E PIPHANY INC, 10-Q, 2000-08-14

E PIPHANY INC
10-Q, 2000-08-14
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 JUNE 30, 2000

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

Commission File Number 000-26881

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 June 30, 2000, was 45,166,080.

<PAGE> 2

E.PIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2000

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NO.
--------------------------------------------------------------------------------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements

Condensed Consolidated Balance Sheets - 3
As of June 30, 2000 and December 31, 1999

Condensed Consolidated Statements of Operations - 4
Three and six months ended June 30, 2000 and 1999

Condensed Consolidated Statements of Cash Flows - 5
Six months ended June 30, 2000 and 1999

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk 29

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

Item 1. Legal Proceedings 31

Item 2. Changes in Securities and Use of Proceeds 31

Item 3. Defaults Upon Senior Securities 31

Item 4. Submission of Matters to a Vote of Securities Holders 31

Item 5. Other Information 32

Item 6. Exhibits and reports on Form 8-K 32

--------------------------------------------------------------------------------
SIGNATURES 33

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

2
<PAGE> 3

E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 58,084 $ 419,244
Short-term investments ................................................ 22,926 20,306
Accounts receivable, net .............................................. 5,502 16,157
Prepaid expenses and other assets ..................................... 2,959 8,423
--------- -----------
Total current assets ............................................... 89,471 464,130
Property and equipment, net ............................................. 3,932 12,082
Goodwill and purchased intangibles ...................................... -- 3,077,864
Other assets ............................................................ 183 752
--------- -----------
Total assets ....................................................... $ 93,586 $ 3,554,828
========= ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of capital lease obligations .......................... $ 237 $ 663
Current portion of notes payable ...................................... 894 --
Trade accounts payable ................................................ 650 1,627
Accrued merger costs .................................................. -- 33,866
Accrued compensation .................................................. 3,504 9,725
Accrued other ......................................................... 2,192 12,163
Deferred revenue ...................................................... 3,643 12,498
--------- -----------
Total current liabilities .......................................... 11,120 70,542
Capital lease obligations, net of current portion ....................... 399 1,036
Notes payable, net of current portion ................................... 7,425 --
--------- -----------
Total liabilities .................................................. 18,944 71,578
--------- -----------
Stockholders' equity:
Common stock .......................................................... 5 6
Additional paid-in capital ............................................ 113,636 3,738,218
Warrants to purchase preferred stock .................................. 143 --
Notes receivable ...................................................... (640) (2,758)
Accumulated and other comprehensive income ............................ (31) (154)
Deferred compensation ................................................. (2,602) (1,669)
Accumulated deficit ................................................... (35,869) (250,393)
--------- -----------
Total stockholders' equity ......................................... 74,642 3,483,250
--------- -----------
Total liabilities and stockholders' equity ......................... $ 93,586 $ 3,554,828
========= ===========
</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)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product license .............................................. $ 1,793 $ 14,293 $ 2,929 $ 22,561
Services ..................................................... 1,437 10,226 2,195 16,373
-------- --------- -------- ---------
Total revenues ............................................ 3,230 24,519 5,124 38,934
-------- --------- -------- ---------
Cost of revenues:
Product license .............................................. 20 315 25 424
Services ..................................................... 1,661 9,376 2,488 15,396
-------- --------- -------- ---------
Total cost of revenues .................................... 1,681 9,691 2,513 15,820
-------- --------- -------- ---------
Gross profit .............................................. 1,549 14,828 2,611 23,114
-------- --------- -------- ---------
Operating expenses:
Research and development ..................................... 1,571 5,408 2,865 9,166
Sales and marketing .......................................... 3,588 15,905 6,351 27,117
General and administrative ................................... 828 4,039 1,284 6,296
In-process research and development charge ................... -- 25,000 -- 47,000
Amortization of goodwill and purchased intangibles .......... -- 117,315 -- 157,258
Stock-based compensation ..................................... 969 1,184 1,572 1,661
-------- --------- -------- ---------
Total operating expenses .................................. 6,956 168,851 12,072 248,498
-------- --------- -------- ---------
Loss from operations ...................................... (5,407) (154,023) (9,461) (225,384)
Other income (expense), net .................................... 20 6,467 115 10,860
-------- --------- -------- ---------
Net loss .................................................. $ (5,387) $(147,556) $ (9,346) $(214,524)
======== ========= ======== =========
Basic and diluted net loss per share ........................... $ (1.05) $ (4.31) $ (1.92) $ (6.77)
======== ========= ======== =========
Shares used in computing basic and diluted net loss per share .. 5,149 34,272 4,869 31,674
======== ========= ======== =========
Pro forma basic and diluted net loss per share(1) .............. $ (0.34) $ (4.31) $ (0.60) $ (6.77)
======== ========= ======== =========
Shares used in computing pro forma basic and
diluted net loss per share(1) .................................. 15,876 34,272 15,543 31,674
======== ========= ======== =========
</TABLE>
-------------
(1) Pro form basic and diluted net loss per share is computed giving effect to
the conversion of preferred shares to common shares as if the conversion
had occurred at the date of their issuance.

