KANA COMMUNICATIONS INC, S-1/A, 1999-09-02

KANA COMMUNICATIONS INC
S-1/A, 1999-09-02
BUSINESS SERVICES, NEC

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<PAGE>

As filed with the Securities and Exchange Commission on September 2, 1999
Registration No. 333-82587
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

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KANA COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)

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<TABLE>
<S> <C> <C>
Delaware 7372 77-0435679
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

87 Encina Avenue
Palo Alto, California 94301
(650) 325-9850
(Address, including zip code, and telephone number, including area code, of
the Registrant's principal executive offices)

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Michael J. McCloskey
Chief Executive Officer
Kana Communications, Inc.
87 Encina Avenue
Palo Alto, California 94301
(650) 325-9850
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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Copies to:
<TABLE>
<S> <C>
Warren T. Lazarow, Esq. Laird H. Simons III, Esq.
David A. Makarechian, Esq. Katherine Tallman Schuda, Esq.
Kimberley E. Henningsen, Esq. Sayre E. Stevick, Esq.
Taylor L. Stevens, Esq. FENWICK & WEST LLP
BROBECK, PHLEGER & HARRISON LLP Two Palo Alto Square
Two Embarcadero Place Palo Alto, California 94301
2200 Geng Road (650) 494-0600
Palo Alto, California 94303
(650) 424-0160
</TABLE>

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

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If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and +
+may be changed. These securities may not be sold until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This preliminary prospectus is not an offer to sell nor does it seek an offer +
+to buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion. Dated September 2, 1999.

3,300,000 Shares

[LOGO OF KANA COMMUNICATIONS]

Kana Communications, Inc.
Common Stock

-----------

This is an initial public offering of shares of Kana Communications, Inc. All
of the 3,300,000 shares of common stock are being sold by Kana.

Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $11.00 and $13.00. Kana has applied for quotation of the common
stock on the Nasdaq National Market under the symbol "KANA".

See "Risk Factors" beginning on page 7 to read about risks you should
consider before buying shares of the common stock.

-----------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

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<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Initial public offering price.................................. $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to Kana............................. $ $
</TABLE>

The underwriters may, under specific circumstances, purchase up to an
additional 495,000 shares from Kana at the initial public offering price less
the underwriting discount.

-----------

The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.

Goldman, Sachs & Co.

Hambrecht & Quist

Wit Capital Corporation

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Prospectus dated , 1999.
<PAGE>

Inside Front Cover

At the top of the page is the phrase, "e-Business Customer Communications
Software and Services enabling..." In the center of the page is the Kana logo.
Encircling the Kana logo are three graphics that depict three different uses for
Kana's products and services. Next to the graphic is the phrase "Customer
Acquisition" in larger type. Below the "Customer Acquisition" line is the phrase
"Direct Marketing Communications" in one slightly smaller, bold type face. Below
that phrase are three bullet points: "Campaigns," "Content Delivery," and
"Promotions." Under the bullet point "Promotions" is an arrow pointing to the
graphic on the lower right of the page which is a dollar sign encircled by two
circular arrows. Below the graphic is the word "eCommerce" in large, bold type.
In slightly smaller type immediately below is the phrase "Transaction
Communications" in smaller bold type. Below that are three bullet points: "Order
fulfillment," "Receipts," and "Confirmations." Next to this text is another
circular arrow, which points to the graphic on the lower left corner of the
page. This graphic consists of two persons with a lightbulb between them.
Surrounding the lightbulb are circular arrows. Below the persons is the phrase
"Customer Retention," in large, bold type. Immediately below this is the phrase
"Service Communications" in smaller, bold type. Immediately below this is three
bullet points: "Feedback," "Pre-Sales Inquiries" and "Support Requests."
<PAGE>

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus.

Our Business

We develop, market and support customer communication software products and
services for e-Businesses. We define e-Businesses as companies that leverage
the reach and efficiency of the Internet to enhance their competitive market
position, from Internet start-ups to the largest 2,000 companies in the world.
Our products and services allow these companies to manage high volumes of
inbound and outbound e-mail and Website-based communications, while
facilitating the delivery of specific and personalized information to each
customer. We offer our products on both a licensed and a hosted basis. Our
customers include both pure Internet companies and traditional companies
seeking to exploit the potential of the Internet. As of June 30, 1999, more
than 100 customers had ordered more than $50,000 of our products and services,
including eBay Inc., eToys Inc., priceline.com Incorporated, Chase Manhattan
Bank, Ford Motor Company and Northwest Airlines. No customer accounted for 10%
or more of our total revenues for 1998 or the first half of 1999.

