35)
======== ========
Net loss ...................................................... $ (3,959) $(66,968)
======== ========
Shares used above ............................................. 4,733 28,452
======== ========
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock .................. 10,622 --
-------- --------
Shares used in computing pro forma basic and diluted net
loss per common share ...................................... 15,355 28,452
======== ========
Pro forma basic and diluted net loss per common share ......... $ (0.26) $ (2.35)
======== ========
</TABLE>

E.piphany has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of basic and diluted net loss per share
were approximately 17,471,000 and 7,389,000 for the three months ended March 31,
1999 and March 31, 2000, respectively.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the FASB
issued SFAS No. 137, "Accounting For Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for E.piphany). This Statement
will not have a material impact on the financial condition or results of the
operations of E.piphany.

6. ACQUISITIONS

THE RIGHTPOINT ACQUISITION

On January 4, 2000, E.piphany acquired RightPoint Software, Inc. in a merger
transaction. Under the terms of the Merger Agreement, stockholders of RightPoint
exchanged approximately 0.1185 shares of E.piphany common stock for each share
of RightPoint common stock they owned at the time the merger was consummated. In
addition, options and warrants to acquire RightPoint common stock were converted
as a result of the merger into equivalent options and warrants for E.piphany
common stock, based upon the exchange ratio. The total purchase price was
approximately $496.8 million, of which $22.0 million was allocated to in-process
research and development and

7
<PAGE> 8

expensed upon closing of the acquisition as it has not reached technological
feasibility and, in management's opinion, had no alternative future use. The
purchase price is subject to adjustments based upon finalization of management's
integration plans, which may include elimination of duplicate facilities and
fixed assets as well as employee severance. Purchased intangibles, representing
purchase price in excess of identified tangible and intangible assets, of
approximately $479.3 million were recorded and are being amortized on a
straight-line basis over a useful life of three years. Accumulated amortization
was approximately $39.9 million at March 31, 2000.

The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility has not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. If these projects
are not successfully developed, future revenue and profitability of the Company
may be adversely affected. Additionally, the value of the other purchased
intangible assets may be impaired.

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

<S> <C> <C>
Cash, receivables and other current assets........................ $ 3,076
Property, plant and equipment and other noncurrent assets......... 817
Note receivable from stockholder.................................. 1,185
Purchased intangibles, including in-process technology............ 501,318
Current liabilities assumed....................................... (9,633)
---------
Net assets acquired..................................... $ 496,763
=========
</TABLE>

The following table presents the unaudited pro forma results assuming that
E.piphany had merged with RightPoint at the beginning of fiscal year 1999. Net
income has been adjusted to exclude the write-off of acquired in-process
research and development of approximately $22.0 million and includes
amortization of purchase intangibles of approximately $39.9 million for both of
the three months ended March 31, 1999 and 2000. This information may not
necessarily be indicative of the future combined results of operations of the
Company.

THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues........................................... $ 3,207 $ 14,415
Net loss........................................... $(66,521) $(66,968)
Basic net loss per share........................... $ (13.69) $ (2.35)
</TABLE>

The Octane Acquisition

On March 15, 2000, E.piphany entered into a definitive agreement to acquire
Octane Software, Inc. Octane Software is a next-generation provider of
multi-channel customer interaction applications and infrastructure software for
sales, service and support. Octane Software enables companies to provide
real-time, interactive customer care to engage, acquire and retain customers in
the new Internet economy. Under the terms of the agreement, we will issue
approximately 12.8 million shares of its common stock to the stockholders of
Octane Software. The acquisition is subject to customary closing conditions,
including regulatory approval and the approval of E.piphany's and Octane
Software's stockholders.

E.piphany will account for the acquisition under the purchase method of
accounting and E.piphany expects to allocate a portion of the purchase price to
intangible assets which will be amortized ratably over their useful lives. In
addition, E.piphany expects to incur a write-off related to in-process research
and development upon closing of the transaction.

The iLeverage Acquisition

On March 27, 2000, E.piphany entered into a definitive agreement to acquire
privately held iLeverage Corporation, a start-up company that is developing
marketing solutions for digital marketplaces, for 181,649 shares of E.piphany
common stock. The acquisition will be accounted for as a purchase and is subject
to customary closing conditions, including the approval of iLeverage
stockholders.

The eClass Direct Acquisition

On April 14, 2000, E.piphany entered into a definitive agreement to acquire
privately held eClass Direct, an application service provider of
permission-based e-mail marketing services, for approximately 750,000 shares of
E.piphany common stock. The acquisition will be accounted for as a purchase and
is subject to customary closing conditions, including the approval of eClass
Direct stockholders.

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

The statements contained in this Quarterly Report on Form 10-Q (the "Report")
that are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. Forward-looking statements
include, without limitation, statements regarding the extent and timing of
future revenues and expenses and customer demand, statements regarding the
deployment of the Company's products, and statements regarding reliance on third
parties. All forward-looking statements included in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements. Factors that might cause or contribute
to such a discrepancy include, but are not limited to, those discussed under the
heading "Risk Factors" and the risks discussed in our other Securities Exchange
Commission ("SEC") filings.

OVERVIEW

The E.piphany E.4 System is an integrated set of software solutions that
provide capabilities for analysis of customer data and managing distributed
database marketing. Companies can implement the E.piphany E.4 System to collect
and analyze data from their existing software systems, and from third party data
providers, to profile their customers' characteristics and preferences. Business
users within these companies can then act on this information by using the
E.piphany E.4 System to design and execute marketing campaigns as well as
personalize products, services and related interactions.

E.piphany was founded in November 1996. From E.piphany's founding through the
end of 1997, E.piphany primarily engaged in research activities, developing
products and building business infrastructure. E.piphany began shipping its
first software product and first generated revenues from software license fees,
implementation and consulting fees, and maintenance fees in early 1998. During
1998, E.piphany introduced several other software products, and in June 1999,
E.piphany began shipping its E.piphany E.4 System software solutions. Although
E.piphany's revenues consistently increased from quarter to quarter during 1998
and 1999, E.piphany incurred significant costs to develop its technology and
products, to continue the recruitment of research and development personnel, to
build a direct sales force and a professional services organization, and to
expand its general and administrative infrastructure. E.piphany's total
headcount has increased from 69 employees at December 31, 1998 to 333 employees
at March 31, 2000 not including employees to be obtained through pending
acquisitions.

ACQUISITIONS

THE OCTANE ACQUISITION

On March 14, 2000, E.piphany entered into a definitive agreement to acquire
Octane Software, Inc. E.piphany expects to complete the acquisition during the
quarter ending June 30, 2000. Octane is a next-generation provider of
multi-channel customer interaction applications and infrastructure software for
sales, service and support. Under the terms of the agreement, E.piphany will
issue up to approximately 12.8 million shares of its common stock in return for
all outstanding shares of Octane capital stock and options, warrants and other
rights to purchase Octane capital stock. The acquisition is subject to customary
closing conditions, including regulatory approval and the approval of
E.piphany's stockholders and Octane's shareholders.

Octane began offering its Internet relationship management applications in
the second quarter of 1999, and began generating revenue from its Internet
relationship management applications in its fiscal quarter ended December 31,
1999. Octane has also experienced significant increases in headcount during 1999
and the first quarter of 2000. As of March 31, 2000, Octane had 263 employees.
Octane has incurred substantial costs to develop its products, and to recruit
and train personnel for its engineering, sales and marketing services
organizations.