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

4
<PAGE> 5

E.PIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 2000
-------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $(9,346) $(214,524)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ............................. 320 1,297
Allowance for doubtful accounts ........................... 201 950
Noncash compensation expense .............................. 1,572 1,661
Noncash interest expense .................................. 9 --
In-process research and development charge ................ -- 47,000
Amortization of goodwill and purchased intangibles ........ -- 157,258
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable ..................................... (766) (7,641)
Prepaid expenses and other assets ....................... (153) (4,433)
Trade accounts payable .................................. (482) 108
Accrued liabilities ..................................... 1,185 2,348
Deferred revenue ........................................ 419 6,697
-------- ---------
Net cash used in operating activities ................ (7,222) (9,279)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment .......................... (811) (4,199)
Cash acquired in acquisitions ................................ -- 24,282
Direct costs of purchase transactions ........................ -- (3,172)
Purchases and sales of investments, net ...................... -- 2,497
-------- ---------
Net cash (used in) provided by investing activities .. (811) 19,408
-------- ---------
Cash flows from financing activities:
Borrowings on line of credit ................................. 8,000 --
Repayments on line of credit ................................. (89) (8,319)
Principal payments on capital lease obligations .............. (28) (164)
Proceeds from secondary offering, net ........................ -- 356,108
Repayments on notes receivable ............................... -- 246
Proceeds from sale of convertible preferred stock, net ....... 5,970 --
Proceeds from sale of common stock, net of repurchases........ 437 3,160
-------- ---------
Net cash provided by financing activities ............ 14,290 351,031
-------- ---------
Net increase (decrease) in cash and cash equivalents ........... 6,257 361,160
Cash and cash equivalents at beginning of period ............... 13,595 58,084
-------- ---------
Cash and cash equivalents at end of period ..................... $ 19,852 $ 419,244
======== =========
</TABLE>

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

5
<PAGE> 6

E.PIPHANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements included herein have been
prepared by E.piphany, 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, E.piphany believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in E.piphany'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 and six months ended June 30, 2000. The results for the three and six
months ended June 30, 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 E.piphany and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.

FOREIGN CURRENCY TRANSLATION

The functional currency of E.piphany'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 June 30, 2000 have not been material. Foreign currency transaction gains
and losses are included in other income (expense) and as of June 30, 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 stockholders ("comprehensive income"). Comprehensive income is
the total of net income and all other non-owner changes in equity. For the three
and six months ended June 30, 1999, and the three and six months ended June 30,
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

6
<PAGE> 7
operations, has been computed as described above and also gives effect to the
conversion of the convertible preferred stock (using the as if-converted to
common stock 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):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net loss .................................. $ (5,387) $(147,556) $ (9,346) $ (214,524)
======== ========= ======== =========
Basic and diluted:
Weighted average shares of common
stock outstanding ......................... 9,277 36,873 9,133 34,301
Less: Weighted average shares subject
to repurchase ............................. (4,128) (2,601) (4,264) (2,627)
-------- --------- -------- ---------
Weighted average shares used in
computing basic and diluted net
loss per common share ..................... 5,149 34,272 4,869 31,674
======== ========= ======== =========
Basic and diluted net loss per
common share .............................. $ (1.05) $ (4.31) $ (1.92) $ (6.77)
======== ========= ======== =========