Our objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve our
objective, we intend to expand our products to enter new markets, increase our
global distribution capabilities and partnerships, expand Kana Online, our
hosted application service, and continue to emphasize customer satisfaction.

Recent Developments

On August 13, 1999, we acquired Connectify, Inc. Connectify develops,
markets and supports electronic direct marketing software for e-Businesses.
Connectify's software enables e-Businesses to profile and target potential and
existing customers and then deliver and track personalized e-mails to their
customers. By using electronic direct marketing software in this way, e-
Businesses can build customer loyalty, increase the probability of repeat
transactions and reduce customer attrition. In connection with this merger, we
issued 3,491,271 shares of our common stock in exchange for all outstanding
shares of Connectify capital stock and assumed all outstanding Connectify
options and warrants. We reserved 208,345 shares of our common stock for
issuance upon the exercise of assumed Connectify options and warrants.

Corporate Information

We were founded by Mark Gainey and Michael Horvath in 1996. We were first
incorporated in California in July 1996 as Kana Net Works, Inc., and we changed
our name to Kana.com, Inc. in January 1997. We then changed our name to Kana
Communications, Inc. in October 1997. We plan to reincorporate in Delaware
before completion of this offering. References in this prospectus to "Kana",
"we", "our", and "us" collectively refer to Kana Communications, Inc., a
Delaware corporation, its subsidiaries and its California predecessor, and not
to the underwriters. Our principal executive offices are located at 87 Encina
Avenue, Palo Alto, California 94301 and our telephone number is (650) 325-9850.

3
<PAGE>

We derive our revenues from the sale of software product licenses and from
professional services including implementation, customization, hosting and
maintenance. Since we began operations in 1997, we have incurred substantial
operating losses, and at June 30, 1999, we had an accumulated deficit of
approximately $18.6 million. For the six months ended June 30, 1999, 78.1% of
our total revenues were license revenue and 21.9% were service revenue. During
this period we incurred a net loss of $9.9 million, and we expect to continue
to incur additional losses in the future.

Kana(R) is a registered trademark, and KANA COMMUNICATIONS and Design(TM)
and the Kana logo are trademarks of Kana Communications, Inc. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.

The Offering

<TABLE>
<S> <C>
Common stock offered......... 3,300,000 shares
Common stock to be
outstanding after the
offering.................... 27,546,388 shares
Use of proceeds.............. For general corporate purposes, including
working capital, product development and capital
expenditures. We may also use a portion of the
proceeds for possible acquisitions.
See "Use of Proceeds".
Proposed Nasdaq National
Market symbol............... KANA
</TABLE>

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of July 31, 1999, and includes
the issuance of 3,491,271 shares of common stock issued in August 1999 in
exchange for all outstanding shares of Connectify capital stock in connection
with the Connectify merger, and excludes:

. 776,467 shares of common stock issuable upon exercise of stock options
outstanding as of July 31, 1999 at a weighted average exercise price of
$1.04 per share;

. 4,700,000 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan;

. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan; and

. 208,345 shares of common stock reserved for issuance upon exercise of
Connectify options and warrants assumed in connection with the Connectify
merger.

See "Capitalization", "Management--Benefit Plans", "Description of Capital
Stock" and Notes 4 and 7 of Notes to Supplemental Consolidated Financial
Statements.

4
<PAGE>

Summary Supplemental Consolidated Financial Data

(In thousands, except per share data)

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Supplemental Consolidated Statement of
Operations Data:
Total revenues.......................... $ -- $ 2,049 $ 656 $ 3,578
Gross profit............................ -- 1,476 583 2,365
Authorization of deferred stock-based
compensation........................... 113 1,263 430 3,063
Operating loss.......................... (1,435) (7,564) (2,466) (9,961)
Net loss................................ $(1,383) $(7,378) $ (2,425) $ (9,854)
======= ======= ======== ========
Basic and diluted net loss per share.... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss per share............. 1,497 2,864 1,535 5,217
======= ======= ======== ========
Pro forma basic and diluted net loss per
share.................................. $ (0.59) $ (0.56)
======= ========
Shares used in computing pro forma basic
and diluted net loss per share......... 12,547 17,729
======= ========
</TABLE>

Shares used in computing pro forma basic and diluted net loss per share
include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.

The supplemental consolidated financial data in this prospectus reflects
our acquisition of Connectify, Inc., which closed on August 13, 1999, and which
was accounted for as a pooling of interests. This means that for accounting and
financial reporting purposes, we treat the two companies as if they had always
been combined.