E.piphany expects that the combination of the companies will result in
significant increases in all expense categories. As of March 31, 2000, Octane
had 60 employees engaged in the delivery of services, 85 employees

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<PAGE> 10

engaged in research and development, 84 employees engaged in sales and marketing
and 34 employees engaged in general and administrative activities. E.piphany
expects that operating expenses will increase in absolute dollars and may
increase as a percentage of revenue as a result of the acquisition.

E.piphany expects that it will continue to add employees across all
departments to invest in the development of technology, to continue to build a
direct sales force and professional services organization and to expand
E.piphany's general and administrative infrastructure following the acquisition.
This expansion places significant demands on E.piphany's management and
operational resources. To manage rapid growth and increased demand, E.piphany
must continue to invest in and implement additional operational systems,
procedures and controls.

E.piphany will account for the acquisition under the purchase method of
accounting and expects to incur a write-off related to in-process research and
development of approximately $25 million in the quarter ending June 30, 2000
upon closing of the transaction, as the in-process technology acquired has not
reached technological feasibility and, in the opinion of management, has no
alternative future use. In addition to the in-process research and development
charge E.piphany will incur, E.piphany expects to allocate a portion of the
purchase price to intangible assets of approximately $2.7 billion which will be
amortized ratably over their estimated useful life of three years.

THE ILEVERAGE ACQUISITION

On May 1, 2000, E.piphany completed its acquisition of privately held
iLeverage Corporation, a start-up company that is developing marketing solutions
for digital marketplaces, for 181,649 shares of E.piphany common stock. The
acquisition is being accounted for as a purchase.

THE ECLASS DIRECT ACQUISITION

THE RIGHTPOINT ACQUISITION

E.piphany acquired RightPoint Software, Inc. on January 4, 2000 in a merger
transaction. RightPoint develops and markets real time marketing software
solutions that enable companies to optimize and present marketing offers,
promotions, and communications while a customer is interacting with a web site,
call center agent or other point of customer interaction. In connection with
this transaction, E.piphany acquired all of the outstanding shares of capital
stock of RightPoint in exchange for approximately 3.1 million shares of
E.piphany's common stock. In addition, options and warrants of RightPoint were
converted into options and warrants to purchase approximately 530,000 shares of
E.piphany's common stock.

RightPoint began offering its current real-time marketing applications in
April 1998. RightPoint began generating revenue from its real-time marketing
applications in its fiscal year ended June 30, 1998. RightPoint's revenues grew
from $806,000 in its fiscal 1998 to $3.5 million in its fiscal 1999. RightPoint
also experienced significant increases in headcount during this period.
RightPoint grew from 34 employees on June 30, 1998 to 79 employees as of
December 31, 1999. RightPoint incurred substantial costs to develop its
products, and to recruit and train personnel for its engineering, sales and
marketing services organizations.

E.piphany accounted for the acquisition under the purchase method of
accounting and incurred a write-off related to in-process research and
development of $22 million which was reflected in the results of operations for
the quarter ended March 31, 2000, as the in-process technology acquired had not
reached technological feasibility and, in the opinion of management, has no
alternative future use. In addition to the in-process research and development
charge E.piphany incurred, E.piphany recorded intangible assets of approximately
$479 million which are being amortized ratably over an estimated useful life of
three years. The total purchase price is subject to adjustments based upon
finalization of management's integration plans, which may include elimination
of duplicate facilities and fixed assets as well as employee severance.

SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY

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<PAGE> 11

E.piphany generates revenues principally from licensing its software products
directly to customers and providing related professional services including
implementation, consulting, support and training. Through March 31, 2000,
substantially all of E.piphany's revenues have been derived from sales within
the United States through E.piphany's direct sales force. E.piphany's license
agreements generally provide that customers pay a software license fee for one
or more software solutions for a specified number of users. The amount of the
license fee varies based on which software solution is purchased, the number of
software solutions purchased and the number of users licensed. Customers can
subsequently pay additional license fees to allow additional users to use
previously purchased software solutions or to purchase additional software
solutions. Each software solution included in the E.piphany E.4 System contains
the same core technology, allowing for easy integration of additional software
solutions as they are purchased from E.piphany. Customers that purchase software
solutions receive the software on compact disc or via Internet delivery.

Customers generally require consulting and implementation services which
include evaluating their business needs, identifying the data sources necessary
to meet these needs and installing the software solution in a manner which
fulfills their needs. Customers have generally purchased these services directly
from E.piphany through E.piphany's internal professional services organization
on either a fixed fee or a time and expense basis. E.piphany has historically
supplemented the capacity of its internal professional services organization by
subcontracting some of these services to consulting organizations, especially to
those organizations with which E.piphany has relationships such as KPMG,
Cambridge Technology Partners and Ernst & Young. However, E.piphany intends to
increasingly encourage customers to purchase services directly from these
consulting organizations. E.piphany believes that this would increase the number
of consultants which can provide consulting and implementation services related
to E.piphany's software products and that it would increase E.piphany's overall
gross margins by increasing E.piphany's percentage of license revenue, which has
substantially higher gross margins than services revenue, as a percentage of
total revenue. E.piphany also believes that it will encourage these consulting
organizations to generate sales leads within their customer base.

Customers also generally purchase maintenance contracts which provide
software upgrades and technical support over a stated term, generally twelve
months. Revenue on software upgrades and technical support is recognized ratably
over the term of the maintenance contract.

E.piphany recognizes product license revenues in accordance with the
provisions of American Institute of Certified Public Accounts (AICPA) Statement
of Position (SOP) 97-2, "Software Revenue Recognition." Pursuant to the
requirements of SOP 97-2, E.piphany recognizes product license revenues when all
of the following conditions are met:

- E.piphany has signed a noncancellable agreement with the customer,

- E.piphany has delivered the software product to the customer,

- the amount of fees to be paid by the customer is fixed or determinable,
and

- E.piphany believes that collection of these fees is probable.

To date, when E.piphany manages the implementation process for its
customers, the implementation services have been considered essential to the
functionality of the software products. Accordingly, both the product license
revenues and services revenues are recognized in accordance with the provisions
of SOP 81-1, "Accounting for Performance of Construction Type and Certain
Production Type Contracts." Prior to 1999, E.piphany recognized substantially
all of its revenues using the completed contract method as estimates of costs
and efforts necessary to complete the implementation were generally not reliable
given E.piphany's lack of history with implementing its products. In 2000 and
future periods, E.piphany expects to recognize most of its revenues using the
percentage of completion method, and therefore both product license and services
revenues are recognized as work progresses. While E.piphany's software solutions
can generally be implemented in less than 16 weeks, implementation can take
longer depending on the solution which has been licensed, the number of software
solutions licensed, the complexity of the customer's information technology
environment and the resources directed by customers to the implementation
projects. To date, E.piphany has managed the implementation of E.piphany's
solutions for the substantial majority of its customers. When E.piphany
subcontracts services to consulting organizations, E.piphany

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is responsible for managing the implementation. To the extent that customers
contract directly with consulting organizations to provide implementation
services, E.piphany does not manage the implementation, and license revenues are
recognized when the relevant conditions of SOP 97-2 are met. Some of E.piphany's
contracts provide for the delivery of unspecified future products over a period
of time. Accordingly, payments received from E.piphany's customers upon the
signing of these agreements are deferred and the revenues are recognized ratably
over the contract period. Revenue allocated to training and other services is
recognized as the services are performed.