Net loss .................................. $ (5,387) $(147,556) $ (9,346) $(214,524)
======== ========= ======== =========

Shares used above ......................... 5,149 34,272 4,869 31,674
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock ............... 10,727 -- 10,674 --
-------- --------- -------- ---------
Shares used in computing pro forma
basic and diluted net loss per
common share .............................. 15,876 34,272 15,543 31,674
======== ========= ======== =========
Pro forma basic and diluted net
loss per common share ..................... $ (0.34) $ (4.31) $ (0.60) $ (6.77)
======== ========= ======== =========
</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 18,126,396 and 8,438,443 for the three months ended June 30, 1999 and June
30, 2000, respectively. The total number of shares excluded from the
calculations of basic and diluted net loss per share were 18,209,177 and
8,468,808 for the six months ended June 30, 1999 and June 30, 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
operations of E.piphany.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principle to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the fourth quarter of 2000. We do not expect the adoption
of SAB 101 to have a material impact on our consolidated results of operations
and financial position.

6. ACQUISITIONS

The Octane Acquisition

On May 31, 2000, E.piphany acquired Octane Software, Inc. in a merger
transaction. 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 Merger Agreement, stockholders of Octane
received approximately 0.5097 shares of E.piphany common stock for each share of
Octane common stock they owned at the time the merger was consummated. In
addition, options and warrants to acquire Octane 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
$2.7 billion, of which $25.0 million was allocated to in-process research and
development and expensed upon closing of the acquisition as it has not reached
technological feasibility and, in management's opinion, had no alternative
future use. The total purchase price is subject to adjustments based upon
finalization of management's integration plans, which may include elimination of

7
<PAGE> 8
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 $2.7 billion were recorded and are being
amortized on a straight-line basis over a useful life of three years.
Accumulated amortization was approximately $74.5 million at June 30, 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 E.piphany
may be adversely affected. There can be no assurance that the value of the other
purchased intangible assets may not become impaired prior to its amortization.

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

<TABLE>
<S> <C>
Cash, receivables and other current assets ................. $ 24,828
Property, plant and equipment and other noncurrent assets .. 4,518
Note receivable from stockholder ........................... 1,179
Purchased intangibles, including in-process technology ..... 2,705,946
Current liabilities assumed ................................ (26,078)
-----------
Net assets acquired .............................. $ 2,710,393
===========
</TABLE>

The eClass Acquisition

On May 31, 2000, E.piphany acquired eClass Direct, Inc. in a merger
transaction. eClass is an application service provider of permission-based
e-mail marketing services. Under the terms of the Merger Agreement, stockholders
of eClass received approximately 0.1411 shares of E.piphany common stock for
each share of eClass common stock. In addition, options to acquire eClass common
stock were converted as a result of the merger into equivalent options for
E.piphany common stock, based upon the exchange ratio. The total purchase price
was approximately $47.3 million. 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. Purchased intangibles, representing purchase price in excess of
identified tangible and intangible assets, of approximately $45.6 million were
recorded and are being amortized on a straight-line basis over a useful life of
three years. Accumulated amortization was approximately $1.3 million at June 30,
2000. There can be no assurance that the value of the other purchased intangible
assets may not become impaired prior to its amortization.