<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................... $ 8,049 $18,249 $53,677
Working capital................................. 4,829 15,029 50,457
Total assets.................................... 12,325 22,525 57,953
Notes payable, less current portion............. 638 638 638
Total stockholders' equity...................... 6,323 16,523 51,951
</TABLE>

The supplemental consolidated balance sheet data as of June 30, 1999 gives
effect to the issuance of 3,491,271 shares of common stock in the Connectify
Merger and is set forth:

. on an actual basis;

. on a pro forma basis to give effect to the sale in July 1999 of
838,466 shares of our preferred stock for total proceeds of $10.2
million, the conversion of all of our outstanding preferred stock
into common stock upon completion of this offering; and

. on an as adjusted basis to reflect the sale of the shares of common
stock offered at an assumed initial public offering price of $12.00
per share and after deducting the estimated underwriting discount and
estimated offering expenses. See "Use of Proceeds" and
"Capitalization".

5
<PAGE>

----------------

Except as set forth in the supplemental consolidated financial statements
or as otherwise specified in this prospectus, all information in this
prospectus:

. assumes no exercise of the underwriters' over-allotment option;

. assumes the completion of a two for three reverse stock split;

. reflects the conversion of all of our outstanding preferred stock into
common stock upon completion of this offering; and

. reflects our reincorporation into Delaware before completion of this
offering.

See "Description of Capital Stock" and "Underwriting".

6
<PAGE>

RISK FACTORS

You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock.

The occurrence of any of the following risks could materially and adversely
affect our business, financial condition and operating results. In this case,
the trading price of our common stock could decline and you might lose part or
all of your investment.

Risks Related to Our Business

Because we have a limited operating history, it is difficult to evaluate our
business and prospects

We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. We
were incorporated in July 1996 and we first recorded revenue in February 1998.
Thus, we have a limited operating history upon which you can evaluate our
business and prospects. Due to our limited operating history, it is difficult
or impossible for us to predict future results of operations. For example, we
cannot forecast operating expenses based on our historical results because they
are limited, and we are required to forecast expenses in part on future revenue
projections. Moreover, due to our limited operating history, any evaluation of
our business and prospects must be made in light of the risks and uncertainties
often encountered by early-stage companies in Internet-related markets. Many of
these risks are discussed in the subheadings below, and include our ability to:

. attract more customers;

. implement our sales, marketing and after-sales service initiatives, both
domestically and internationally; and

. execute our product development activities.

We may not successfully address any of these risks.

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

Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter particularly because our
products and services are relatively new and our prospects uncertain. If our
quarterly revenues or operating results fall below the expectations of
investors or public market analysts, the price of our common stock could
decline substantially. Factors that might cause quarterly fluctuations in our
operating results include the factors described in the subheadings below as
well as:

. the evolving and varying demand for customer communication software
products and services for e-Businesses, particularly our products and
services;

. the timing of new releases of our products;

. the discretionary nature of our customers' purchasing and budgetary
cycles;

. changes in our pricing policies or those of our competitors;

. the timing of execution of large contracts that materially affect our
operating results;

. the mix of sales channels through which our products and services are
sold;

. the mix of our domestic and international sales;

. costs related to the customization of our products;

7
<PAGE>

. our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;

. any costs or expenses related to our anticipated move to new corporate
offices; and

. global economic conditions, as well as those specific to large
enterprises with high e-mail volume.

We also often offer volume-based pricing, which may affect our operating
margins. Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenues levels. As a result, if
total revenues for a particular quarter are below our expectations, we could
not proportionately reduce operating expenses for that quarter. Therefore, this
revenue shortfall would have a disproportionate effect on our expected
operating results for that quarter. In addition, because our service revenue is
largely correlated with our license revenue, a decline in license revenue could
also cause a decline in our service revenue in the same quarter or in
subsequent quarters.

Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".

We have a history of losses and may not be profitable in the future, which may
reduce the trading price of our common stock

Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at June
30, 1999, we had an accumulated deficit of approximately $18.6 million. For the
six months ended June 30, 1999, we had a net loss of $9.9 million, or 275% of
revenues for that period. Since inception, we have funded our business
primarily through selling our stock, not from cash generated by our business.
Our growth in recent periods has been from a limited base of customers, and we
may not be able to sustain these growth rates. We expect to continue to
increase our operating expenses. As a result, we expect to continue to
experience losses and negative cash flows, even if sales of our products and
services continue to grow, and may not generate sufficient revenues to achieve
profitability in the future.