COST OF REVENUES AND OPERATING EXPENSES

E.piphany's cost of license revenues primarily consists of license fees due
to third parties for integrated technology. E.piphany's cost of services
revenues include salaries and related expenses for E.piphany's implementation,
consulting support and training organizations, costs of subcontracting to
consulting organizations to provide consulting services to customers and an
allocation of facilities, communications and depreciation expenses. E.piphany's
operating expenses are classified into three general categories: sales and
marketing, research and development, and general and administrative. E.piphany
classifies all charges to these operating expense categories based on the nature
of the expenditures. E.piphany allocates the costs for overhead and facilities
to each of the functional areas that use the overhead and facilities services
based on their headcount. These allocated charges include facility rent for
corporate offices, communication charges and depreciation expenses for office
furniture and equipment.

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

RESULTS OF OPERATIONS

REVENUES

Total revenues increased to $14.4 million for the three months ended March
31, 2000, from $1.9 million for the three months ended March 31, 1999. For the
three months ended March 31, 2000, there were no customers that made up more
than 10% of revenue. For the three months ended March 31, 1999, KPMG, FileNET,
Pivotal, and Hilton accounted for 22%, 13%, 10%, and 10% of total revenues,
respectively.

Product license revenues increased to $8.3 million, or 57% of total revenue,
for the three months ended March 31, 2000 from $1.1 million, or 60% of total
revenue, for the three months ended March 31, 1999. The increase in dollar
amount of product license revenues was due to both an increase in the number of
licenses sold and the average size of the licenses, and resulted primarily from
the growth of E.piphany's direct sales force and the introduction and shipment
of new products.

Services revenues increased to $6.1 million, or 43% of total revenues, for
the three months ended March 31, 2000 from $0.8 million, or 40% of revenues, for
the three months ended March 31, 1999. The increase in dollar amount of service
revenues was primarily attributable to increased implementation and consulting
services performed in connection with increased license sales and to maintenance
contracts sold to E.piphany's new customers.

Services revenues as a percentage of total revenues has varied significantly
from quarter to quarter due to E.piphany's relatively early stage of
development. The relative amount of services revenues as compared to license
revenues has varied based on the volume of license fees for software solutions
compared to the volume of license fees for additional users, which generally do
not require services. In addition, the amount of services E.piphany provides for
a software solution can vary greatly depending on the solution which has been
licensed, the complexity of the customers' information technology environment,
the resources directed by customers to their implementation projects, the number
of users licensed and the extent to which consulting organizations provide
services directly to customers. Services revenues have substantially lower
margins relative to product license revenues. To the extent

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that services revenues become a greater percentage of our total revenues and
services margins do not increase, E.piphany's overall gross margins will
decline.

This is especially true when E.piphany is required to subcontract with
consulting organizations to supplement its internal professional services
organization. It generally costs E.piphany more to subcontract with consulting
organizations to provide these services than to provide these services itself.
To offset the effect that providing services itself or through subcontractors
has on E.piphany's gross margins, E.piphany intends to further encourage
customers to contract directly with consulting organizations for implementation
and consulting services. Encouraging direct contracts between E.piphany's
customers and consulting organizations may also increase the overall amount of
services available to customers and generate sales leads. E.piphany does not
receive any services revenues when customers contract directly with consulting
organizations for implementation and consulting services.

COST OF REVENUES

Total cost of revenues increased to $6.1 million for the three months ended
March 31, 2000 from $0.8 million for the three months ended March 31, 1999. Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements and have not been significant to
date. Cost of services revenues consists primarily of the costs of consulting
and customer service and support. Cost of services revenues increased to $6.0
million, or 98% of services revenues, for the three months ended March 31, 2000
from $0.8 million, or 109% of services revenues, for the three months ended
March 31, 1999. The increase in cost of services revenues in absolute dollars
resulted primarily from the hiring of additional employees and the
subcontracting of consulting services to consulting organizations to support
increased customer demand for consulting services. Cost of services revenues has
almost exceeded service revenues during the three months ended March 31, 2000,
and during the three months ended March 31, 1999 exceeded services revenues, due
to the rapid growth of E.piphany's services organization from 14 employees at
March 31, 1999 to 93 employees at March 31, 2000 and E.piphany's investment in
experienced management in anticipation of future revenue growth.

OPERATING EXPENSES

Research and Development

Research and development expenses consist primarily of personnel and related
costs associated with E.piphany's product development efforts. Research and
development expenses increased to $3.8 million for the three months ended March
31, 2000 from $1.3 million for the three months ended March 31, 1999. The
increase in absolute dollars was primarily due to an increase in the number of
employees engaged in research and development from 22 employees as of March 31,
1999 to 86 employees as of March 31, 2000. Research and development expenses as
a percentage of total revenues decreased from 68% for the three months ended
March 31, 1999 to 26% for the three months ended March 31, 2000. Research and
development expenses as a percentage of total revenues decreased primarily due
to growth in E.piphany's revenues. E.piphany believes that investments in
product development are essential to its future success and expects that the
absolute dollar amount of research and development expenses will increase in
future periods.

Sales and Marketing

Sales and marketing expenses consist primarily of employee salaries, benefits
and commissions, and the costs of trade shows, seminars, promotional materials
and other sales and marketing programs. Sales and marketing expenses increased
to $11.2 million for the three months ended March 31, 2000 from $2.8 million for
the three months ended March 31, 1999. Sales and marketing expenses as a
percentage of total revenues decreased from 146% for the three months ended
March 31, 1999 to 78% for the three months ended March 31, 2000. The increase in
sales and marketing expenses in absolute dollars was primarily attributable to
an increase in the number of direct sales, pre-sales support and marketing
employees from 27 as of March 31, 1999 to 117 as of March 31, 2000. E.piphany
expects that the absolute dollar amount of sales and marketing expenses will
continue to increase due to the planned growth of its sales force, including the
establishment of sales offices in additional domestic and international
locations including Europe and Asia, and due to expected additional increases in
advertising and marketing programs and other promotional activities.

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General and Administrative

General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $2.3 million for the three
months ended March 31, 1999 from $0.5 million for the three months ended March
31, 2000. The increase in general and administrative expenses in absolute
dollars was primarily attributable to an increase in the number of executive,
finance and administrative employees from 7 as of March 31, 1999 to 37 as of
March 31, 2000. E.piphany expects general and administrative expenses to
increase in absolute dollars in future periods.

Amortization of Goodwill and Purchased Intangibles

Goodwill and purchased intangibles represent the purchase price of
RightPoint in excess of identified tangible assets. In January 2000, E.piphany
recorded $479.3 million of goodwill and purchased intangibles, which are being
amortized on a straight-line basis over three years. The total purchase price is
subject to adjustments based upon finalization of management's integration
plans, which may include elimination of duplicate facilities and fixed assets as
well as employee severance. E.piphany recorded amortization expense of $39.9
million for the three months ended March 31, 2000.