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

<TABLE>
<S> <C>
Cash, receivables and other current assets ........ $ 1,571
Property, plant and equipment ..................... 250
Purchased intangibles ............................. 45,605
Current liabilities assumed ....................... (127)
--------
Net assets acquired ..................... $ 47,299
========
</TABLE>

The iLeverage Acquisition

On May 1, 2000, E.piphany acquired iLeverage Corporation in a merger
transaction. iLeverage develops marketing solutions for digital marketplaces.
Under the terms of the Merger Agreement, stockholders of iLeverage received
approximately 0.007 and 0.008097 shares of E.piphany common stock for each share
of iLeverage common stock and preferred stock, respectively. In addition,
options to acquire iLeverage common stock were converted as a result of the
merger into equivalent options for E.piphany common stock, based upon the
exchange ratio. The total purchase price was approximately $29.0 million. 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. Purchased
intangibles, representing purchase price in excess of identified tangible and
intangible assets, of approximately $29.1 million were recorded and are being
amortized on a straight-line basis over a useful life of three years.
Accumulated amortization was approximately $1.6 million at June 30, 2000. There
can be no assurance that the value of the other purchased intangible assets may
not become impaired prior to its amortization.

8
<PAGE> 9
In connection with the acquisition of iLeverage, net assets acquired were as
follows (in thousands):

<TABLE>
<S> <C>
Cash, receivables and other current assets ........ $ 285
Purchased intangibles 29,143
Current liabilities assumed ....................... (391)
--------
Net assets acquired ..................... $ 29,037
========
</TABLE>

The RightPoint Acquisition

On January 4, 2000, E.piphany acquired RightPoint Software, Inc. 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. Under the terms of the
Merger Agreement, shareholders of RightPoint received 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
expensed upon closing of the acquisition as it has not reached technological
feasibility and, in management's opinion, had no alternative future use. 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. 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 $79.9 million at June 30, 2000.

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

<TABLE>
<S> <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, iLeverage, Octane, and eClass at the
beginning of fiscal year 1999. Net income has been adjusted to exclude the
write-offs of acquired in-process research and development of approximately
$47.0 million and includes

9
<PAGE> 10
amortization of purchased intangibles of approximately $538.9 million for the
six months ended June 30, 1999 and 2000. Net income also includes $1.7 million
and $1.6 million of stock based compensation for the six months ended June 30,
2000 and 1999, respectively, and $14.0 million of acquisition related costs for
the six months ended June 30, 2000. This information may not necessarily be
indicative of the future combined results of operations of E.piphany (in
thousands, except per share amounts).

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
--------- ---------
<S> <C> <C>
Revenues ........................ $ 10,131 $ 46,822
Net loss ........................ $(553,536) $(582,992)
Basic net loss per share ........ $ (17.76) $ (12.36)
</TABLE>

10
<PAGE> 11

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 E.piphany'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 E.piphany's products, and statements regarding reliance on third
parties. All forward-looking statements included in this document are based on
information available to E.piphany as of the date hereof, and E.piphany assumes
no obligation to update any such forward-looking statement. It is important to
note that E.piphany'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

E.piphany develops, markets and sells E.piphany E.4, an integrated suite of
customer relationship management software solutions that provide capabilities
for the analysis of customer data, the creation of inbound and outbound
marketing campaigns, and the execution of sales and service customer
interactions. Companies can implement E.piphany E.4 to collect and analyze data
from their existing software systems, and from third party data providers, to
better understand and proactively and personally interact with their customers
across a variety of channels. Business users within these companies can use this
information 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 753 employees
at June 30, 2000.

ACQUISITIONS

THE OCTANE ACQUISITION

On May 31, 2000, E.piphany acquired Octane Software, Inc. in a merger
transaction. Octane is a next-generation provider of multi-channel customer
interaction applications and infrastructure software for sales, service and
support. In connection with this transaction, E.piphany acquired all of the
outstanding shares of capital stock of Octane in exchange for 11,568,951 million
shares of E.piphany's common stock. In addition, options and warrants of Octane
were converted into options and warrants to purchase approximately 1,224,559
shares of E.piphany's common stock. E.piphany expects that the combination of
the companies will result in significant increases in all expense categories.
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 accounted for the acquisition under the purchase method of accounting
and the results of Octane's operations subsequent to May 31, 2000 have been
included in E.piphany's operating results for the three and six months ended
June 30, 2000. Please see Note 6 in the Notes to Condensed Consolidated
Financial Statements for more detailed information.