In addition, as a result of the Connectify merger, we expect that our
losses will increase even more significantly because of additional costs and
expenses related to:

. an increase in the number of our employees;

. an increase in research and development activities;

. an increase in sales and marketing activities; and

. assimilation of operations and personnel.

If we do achieve profitability, we may not be able to sustain or increase any
profitability on a quarterly or annual basis in the future. See "Supplemental
Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".

We face substantial competition and may not be able to compete effectively

We currently face competition for our products from systems designed by in-
house and third-party development efforts. We expect that these systems will
continue to be a principal source of

8
<PAGE>

competition for the foreseeable future. Our competitors include a number of
companies offering one or more products for the e-Business communications
market, some of which compete directly with our products. For example, our
competitors include companies providing stand-alone point solutions, including
Annuncio, Inc., Brightware, Inc., eGain Communications Corp., Mustang Software,
Inc. and Responsys.com. In addition, we may compete with companies providing
customer management and communications solutions, such as Clarify Inc., Digital
Impact, Inc., Genesys Telecommunications Laboratories, Inc., Lucent
Technologies, Inc., Message Media, Inc., Oracle Corporation, Pivotal
Corporation, Siebel Systems, Inc., Silknet Software, Inc. and Vantive
Corporation.

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

We may not be able to compete successfully against current and future
competitors, and competitive pressures may seriously harm our business. See
"Business--Competition".

Our failure to consummate our expected sales in any given quarter could
dramatically harm our operating results because of the large size of our
typical orders

Our sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which we
have little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, we are
unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of a typical order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant sales occur
earlier than anticipated, revenues for subsequent quarters may be lower than
expected.

We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle

The long sales cycle for our products may cause license revenue and
operating results to vary significantly from period to period. To date, the
sales cycle for our products has taken three to 12 months in the United States
and longer in foreign countries. Our sales cycle has required pre-purchase
evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to our prospective customers regarding the use and
benefits of our products. Many of our customers evaluate our software slowly
and deliberately, depending on the specific technical capabilities of the
customer, the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products.

Difficulties in implementing our products could harm our revenues and margins

Forecasting our revenues depends upon the timing of implementation of our
products. This implementation typically involves working with sophisticated
software, computing and communications systems. If we experience difficulties
with implementation or do not meet project milestones in a timely manner, we
could be obligated to devote more customer support, engineering and other
resources to a particular project. Some customers may also require us to
develop customized features or

9
<PAGE>

capabilities. If new or existing customers have difficulty deploying our
products or require significant amounts of our professional services support or
customized features, our revenue recognition could be further delayed and our
costs could increase, causing increased variability in our operating results.

Our business depends on the acceptance of our products and services, and it is
uncertain whether the market will accept our products and services

Of our total revenue of $3.6 million for the six months ended June 30,
1999, $2.8 million was derived from licenses of our product and $783,000 from
related services. We are not certain that our target customers will widely
adopt and deploy our products and services. Our future financial performance
will depend on the successful development, introduction and customer acceptance
of new and enhanced versions of our products and services. In the future, we
may not be successful in marketing our products and services or any new or
enhanced products.

We may be unable to hire and retain the skilled personnel necessary to develop
our engineering, professional services and support capabilities in order to
continue to grow

We intend to at least double our sales, marketing, engineering,
professional services and product management personnel over the next 12 months.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. Our
failure to attract and retain the highly trained personnel that are integral to
our product development and professional services group, which is the group
responsible for implementation and customization of, and technical support for,
our products and services, may limit the rate at which we can develop and
install new products or product enhancements, which would harm our business. We
will need to increase our staff to support new customers and the expanding
needs of our existing customers, without compromising the quality of our
customer service. Since our inception, 13 full time employees have left or have
been terminated, and we expect to lose more employees in the future. Hiring
qualified professional services personnel, as well as sales, marketing,
administrative and research and development personnel, is very competitive in
our industry, particularly in the San Francisco Bay Area, where Kana is
headquartered, due to the limited number of people available with the necessary
technical skills. We expect to face greater difficulty attracting these
personnel with equity incentives as a public company than we did as a privately
held company. See "Business--Employees".

We may face difficulties in hiring and retaining qualified sales personnel to
sell our products and services, which could harm our ability to increase our
revenues in the future

Our financial success depends to a large degree on the ability of our
direct sales force to increase sales to a level required to adequately fund
marketing and product development activities. Therefore, our ability to
increase revenues in the future depends considerably upon our success in
recruiting, training and retaining additional direct sales personnel and the
success of the direct sales force. Also, it may take a new salesperson a number
of months before he or she becomes a productive member of our sales force. Our
business will be harmed if we fail to hire or retain qualified sales personnel,
or if newly hired salespeople fail to develop the necessary sales skills or
develop these skills more slowly than we anticipate. See "Business--Employees".