In-Process Research and Development Charge

In connection with the RightPoint acquisition, E.piphany expensed $22.0
million of acquired in-process research and development in the quarter ended
March 31, 2000 which, in the opinion of management, had not reached
technological feasibility and had no alternative future use.

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

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

The nature of the efforts to develop the acquired in-process technology into
commercially viable products and services principally related to the completion
of certain planning, designing, coding, prototyping, and testing activities that
were necessary to establish that the developmental RightPoint technologies met
their design specifications including functional, technical, and economic
performance requirements. Anticipated completion dates ranged from 3 to 11
months, at which times RightPoint expected to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$6.0 million.

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

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

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

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

Stock-Based Compensation

Stock-based compensation consists of amortization of deferred compensation in
connection with stock option grants and sales of stock to employees at exercise
or sales prices below the deemed fair market value of E.piphany's common stock
and compensation related to equity instruments issued to non-employees for
services rendered. E.piphany has recorded aggregate deferred compensation of
$5.9 million related to stock-based compensation to employees. As of March 31,
2000, deferred compensation remaining to be amortized totaled $2.1 million. This
amount is being amortized over the respective vesting periods of these equity
instruments in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. Total stock-based compensation was $477,000 for the three
months ended March 31, 2000. E.piphany expects amortization of approximately
$1,023,000 in the last three quarters of 2000 and $781,000, $309,000, and
$25,000 for the years ended December 31, 2001, 2002, and the first half of 2003,
respectively.

INTEREST INCOME, NET

The increase in interest income, net of interest expense, for the three
months ended March 31, 2000 when compared to the same period in the prior year
was due to increased cash balances as a result of the completion of E.piphany's
initial public offering in September 1999 and its secondary offering in January
2000.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities totaled $4.2 million and $3.2 million
for the three months ended March 31, 2000 and 1999, respectively. Cash used in
operating activities for each period resulted from net losses in those periods.
For the period ended March 31, 2000, cash used in operating activities also
resulted from an increase in accounts receivable and a decrease in accounts
payable. These uses of cash were partially offset by an increase in accrued
liabilities.

Net cash used in investing activities totaled $24.2 million and $0.5 million
for the three months ended March 31, 2000 and 1999, respectively. The increase
resulted from purchases of short-term investments and to a lesser extent,
purchases of property and equipment.

Net cash provided by financing activities totaled $348.7 million and $3.0
million for the three months ended March 31, 2000 and 1999, respectively. The
increase was due primarily to the receipt of proceeds from E.piphany's recently
completed secondary offering.

At March 31, 2000, E.piphany had $401.3 million in cash and cash equivalents
and $23.5 million in short-term investments. E.piphany had a $3.0 million term
loan under a senior credit facility which was paid in full during January 2000.

On January 20, 2000, E.piphany completed a follow-on public offering.
E.piphany issued 1,993,864 shares of common stock in exchange for net proceeds
of approximately $338.6 million, after deduction of the underwriters' discount
and expenses. In connection with the follow-on offering on February 15, 2000,
the underwriters' exercised an option to purchase from E.piphany an additional
104,342 shares of common stock, resulting in additional net proceeds of
approximately $17.7 million, after the underwriters' discount and expenses. The
aggregate number of shares of E.piphany common stock issued in the follow-on
offering was 2,098,206, resulting in aggregate net proceeds of approximately
$365.4 million, after the underwriters' discount and expenses.

In addition, E.piphany has a subordinated debt facility with Comdisco, Inc.
under which E.piphany is entitled to borrow up to $10.0 million, over 42 months
beginning June 1999 at a fixed interest rate of 10.0%. All borrowings under the
subordinated facility are secured by essentially all of E.piphany's assets after
the rights of senior creditors,

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and E.piphany cannot maintain more than $5.0 million of senior debt without
approval of the lender. The outstanding balance of $5.0 million from this loan
was paid in full during January 2000. E.piphany also has a $2.0 million
equipment lease line with Comdisco. Under the equipment lease line, E.piphany is
entitled to lease equipment with payment terms extending over 42 months. The
ability to lease new equipment expires on May 31, 2000 and borrowings bear
interest at 8.5% for the first six months of the lease, and 8.0% thereafter.
E.piphany is currently considering whether to seek to extend this equipment
lease line.

As of March 31, 2000, E.piphany's principal sources of liquidity included
$401.3 million of cash and cash equivalents and $23.5 million in short-term
investments. E.piphany anticipates a substantial increase in its capital
expenditures consistent with anticipated growth in operations, infrastructure
and personnel. E.piphany believes that its current cash and cash equivalents and
short-term investments will be sufficient to meet its anticipated liquidity
needs for working capital and capital expenditures for at least the next twelve
months. If E.piphany requires additional capital resources to grow its business
internally or to acquire complementary technologies and businesses at any time
in the future, E.piphany may seek to sell additional equity or debt securities
or secure an additional bank line of credit. The sale of additional equity or
convertible debt securities could result in additional dilution to E.piphany's
stockholders. E.piphany cannot assure you that any financing arrangements will
be available in amounts or on terms acceptable to it in the future.

RISK FACTORS

WE MAY NOT REALIZE ANY BENEFITS FROM OUR PENDING MERGERS.

Achieving the benefits of the pending mergers with Octane and other companies
will depend in part on the integration of technology, operations and personnel.
The integration of E.piphany with these companies will be a complex, time
consuming and expensive process and may disrupt E.piphany's business if not
completed in a timely and efficient manner. Among the challenges involved in
this integration are demonstrating to customers and suppliers that the merger
will not result in adverse changes in client service standards or business
focus, persuading E.piphany's employees and employees of these companies that
our business cultures are compatible and retaining key personnel. Neither we nor
these companies have experience in integrating operations on the scale
represented by the mergers, and it is not certain that we can successfully
integrated these companies in a timely manner or at all or that any of the
anticipated benefits of the mergers will be realized. Failure to do so could
seriously harm our business, financial condition and operating results.

IF WE DO NOT INTEGRATE OUR TECHNOLOGY QUICKLY AND EFFECTIVELY WITH ACQUIRED
TECHNOLOGIES, MANY OF THE POTENTIAL BENEFITS OF OUR PENDING MERGERS MAY NOT BE
REALIZED.

We intend to integrate Octane's and other companies' technology into our own
software solutions as well as offer these companies' solutions separately. We
cannot assure you that we will be able to integrate this technology quickly and
effectively. In order to obtain the benefits of the mergers, we must make these
companies' technology, products and services operate together with our
technology, products and services. We may be required to spend additional time
or money on integration which would otherwise be spent on developing our own
business and services. If we do not integrate the technology effectively or if
management spends too much time on integration issues, it could harm our
business, financial condition and results of operations.

THE MERGERS MAY RESULT IN A LOSS OF EMPLOYEES.

Despite our efforts to hire and retain quality employees, we might lose some
of our own employees or employees of the companies we acquire following the
mergers. Competition for qualified management, engineering and technical
employees in the software industry is intense. We may have a different corporate
culture from the companies to be acquired, and employees of these companies may
not want to work for a larger, publicly-traded company instead of a smaller,
start-up company. Some key employees of Octane hold options which will partially
vest as a result of the merger, and this may affect our ability to retain these
employees. In addition, competitors may recruit employees prior to the merger
and during integration, as is common in high technology mergers. As a result,
employees could leave with little or no prior notice. We cannot assure you that
the combined company will be able to attract, retain and integrate employees
following the merger.