THE eCLASS ACQUISITION

On May 31, 2000, E.piphany acquired eClass Direct, Inc., an application
service provider of permission-based e-mail marketing services in a merger
transaction. In connection with this transaction, E.piphany acquired all of the
outstanding shares of capital stock of eClass in exchange for 722,687 million
shares of E.piphany's common stock. In addition, options of eClass were
converted into options to purchase approximately 46,383 shares of E.piphany's
common stock.

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E.piphany accounted for the acquisition under the purchase method of accounting
and the results of eClass' operations subsequent to May 31, 2000 have been
included in E.piphany's operating results for the three and six months ended
June 30, 2000. Please see Note 6 in the Notes to Condensed Consolidated
Financial Statements for more detailed information.

THE iLEVERAGE ACQUISITION

On May 1, 2000, E.piphany acquired iLeverage Corporation, a start-up company
that develops marketing solutions for digital marketplaces. In connection with
this transaction, E.piphany acquired all of the outstanding shares of capital
stock of iLeverage in exchange for 118,097 million shares of E.piphany's common
stock. In addition, options of iLeverage were converted into options to purchase
approximately 63,487 shares of E.piphany's common stock. E.piphany accounted for
the acquisition under the purchase method of accounting and the results of
iLeverage's operations subsequent to May 1, 2000 have been included in
E.piphany's operating results for the three and six months ended June 30, 2000.
Please see Note 6 in the Notes to Condensed Consolidated Financial Statements
for more detailed information.

THE RIGHTPOINT ACQUISITION

On January 4, 2000, E.piphany acquired RightPoint Software, Inc. 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 3,076,661 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. E.piphany accounted for the acquisition under the purchase method
of accounting and the results of RightPoint's operations subsequent to January
4, 2000 have been included in E.piphany's operating results for the three and
six months ended June 30, 2000. Please see Note 6 in the Notes to Condensed
Consolidated Financial Statements for more detailed information.

SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY

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 June 30, 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,
PricewaterhouseCoopers 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 who 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

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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 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

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Total revenues increased to $24.5 million for the three months ended June 30,
2000, from $3.2 million for the three months ended June 30, 1999. Total revenues
increased to $38.9 million for the six months ended June 30, 2000, from $5.1
million for the six months ended June 30, 1999.

Product license revenues increased to $14.3 million, or 58% of total revenue,
for the three months ended June 30, 2000 from $1.8 million, or 56% of total
revenue, for the three months ended June 30, 1999. Product license revenues
increased to $22.6 million, or 58% of total revenue, for the six months ended
June 30, 2000 from $2.9 million, or 57% of total revenue, for the six months
ended June 30, 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 $10.2 million, or 42% of total revenues, for
the three months ended June 30, 2000 from $1.4 million, or 44% of revenues, for
the three months ended June 30, 1999. Services revenues increased to $16.4
million, or 42% of total revenues, for the six months ended June 30, 2000 from
$2.2 million, or 43% of revenues, for the six months ended June 30, 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.

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. 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. To the extent 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.

COST OF REVENUES

Total cost of revenues increased to $9.7 million for the three months ended
June 30, 2000 from $1.7 million for the three months ended June 30, 1999. Total
cost of revenues increased to $15.8 million for the six months ended June 30,
2000 from $2.5 million for the six months ended June 30, 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 $9.4 million, or 92%
of services revenues, for the three months ended June 30, 2000 from $1.7
million, or 116% of services revenues, for the three months ended June 30, 1999.
Cost of services revenues increased to $15.4 million, or 94% of services
revenues, for the six months ended June 30, 2000 from $2.5 million, or 113% of
services revenues, for the six months ended June 30, 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 and six months ended June 30, 2000, and during the three months and six
months ended June 30, 1999 exceeded services revenues, due to the rapid growth
of E.piphany's services organization from 28 employees at June 30, 1999 to 239
employees at June 30, 2000 and E.piphany's investment in experienced management
in anticipation of future revenue growth. Cost of services

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revenues may exceed services revenues in the near term as E.piphany integrates
the Octane service organization, which is at an earlier stage of development and
as E.piphany rapidly grows its services capacity in the international markets.