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In addition, in connection with the proposed mergers, certain employees have
entered into employment and non-competition agreements which will restrict their
ability to compete with us if they leave. We cannot assure you of the
enforceability of these non-competition agreements or that these employees will
continue to work at E.piphany under their employment agreements after the
mergers.

THE MERGERS MAY RESULT IN A LOSS OF CUSTOMERS.

As a result of the merger some customers or potential customers may not
continue to do business with us or the companies to be acquired. In such case,
we may lose significant revenue these companies might have otherwise received
had the merger not occurred.

MERGER RELATED ACCOUNTING CHARGES WILL DELAY AND REDUCE OUR PROFITABILITY.

The Octane acquisition and acquisition of other companies are being accounted
for by us under the "purchase" method of accounting. The RightPoint acquisition
was accounted for under the "purchase" method of accounting. Under the purchase
method, the purchase price of the companies acquired is allocated to the assets
and liabilities acquired. As a result, we will incur accounting charges from the
mergers which will delay and reduce our profitability. These charges are
currently estimated to include:

- amortization of intangible assets estimated to be approximately $2.7
billion amortized over three years in connection with the acquisition of
Octane,

- in-process research and development of approximately $25 million, to be
expensed in the quarter ended June 30, 2000, and

- other costs not currently known.

IF THE CONDITIONS TO THE MERGERS ARE NOT MET, THE MERGERS WILL NOT OCCUR.

Several conditions must be satisfied or waived to complete the pending
mergers. We cannot assure you that each of the conditions to each merger will be
satisfied. If the conditions for a merger are not satisfied or waived, the
merger will not occur or will be delayed, and we may lose some or all of the
intended benefits of the merger.

E.PIPHANY AND OCTANE HAVE A HISTORY OF LOSSES, EXPECT LOSSES IN THE FUTURE AND
THE COMBINED COMPANY MAY NOT EVER BECOME PROFITABLE.

We incurred net losses of $67.0 million for the quarter ended March 31, 2000,
$22.4 million in the year ended December 31, 1999, $10.3 million in the year
ended December 31, 1998 and $3.1 million in the year ended December 31, 1997. We
had an accumulated deficit of $102.8 million as of March 31, 2000, and $35.9
million as of December 31, 1999. Octane incurred net losses of $14.0 million for
the quarter ended March 31, 2000, $14.4 million for the year ended December 31,
1999 and $1.4 million for the year ended December 31, 1998. Octane had an
accumulated deficit of $33.9 million at March 31, 2000, and $18.3 million at
December 31, 1999. We expect to continue to incur losses before amortization
charges for the foreseeable future. In addition, in connection with the
acquisitions of Octane, RightPoint and other companies, we will incur
significant accounting charges for the amortization of intangible assets over
the three years following these mergers. These losses will be substantial, and
we may not ever become profitable. In addition, we expect to significantly
increase our expenses in the near term, especially research and development and
sales and marketing expenses. Therefore, our operating results will be harmed if
our revenue does not keep pace with its expected increase in expenses or is not
sufficient for us to achieve profitability. If we do achieve profitability in
any period, it cannot be certain that we will sustain or increase profitability
on a quarterly or annual basis.

OUR LIMITED OPERATING HISTORY AND THE LIMITED OPERATING HISTORY OF THE COMPANIES
WE PROPOSED TO ACQUIRE, MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR
BUSINESS DIFFICULT.

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Our limited operating history and the limited operating history of
RightPoint, Octane and the limited operating history of the other companies that
we proposed to acquire makes it difficult to forecast the combined company's
future operating results. We were founded in November 1996 and began developing
products in 1997. Octane was founded in 1997 and began developing products in
1998. Our revenue and income potential is unproven. We received our first
revenues from licensing our software and performing related services in early
1998, and began shipping the E.piphany E.4 System software in June 1999. Octane
began offering its products in the third quarter of 1999. Since neither we nor
the companies we proposed to acquire has a long history upon which to base
forecasts of future operating results, any predictions about our future revenues
and expenses may not be as accurate as they would be if E.piphany, Octane and
the other companies we acquire had a longer business history.

VARIATIONS IN QUARTERLY OPERATING RESULTS DUE TO SUCH FACTORS AS CHANGES IN
DEMAND FOR OUR PRODUCTS AND CHANGES IN OUR MIX OF REVENUES MAY CAUSE OUR STOCK
PRICE TO DECLINE.

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

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

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

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

- customers' decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next,

- changes in demand for our software or for enterprise software and real
time marketing solutions generally,

- announcements or introductions of new products by our competitors,

- software defects and other product quality problems,

- our ability to integrate acquisitions,

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

- our ability to hire, train and retain sufficient engineering,
consulting, training and sales staff.

THE LOSS OF KEY PERSONNEL OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD AFFECT OUR ABILITY TO SUCCESSFULLY GROW OUR BUSINESS.

Our future success will depend in large part on our ability to hire and
retain a sufficient number of qualified personnel, particularly in sales,
marketing, research and development, service and support. If we are unable to do
so, this inability could affect our ability to grow our business. Competition
for qualified personnel in high technology is intense, particularly in the
Silicon Valley region of Northern California where our principal offices are
located. Our future success also depends upon the continued service of our
executive officers and other key sales, engineering and technical staff. The
loss of the services of our executive officers and other key personnel would
harm our operations. None of our officers or key personnel are bound by an
employment agreement, other than Gayle Crowell

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and the Octane employees who entered into agreements in connection with the
merger, and we do not maintain key person insurance on any of our employees. We
would also be harmed if one or more of our officers or key employees decided to
join a competitor or otherwise compete with us.

The market price of our common stock has fluctuated substantially since our
initial public offering in September 1999. Consequently, potential employees may
perceive our equity incentives such as stock options as less attractive and
current employees whose options are no longer priced below market value may
choose not to remain employed by us. In that case, our ability to attract or
retain employees will be adversely affected. Furthermore, a substantial portion
of the equity incentives previously granted to Octane employees will accelerate
and become substantially vested upon the closing of the merger. New options
granted to Octane employees at the current market price of our common stock may
not be sufficient to retain Octane employees.

IF CUSTOMERS DO NOT CONTRACT DIRECTLY WITH CONSULTING ORGANIZATIONS TO IMPLEMENT
AND SUPPORT E.PIPHANY'S AND OCTANE'S PRODUCTS, OUR REVENUES, PROFITABILITY AND
MARGINS MAY BE HARMED.

Our principal focus and Octane's principal focus is providing software
solutions rather than services. As a result, we encourage our customers to
purchase consulting, implementation, maintenance and training services directly
from consulting organizations instead of purchasing these services from us.
While we do not receive any fees directly from these consulting organizations
when they contract directly with our customers, we believe that these consulting
organizations increase market awareness and acceptance of our software solutions
and allow us to focus on software development and licensing. If consulting
organizations are unwilling or unable to provide a sufficient level and quality
of 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.

Further, to the extent that consulting organizations do not provide
consulting, implementation, maintenance and training services directly to our
customers, we need to provide these services to our customers. We provide these
services to our customers either directly through our internal professional
services organization or indirectly through subcontractors we hire to perform
the services on our behalf. Because our margins on service revenues are less
than our margins on license revenues, our overall margins decline when we
provide 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,
implementation, maintenance and training services and obtain them from our
internal professional services organization, which employed a staff of 93 as of
March 31, 2000, or from outside consulting organizations. Octane employed a
staff of 60 in its internal professional services organization as of March 31,
2000. When we provide these services, we generally recognize revenue from the
licensing of our software products as the implementation services are performed.
If our internal professional services organization does not effectively
implement and support our products or if we are unable to expand our internal
professional services organization as needed to meet our customers' needs, our
ability to sell software, and accordingly our revenues, will be harmed.

In addition, when we sell licenses together with professional services for
implementation, we generally recognize the revenue from both the license and the
services as we perform the implementation services. Therefore, delays in
providing implementation services will delay our recognition of revenue. If we
are unable to expand our internal professional services organization to keep
pace with sales, we will be required to increase our use of subcontractors to
help meet our implementation and service obligations, which will result in lower
gross margins. In addition, we may be unable to negotiate agreements with
subcontractors to provide a sufficient level and quality of services. If we fail
to retain sufficient subcontractors, our ability to sell software for which
these services are required will be harmed and our revenues will suffer.

OUR SERVICES REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR PRODUCT
REVENUES, AND AN INCREASE IN SERVICE REVENUES RELATIVE TO LICENSE REVENUES COULD
HARM OUR GROSS MARGINS.

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<PAGE> 20

E.piphany's services revenues, which includes fees for consulting,
implementation, maintenance and training, were 43% of its revenues for the
quarter ended March 31, 2000, 47% of its revenues for the year ended December
31, 1999 and 34% of E.piphany's revenues for the year ended December 31, 1998.
Octane's services revenues were 46% of its revenues for the quarter ended March
31, 2000, 81% of its revenues for the year ended December 31, 1999 and 100% of
revenues for the year ended December 31, 1998. Both companies' services revenues
have substantially lower gross margins than license revenues. Our cost of
services revenues for the quarter ended March 31, 2000 and the year ended
December 31, 1999 was 98% and 102%, respectively, of our services revenues.
Octane's cost of services revenues for the quarter ended March 31, 2000 and the
year ended December 31, 1999 was 94% and 59%, respectively, of its services
revenues. An increase in the percentage of total revenues represented by
services revenues could adversely affect our overall gross margins.

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

- the software solution which has been licensed,

- the complexity of the customers' information technology environment,

- the resources directed by customers to their implementation projects,

- the number of users licensed, and

- the extent to which outside consulting organizations provide services
directly to customers.

NEW PRODUCT INTRODUCTIONS AND PRICING STRATEGIES BY OUR COMPETITORS COULD
ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND COULD RESULT IN PRESSURE
TO PRICE OUR PRODUCTS IN A MANNER THAT REDUCES OUR MARGINS.

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

We compete principally with vendors of:

- data management and data analysis software tools, such as Brio
Technology, Broadbase, Business Objects, Informatica, Microstrategy and
Sagent Technology,

- enterprise application software, such as Oracle, PeopleSoft, SAP and
Siebel Systems,

- marketing campaign management software tools, such as Exchange
Applications, Prime Response, and Recognition Systems,

- software that recommends products to customers in real-time based on
simple analytics rules such as Net Perceptions, and

- electronic customer relations management software, such as Kana
Communications (Silknet Software), eGain, Primus Knowledge Solutions,
Nortel (Clarify), PeopleSoft (Vantive), and Siebel Systems (Scopus).

Many of these companies have significantly greater financial, technical,
marketing, service and other resources. Many of these companies also have a
larger installed base of users, have been in business longer or have greater
name recognition than we do. For example, in fiscal 1999, Oracle's annual
revenue exceeded $8.0 billion, and the annual revenue of Siebel Systems in
fiscal 1999 exceeded $790 million. Some large companies may attempt to build
capabilities into their products that are similar to the capabilities of our
products. Some of our competitors' products may be more effective than our
products at performing particular functions or be more customized for particular
needs. Even if these functions are more limited than those provided by our
products, our competitors' software

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<PAGE> 21

products could discourage potential customers from purchasing our products. For
example, our competitors' software products may incorporate other capabilities,
such as recording accounting transactions, customer orders or inventory
management data. A software product that performs these functions, as well as
some of the functions of our software solutions, may be appealing to some
customers because it would reduce the number of different types of software
necessary to effectively run their business. Further, our competitors may be
able to respond more quickly than we can to changes in customer requirements.

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

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

OUR REVENUES MIGHT BE HARMED BY RESISTANCE TO ADOPTION OF E.PIPHANY'S SOFTWARE
BY INFORMATION TECHNOLOGY DEPARTMENTS.

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

IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, OUR REVENUES WILL BE REDUCED.

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

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

- not achieve favorable results using these products,

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

- use alternative methods to solve the same business problems.

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

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<PAGE> 22

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
E.piphany E.4 System and the Octane 2000 suite of products and develop new
products that include new technological developments, keep pace with products of
our competitors and satisfy the changing requirements of our customers. If we do
not, we may not achieve market acceptance and we may be unable to attract new
customers. E.piphany may also lose existing customers, to whom we seeks to sell
additional software solutions and professional services.

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

- improve and introduce new software solutions for reporting and analysis,
distributed database marketing and e-commerce,

- integrate Octane's offerings with the E.piphany E.4 System offerings,

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

- enhance our software's ease of administration,

- improve our software's ability to extract data from existing software
systems, and

- adapt to rapidly changing computer operating system and database
standards and Internet technology.

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

In addition, we have entered into customer contracts which contain specific
performance goals relating to new product releases or enhancements, and if we
are not able to meet these goals, we may be required to, among other things,
return fees, pay damages and offer discounts.

IF OUR PRODUCTS DO NOT STAY COMPATIBLE WITH CURRENTLY POPULAR SOFTWARE PROGRAMS,
WE MAY LOSE SALES AND REVENUES.

The E.piphany E.4 System and the Octane 2000 suite of 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 its software to be
compatible with newer versions of these programs, we may lose customers.

In order to operate the E.piphany E.4 System or the Octane 2000 suite of
products, each of these systems must be installed on both a computer server
running the Microsoft Windows NT or Windows 2000 computer operating systems and
a computer server running database software from Microsoft or Oracle. E.piphany
and Octane are each currently modifying their respective software to also
operate on UNIX operating systems and IBM DB2 databases. If we fail to
successfully complete these modifications in a timely manner, we may lose sales
and revenues. In addition, users access the E.piphany E.4 System and certain of
Octane's products through standard Internet browsers such as Microsoft Internet
Explorer. If we fail to obtain access to developer versions of these software
products, we may be unable to build and enhance our products on schedule.

After installation, each of the E.piphany E.4 System and the Octane 2000
suite of products collects and analyzes data to profile customers'
characteristics and preferences. This data may be stored in a variety of our
customers' existing software systems, including leading systems from Oracle,
PeopleSoft, Siebel Systems, SAP and Vantive, running on a variety of computer
operating systems. If we fail to enhance our software to collect data from new
versions of these products, we may lose potential customers. If we lose
customers, our revenues and profitability may be harmed.

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<PAGE> 23

IF DATABASE ACCESS BECOMES STANDARDIZED, DEMAND FOR OUR PRODUCTS WILL BE
REDUCED.