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 $5.4 million for the three months ended June
30, 2000 from $1.6 million for the three months ended June 30, 1999. Research
and development expenses increased to $9.2 million for the six months ended June
30, 2000 from $2.9 million for the six months ended June 30, 1999. The increase
in absolute dollars was primarily due to an increase in the number of employees
engaged in research and development from 36 employees as of June 30, 1999 to 186
employees as of June 30, 2000. Research and development expenses as a percentage
of total revenues decreased from 49% for the three months ended June 30, 1999 to
22% for the three months ended June 30, 2000. Research and development expenses
as a percentage of total revenues decreased from 56% for the six months ended
June 30, 1999 to 24% for the six months ended June 30, 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 $15.9 million for the three months ended June 30, 2000 from $3.6 million for
the three months ended June 30, 1999. Sales and marketing expenses increased to
$27.1 million for the six months ended June 30, 2000 from $6.4 million for the
six months ended June 30, 1999. Sales and marketing expenses as a percentage of
total revenues decreased from 111% for the three months ended June 30, 1999 to
65% for the three months ended June 30, 2000. Sales and marketing expenses as a
percentage of total revenues decreased from 124% for the six months ended June
30, 1999 to 70% for the six months ended June 30, 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 38 as of June 30, 1999 to 240 as of June 30, 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.

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 $4.0 million for the three
months ended June 30, 2000 from $0.8 million for the three months ended June 30,
1999. General and administrative expenses increased to $6.3 million for the six
months ended June 30, 2000 from $1.3 million for the six months ended June 30,
1999.

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 13 as of June 30, 1999 to 59 as of June 30, 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 Octane,
RightPoint, eClass and iLeverage in excess of identified tangible assets. During
the first six months of 2000, E.piphany recorded approximately $3.2 billion of
goodwill and purchased intangibles, which are being amortized on a straight-line
basis over three years. The total

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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 $117.3 million and $157.3 million for the three months
and the six months ended June 30, 2000, respectively. There can be no assurance
that the value of the other purchased intangible assets may not become impaired
prior to its amortization.

In-Process Research and Development Charge

THE OCTANE ACQUISITION

In connection with the acquisition of the Octane Software, Inc., the
Company allocated $25.0 million of the purchase price to in-process research and
development projects. This allocation represented the estimated fair value based
on risk-adjusted cash flows related to the incomplete research and development
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility, and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.

At the acquisition date, Octane was conducting design, development,
engineering and testing activities associated with the completion of subsequent
releases of the Octane 2000 application solution. The projects under development
at the valuation date represent next-generation technologies that are expected
to address emerging market demands for a new mix of complex e-business
objectives.

At the acquisition date, the technologies under development were
approximately 50 percent complete based on engineering man-month data and
technological progress. Octane expected to spend approximately $5.6 million to
complete all phases of the R&D. Anticipated completion dates ranged from 5 to 6
months, at which times the Company expects to begin benefiting from the
developed technologies.

In making its purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well as
project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired 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
the Company and its competitors. The resulting net cash flows from such projects
are based on management's estimates of cost of sales, operating expenses, and
income taxes from such projects.

Aggregate revenues for the developmental Octane products were estimated
to grow based on forecast sales for the five years following introduction,
assuming the successful completion and market acceptance of the major R&D
programs. The estimated revenues for the in-process projects were expected to
peak within five years of acquisition and then decline sharply as other new
products and technologies are expected to enter the market.

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 and profitability of
the developmental projects, a discount rate of 25 percent was considered
appropriate for the in-process R&D. These discount rates were commensurate with
the Octane's stage of development and the uncertainties in the economic
estimates described above.

If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.

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THE RIGHTPOINT ACQUISITION

In connection with the RightPoint acquisition, E.piphany expensed $22.0
million of acquired in-process research and development 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.

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 June 30, 2000, deferred compensation remaining to be amortized
totaled $1.7 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 $1,184,000 and $1,661,000 for the three and six months ended June 30, 2000,
respectively. E.piphany expects amortization of approximately $606,000 in the
last two quarters of 2000 and $775,000, $306,000, 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 six
months ended June 30, 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.