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

E.PIPHANY'S AND OCTANE'S PRODUCTS HAVE LONG SALES CYCLES WHICH MAKES IT
DIFFICULT TO PLAN EXPENSES AND FORECAST RESULTS.

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

- the complex nature of our products,

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

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

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

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

- potential customers may delay purchases due to announcements or planned
introductions of new products by E.piphany or its competitors, and

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

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

IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR RELATIONSHIPS WITH THIRD
PARTIES, OUR ABILITY TO GROW REVENUES COULD BE HARMED.

In order to grow our business, we must generate, retain and strengthen
relationships with third parties. To date, we have established relationships
with several companies, including consulting organizations and system
integrators that implement our software, including Cambridge Technology
Partners, Ernst & Young and KPMG; resellers, including Acxiom, Harte-Hanks and
Pivotal; and application service providers that provide access to our software
to their customers over the Internet, including Corio, Exactis.com, Bullseye
Interactive and Interrelate. Similarly, Octane has also entered into reseller
agreements with several companies including TeleTech, Eltrax, RISC Management,
e-Assist.com, Brigade Solutions, e-Convergent, and MISNet. If the third parties
with whom we and Octane have relationships do not provide sufficient,
high-quality service or integrate and support our software correctly, our
revenues may be harmed. In addition, the third parties with whom we have
relationships may offer products of other companies, including products that
compete with our products. We typically enter into contracts with third parties
that generally set out the nature of our relationships. However, our contracts
do not require these third parties to devote resources to promoting, selling and
supporting our products. Therefore we have little control over these third
parties. We cannot assure you that we can generate and maintain relationships
that offset the significant time and effort that are necessary to develop these
relationships.

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<PAGE> 24

We must also effectively take advantage of the resources and expertise of
third parties to help it develop the E.piphany E.4 System and the Octane 2000
product suite. Our agreements with third parties do not require them to help us
develop new software. If we fail to effectively work with third parties, our
ability to increase revenues by broadening our software solution offerings,
particularly in additional specific industries, will be limited.

IF WE FAIL TO EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, WE WILL NOT BE ABLE
TO INCREASE REVENUES.

In order to grow our business, we need to increase market awareness and sales
of our products and services. To achieve this goal, we need to increase both our
direct and indirect sales channels. If we fail to do so, this failure could harm
our ability to increase revenues. E.piphany and Octane currently receive
substantially all of their revenues from direct sales, but we intend to increase
sales through indirect sales channels in the future. We also need to expand our
direct sales force by hiring additional salespersons and sales management.

We intend to derive revenues from indirect sales channels by selling our
software through value added resellers. These resellers offer our software
products to their customers together with consulting and implementation services
or integrate our software solutions with other software. We also intend to
increasingly offer our software through application service providers, who
install our software on their own computer servers and charge their customers
for access to that software. We need to expand our indirect sales channels by
entering into additional relationships with these third parties.

We have not derived a material amount of revenues from international sales to
date, but we expect as part of our strategy to increase international sales
principally through the use of indirect sales channels. We will be even more
dependent on indirect sales channels in the future due to our international
strategy. We also plan to use international direct sales personnel and therefore
must hire additional sales personnel outside the United States. Our ability to
develop and maintain these channels will significantly affect our ability to
penetrate international markets.

WE HAVE GROWN VERY QUICKLY AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO
GENERATE NEW REVENUES AND ACHIEVE PROFITABILITY WOULD BE HARMED.

We have grown significantly since our inception and will need to grow quickly
in the future. Any failure to manage this growth could impede our ability to
increase revenues and achieve profitability. We have increased our number of
employees from 21 at December 31, 1997 to 333 as of March 31, 2000. Following
the acquisition of Octane, we expect to have over 500 employees. The acquisition
of Octane and future expansion could be expensive and strain our management and
other resources. In order to manage growth effectively, we must:

- hire, train and integrate new personnel,

- integrate people and technologies from acquired companies,

- continue to augment our financial and accounting systems,

- manage our sales operations, which are in several locations, and

- expand our facilities.

IF OTHERS CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, WE COULD
INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM SELLING OUR PRODUCTS.

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

We have been contacted by a company which has asked us to evaluate the need
for a license of a patent the company holds directed to data extraction
technology. This company has filed litigation alleging infringement of its

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<PAGE> 25

patent against three of our competitors. We cannot assure you that the holder of
the patent will not file litigation against us or that we would prevail in the
case of such litigation. In addition, the patent holder has informed us that it
has applications pending in numerous foreign countries. The patent holder may
also have applications on file in the United States covering related subject
matter which are confidential until the patent is issued.

Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of our management and key personnel from
our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements.

However, we may not be able to obtain royalty or license agreements on terms
acceptable to it, or at all. We also may be subject to significant damages or an
injunction against use of its 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.

In addition, in all of Octane's software license agreements, Octane has
agreed to indemnify its customers against losses attributable to intellectual
property infringement by Octane's software. Should a third party claim that
Octane infringes their intellectual property, E.piphany could incur substantial
costs in defending and resolving such claims.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THIS INABILITY
COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUES AND INCREASE OUR
COSTS.

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

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

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

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

PRIVACY AND SECURITY CONCERNS, PARTICULARLY RELATED TO THE USE OF OUR SOFTWARE
ON THE INTERNET, MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE DEMAND FOR OUR
PRODUCTS.

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

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

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<PAGE> 26

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

E.PIPHANY'S AND OCTANE'S PRODUCTS ARE NEW, AND IF THEY CONTAIN DEFECTS OR OUR
SERVICES ARE NOT PERCEIVED AS HIGH QUALITY, WE COULD LOSE POTENTIAL CUSTOMERS OR
BE SUBJECT TO DAMAGES.

We began shipping our first products in early 1998, and in June 1999, began
shipping our E.piphany E.4 System software. Octane began shipping its current
software product in February 2000. These products are complex and may contain
currently unknown errors, defects or failures, particularly since they are new
and recently released. In the past we have discovered software errors in some of
our products after introduction. We may not be able to detect and correct errors
before releasing our products commercially. If our commercial products contain
errors, we may be required to:

- expend significant resources to locate and correct the error,

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

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

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

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

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

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

- be expensive to defend, and

- result in large damage awards.

Our product liability insurance may not be adequate to cover all of the
expenses resulting from a claim. In addition, if our customers do not find our
services to be of high quality, they may elect to use other training, consulting
and product integration firms rather than contract for our services. If
customers are dissatisfied with our services, we may lose revenues.

WE INTEND TO EXPAND OUR INTERNATIONAL SALES EFFORTS BUT WE DO NOT HAVE
SUBSTANTIAL EXPERIENCE IN INTERNATIONAL MARKETS.

Although our international sales have been immaterial to date, we intend to
expand our international sales efforts in the future. We have limited experience
in marketing, selling and supporting our products and services abroad. If we are
unable to grow our international operations successfully and in a timely manner,
our business and operating

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<PAGE> 27

results could be seriously harmed. In addition, doing business internationally
involves greater expense and many additional risks, particularly:

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

- differing intellectual property rights,

- differing labor regulations,

- unexpected changes in regulatory requirements,

- changes in a specific country's or region's political or economic
conditions,

- greater difficulty in establishing, staffing and managing foreign
operations, and

- fluctuating exchange rates.