<PAGE> 18

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities totaled $9.3 million and $7.2 million
for the six months ended June 30, 2000 and 1999, respectively. Cash used in
operating activities for each period resulted from net losses in those periods.
For the period ended June 30, 2000, cash used in operating activities also
resulted from an increase in accounts receivable and prepaid expenses and other
assets. These uses of cash were partially offset by an increase in accrued
liabilities and deferred revenue.

Net cash provided by investing activities totaled $19.4 million for the six
months ended June 30, 2000 compared to $0.8 million used in investing activities
for the six months ended June 30, 1999. The increase resulted from cash acquired
from E.piphany's acquisitions during the first six months of 2000.

Net cash provided by financing activities totaled $351.0 million and $14.3
million for the six months ended June 30, 2000 and 1999, respectively. The
increase was due primarily to the receipt of proceeds from E.piphany's recently
completed secondary offering.

At June 30, 2000, E.piphany had $419.2 million in cash and cash equivalents
and $20.3 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 $338.4 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
$356.1 million, after the underwriters' discount and expenses.

In addition, E.piphany had 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%. 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 expired on May 31,
2000 and borrowings bear interest at 8.5% for the first six months of the lease,
and 8.0% thereafter.

As of June 30, 2000, E.piphany's principal sources of liquidity included
$419.2 million of cash and cash equivalents and $20.3 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 RECENT MERGERS.

Achieving the benefits of the mergers with Octane and other companies
E.piphany acquired will depend in part on the integration of technology,
operations and personnel. The integration of E.piphany with these companies is 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

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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 RECENT 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 acquired 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 we 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 partially
vested as a result of the merger, and this may affect our ability to retain
these employees. In addition, competitors may recruit employees 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.

In addition, in connection with the 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.

THE MERGERS MAY RESULT IN A LOSS OF CUSTOMERS.

As a result of the mergers some customers or potential customers may not
continue to do business with us. In such case, we may lose significant revenue
these companies might have otherwise received had the mergers 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. 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 $3.2
billion amortized over three years in connection with the acquisition of
Octane, RightPoint, eClass, and iLeverage,

- in-process research and development of approximately $47 million, to be
expensed in the six months ended June 30, 2000, and

- other costs not currently known.

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E.PIPHANY HAS A HISTORY OF LOSSES, EXPECTS LOSSES IN THE FUTURE AND MAY NOT EVER
BECOME PROFITABLE.

We incurred net losses of $214.5 million for the six months ended June 30,
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 $250.4 million as of June 30, 2000, and
$35.9 million as of 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, eClass, and iLeverage,
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 ACQUIRED, MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR BUSINESS
DIFFICULT.

Our limited operating history and the limited operating history of the
companies that we acquired makes it difficult to forecast 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 acquired have a long history upon which to base forecasts of
future operating results, any predictions about our future revenues and expenses
may not be as accurate as they would be if E.piphany, Octane and the other
companies we acquired 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,

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- 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 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 accelerated and
became 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 OUR PRODUCTS, OUR REVENUES, PROFITABILITY AND MARGINS MAY BE HARMED.

Our 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 239 as of
June 30, 2000, or from outside consulting organizations. 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

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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.

Our services revenues, which includes fees for consulting, implementation,
maintenance and training, were 42% of our revenues for the six months ended June
30, 2000, 47% of our revenues for the year ended December 31, 1999 and 34% of
our revenues for the year ended December 31, 1998. Our services revenues have
substantially lower gross margins than license revenues. Our cost of services
revenues for the six months ended June 30, 2000 and the year ended December 31,
1999 was 94% and 102%, respectively, of our 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 Broadbase,
Business Objects, Informatica, and Microstrategy,

- 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 such as Net
Perceptions, and

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- electronic customer relationship management software, such as Kana
Communications, eGain, and Primus Knowledge Solutions.

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 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

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- 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.

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

In order to operate the E.piphany E.4 System, the system 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 is currently modifying its 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 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.

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After installation, the E.piphany E.4 System 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.

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.