E.piphany plans to expand its international operations in the near future,
and this will require a significant amount of attention from our management and
substantial financial resources. E.piphany has begun its efforts at
international expansion in Europe and, as of March 31, 2000, including
RightPoint's international presence, had nine sales and marketing professionals
located in the United Kingdom and France. Octane has sales operations based in
the United Kingdom, Australia, and Germany including 23 professionals employed
in those locations. E.piphany is also exploring other regions for future
expansion.

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 acquisition of Octane, we may acquire or make investments
in other complementary companies, services and technologies in the future. If we
fail to properly evaluate and execute acquisitions and investments, they may
seriously harm our business and prospects. To successfully complete an
acquisition, we must:

- properly evaluate the technology,

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

- integrate and retain personnel,

- combine potentially different corporate cultures, and

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

If we fail to do any of these, we may suffer losses or our management may be
distracted from our day-to-day operations. In addition, if we conduct
acquisitions using convertible debt or equity securities, existing stockholders
may be diluted which could affect the market price of our stock.

SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE MAY AFFECT OUR QUARTERLY REVENUES.

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

FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE PURCHASED IN OUR INITIAL
PUBLIC OFFERING AND THOSE ISSUED IN THE MERGER, MAY DEPRESS OUR STOCK PRICE.

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<PAGE> 28

If our stockholders or optionees sell substantial amounts of our common stock
in the public market, the market price of our common stock could fall. In
addition, such sales could create the perception to the public of difficulties
or problems with our products and services. As a result, these sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.

On April 14, 2000, we had 32,444,364 shares of common stock outstanding. Of
these shares, 31,182,693 are currently available for sale in the public market,
20,515,245 of which first became freely tradeable on April 20, 2000. In
addition, we will issue up to approximately 12,800,000 freely tradable shares to
Octane's shareholders in the merger. The remaining outstanding shares of our
common stock will become eligible for sale in the public market as follows:

NUMBER OF SHARES DATE
---------------- ----

<S> <C> <C>
843,376............................................ At June 16, 2000
316,407............................................ At August 19, 2000
21,571............................................. At September 22, 2000
6,250.............................................. At September 27, 2000
74,067............................................. At December 14, 2000
</TABLE>

The above table excludes options and warrants (including those assumed in the
merger). Shares issued upon the exercise of outstanding options (including those
assumed in the merger) may generally also be sold in the public market.
E.piphany and its underwriters may remove the lock-up restrictions in advance
without prior notice.

WE DO NOT INTEND TO PAY DIVIDENDS, YOU WILL NOT RECEIVE FUNDS WITHOUT SELLING
SHARES AND YOU MAY LOSE THE ENTIRE AMOUNT OF YOUR INVESTMENT.

E.piphany has never declared or paid any cash dividends on its capital stock
and does not intend to pay dividends in the foreseeable future. E.piphany
intends to invest its future earnings, if any, to fund our growth. Therefore,
you will not receive any funds without selling your shares. We further cannot
assure you that you will receive a return on your investment when you sell your
shares or that you will not lose the entire amount of your investment.

BECAUSE SOME EXISTING STOCKHOLDERS TOGETHER OWN 22.4% OF OUR STOCK, THE VOTING
POWER OF OTHER STOCKHOLDERS MAY BE LIMITED.

After the closing of the acquisition of Octane, it is anticipated that our
officers, directors and five percent or greater stockholders will beneficially
own or control, directly or indirectly, approximately 10,220,773 shares of
common stock, which in the aggregate represented approximately 22.4% of the
outstanding shares of common stock. As a result, if some of these persons or
entities act together, they may have the ability to control matters submitted to
E.piphany's stockholders for approval, including the election and removal of
directors and the approval of any business combination. This may delay or
prevent an acquisition or cause the market price of our stock to decline. Some
of these persons or entities may have interests different than yours. For
example, they may be more interested in selling E.piphany to an acquiror than
other investors or may want E.piphany to pursue strategies that are different
from the wishes of other investors.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF E.PIPHANY.

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

Our board of directors also have the ability to issue preferred stock which
would significantly dilute the ownership of a hostile acquiror. In addition,
Section 203 of the Delaware General Corporation Law limits business

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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 E.piphany 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 acquiror that it
did not feel was in the strategic interests of E.piphany. If the acquiror was
discouraged from offering to acquire E.piphany or prevented from successfully
completing a hostile acquisition by the antitakeover measures, you could lose
the opportunity to sell your shares at a favorable price.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange 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 Quarterly
Report on Form 10-Q.

Foreign Currency Exchange Rate Risk

To date, all of our recognized revenues have been denominated in U.S. dollars
and primarily from customers in the United States, and our exposure to foreign
currency exchange rate changes has been immaterial. We expect, however, that
future product license and services revenues may also be derived from
international markets and may be denominated in the currency of the applicable
market. As a result, our operating results may become subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales denominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor our
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not adversely affect
our financial results in the future.

Interest Rate Risk

As of March 31, 2000, we had cash and cash equivalents of $401.3 million
which consist of cash and highly liquid short-term investments. Declines of
interest rates over time will reduce our interest income from our short-term
investments. Based upon our balance of cash and cash equivalents, a decrease in
interest rates of 0.5% would cause a corresponding decrease in our annual
interest income by approximately $2.0 million. As of March 31, 2000, we did not
have any short-term or long term debt outstanding.

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E.PIPHANY, INC.

FORM 10-Q, MARCH 31, 2000

PART II: OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

27.1 Financial Data Schedule.

(b) Reports on Form 8-K

A current report on Form 8-K was filed with the Securities and
Exchange Commission by E.piphany on March 28, 2000 to report the
announcement of the signing of a definitive agreement to acquire
Octane Software, Inc.

A current report on Form 8-K was filed with the Securities and
Exchange Commission by E.piphany on January 19, 2000 to report
the completion of E.piphany's acquisition of RightPoint Software,
Inc. and to include financial statements of RightPoint Software,
Inc. and pro forma financial information of E.piphany related to
the acquisition.

ITEMS 1, 2, 3, 4 AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.

30
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E.PIPHANY, INC.

FORM 10-Q, MARCH 31, 2000

SIGNATURES

Pursuant to the requirements of the Securities and 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 5, 2000 SIGNATURE: /s/ Roger S. Siboni
---------------------------- -------------------------------

Roger S. Siboni
President, Chief Executive
Officer and Director

DATE: May 5, 2000 SIGNATURE: /s/ Kevin J. Yeaman
---------------------------- -------------------------------

Kevin J. Yeaman
Chief Financial Officer

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<PAGE> 32
EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 401,268
<SECURITIES> 23,452
<RECEIVABLES> 9,867
<ALLOWANCES> 550
<INVENTORY> 0
<CURRENT-ASSETS> 437,475
<PP&E> 7,163
<DEPRECIATION> 467
<TOTAL-ASSETS> 883,866
<CURRENT-LIABILITIES> 25,121
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 858,740
<TOTAL-LIABILITY-AND-EQUITY> 883,866
<SALES> 14,415
<TOTAL-REVENUES> 14,415
<CGS> 6,129
<TOTAL-COSTS> 6,129
<OTHER-EXPENSES> 79,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (66,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,968)
<EPS-BASIC> (2.35)
<EPS-DILUTED> (2.35)

</TABLE>