OUR 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. 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 Ernst & Young, KPMG and
PricewaterhouseCoopers; 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 and Interrelate. 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

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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.

We must also effectively take advantage of the resources and expertise of
third parties to help it develop the E.piphany E.4 System. 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. We currently receive substantially all of our
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 753 as of June 30, 2000. 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.

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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
patent against several 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.

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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 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.

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

We began shipping our first products in early 1998, 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.

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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 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 June 30, 2000, had 37 sales and
marketing professionals located in the United Kingdom, Australia, Germany and
France. 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 acquisitions that we have already completed, we may
acquire or make investments in other complementary companies, services and
technologies in the future. If we fail to 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 transaction 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.

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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.

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 has 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 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 this 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 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.

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Interest Rate Risk

As of June 30, 2000, we had cash and cash equivalents of $419.2 million which
consisted of cash and highly liquid short-term investments. Declines of interest
rates over time would 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 $2.1 million. As of June 30, 2000, we did not
have any short-term or long-term debt outstanding.

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E.PIPHANY, INC.

FORM 10-Q, JUNE 30, 2000

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

As of the date hereof, there is no material litigation pending against
E.piphany. From time to time, E.piphany may be a party to litigation and claims
incident to the ordinary course of our business. Although the results of
litigation and claims cannot be predicted with certainty, we believe that the
final outcome of such matters will not have a material adverse effect on the
results of operations, financial condition or prospects of E.piphany.

Item 2. Changes in Securities and Use of Proceeds

(a) None.

(b) None.

(c) On May 1, 2000, E.piphany issued 181,649 shares of E.piphany
common stock that were not registered under the Securities Act of
1933 to acquire iLeverage Corporation, a company that develops
marketing solutions for digital marketplaces. This transaction
was exempt from registration under Section 3(a)(10) of the
Securities Act of 1933 after a fairness hearing was conducted.

On May 31, 2000, E.piphany issued 769,070 shares of E.piphany
common stock that were not registered under the Securities Act of
1933 to acquire eClass Direct, Inc., an application service
provider of permission based e-mail marketing services. This
transaction was exempt from registration under Section 3(a)(10)
of the Securities Act of 1933 after a fairness hearing was
conducted.

(d) None.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The Company's annual meeting of stockholders was held on May 31, 2000 and the
following matters were considered and voted upon:

To approve the election of Roger S. Siboni to serve as a member of E.piphany's
Board of Directors.

Common Stock: FOR: 25,529,902 AGAINST: 11,317 ABSTAIN: 0

To approve the election of Sam H. Lee to serve as a member of E.piphany's Board
of Directors.

Common Stock: FOR: 25,530,152 AGAINST: 11,067 ABSTAIN: 0

To approve the selection and appointment of Arthur Andersen LLP as E.piphany's
independent public accountants.

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Common Stock: FOR: 25,535,777 AGAINST: 2,024 ABSTAIN: 3,418

A special meeting of stockholders was held on May 31, 2000 and the
following matter was considered and voted upon:

To approve the issuance of shares of E.piphany common stock to shareholders
of Octane Software, Inc. in connection with the merger of a wholly-owned
subsidiary of E.piphany with Octane.

Common Stock: FOR: 18,404,728 AGAINST: 36,191 ABSTAIN: 5,441

Item 5. Other Information

None.

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 June 15, 2000 to report the
completion of E.piphany's acquisition of eClass Direct, Inc.

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

A current report on Form 8-K was filed with the Securities and
Exchange Commission by E.piphany on May 31, 2000 to report the
completion of E.piphany's acquisition of iLeverage Corporation.

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E.PIPHANY, INC.

FORM 10-Q, JUNE 30, 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: August 14, 2000 SIGNATURE: /s/ Roger S. Siboni
-------------------- ------------------------------
Roger S. Siboni
President, Chief Executive
Officer and Director

DATE: August 14, 2000 SIGNATURE: /s/ Kevin J. Yeaman
-------------------- ------------------------------
Kevin J. Yeaman
Chief Financial Officer

<PAGE> 35
INDEX TO EXHIBITS

27.1 FINANCIAL DATA SCHEDULE