Loss of our Chief Executive Officer and President could harm our business

Our future success depends to a significant degree on the skills,
experience and efforts of our senior management. In particular, we depend upon
the continued services of Michael J. McCloskey, our Chief Executive Officer,
and Mark S. Gainey, our President and co-founder. The loss of the services of
any of these individuals could harm our business and operations. In addition,
we have not obtained life insurance benefiting Kana on any of our key employees
or entered into employment agreements with our key employees. If any of our key
employees left or was seriously injured and unable to work and we were unable
to find a qualified replacement, our business could be harmed.

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<PAGE>

A failure to manage our internal operating and financial functions could lead
to inefficiencies in conducting our business and subject us to increased
expenses

Our ability to offer our products and services successfully in a rapidly
evolving market requires an effective planning and management process. We have
limited experience in managing rapid growth. We are experiencing a period of
growth that is placing a significant strain on our managerial, financial and
personnel resources. Our business will suffer if this growth continues and we
fail to manage this growth. On June 30, 1999, we had a total of 98 full-time
employees compared to 38 on June 30, 1998. We expect to continue to hire new
employees at a rapid pace. For example, we added 38 employees between July 1,
1999 and August 13, 1999, and 31 new employees who joined us as a result of the
Connectify merger. Moreover, we will need to assimilate substantially all of
Connectify's operations into our operations. The rate of our recent growth has
made management of that growth more difficult. Any additional growth will
further strain our management, financial, personnel, internal training and
other resources. To manage any future growth effectively, we must improve our
financial and accounting systems, controls, reporting systems and procedures,
integrate new personnel and manage expanded operations. Any failure to do so
could negatively affect the quality of our products, our ability to respond to
our customers, and retain key personnel, and our business in general. We plan
to move our corporate offices to a new location in November 1999. This move may
disrupt our business and operations. See "Business--Facilities".

The integration of our new Chief Executive Officer, Vice President of Business
Development, Vice President of Marketing, Vice President of Electronic Direct
Marketing and Vice President of International Sales into our management team
may interfere with our operations

We have recently hired a number of new officers, including our Chief
Executive Officer, Michael J. McCloskey, who joined us in June 1999, and our
Vice President of Business Development, Vice President of Marketing, Vice
President of Electronic Direct Marketing and Vice President of International
Sales, each of whom has been with us for less than two months. To integrate
into our company, these individuals must spend a significant amount of time
learning our business model and management system, in addition to performing
their regular duties. Accordingly, the integration of new personnel has
resulted and will continue to result in some disruption to our ongoing
operations.

The Connectify merger may result in disruptions to our business and management
due to difficulties in assimilating personnel and operations

We may not realize the benefits from the Connectify merger. We may not be
able to successfully assimilate the additional personnel, operations, acquired
technology and products into our business. In particular, we will need to
assimilate and retain key professional services, engineering and marketing
personnel. Other key Connectify personnel may decide not to work for us. In
addition, Connectify's product will have to be integrated into our products,
and it is uncertain whether we may accomplish this easily. These difficulties
could disrupt our ongoing business, distract our management and employees or
increase our expenses. In connection with the merger, we issued a total of
3,491,271 shares of our common stock in exchange for all outstanding shares of
Connectify capital stock and reserved 208,345 shares of common stock for
issuance upon the exercise of Connectify options and warrants we assumed in the
merger. The issuance of these securities is dilutive to our existing
stockholders.

If we acquire additional companies, products or technologies, we may face risks
similar to those faced in the Connectify merger

If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
buy another company, we will likely face the same risks,

11
<PAGE>

uncertainties and disruptions as discussed above with respect to the Connectify
merger. Furthermore, we may have to incur debt or issue equity securities to
pay for any additional future acquisitions or investments, the issuance of
which could be dilutive to us or our existing stockholders. In addition, our
profitability may suffer because of acquisition-related costs or amortization
costs for acquired goodwill and other intangible assets.

Delays in the development of new products or enhancements to existing products
would hurt our sales and damage our reputation

To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-Business
customer interactions needs. Any failure to do so could harm our business. If
we experience product delays in the future, we may face:

. customer dissatisfaction;

. cancellation of orders and license agreements;

. negative publicity;

. loss of revenues;

. slower market acceptance; and

. legal action by customers against us.

In the future, our efforts to remedy this situation may not be successful
and we may lose customers as a result. Delays in bringing to market new
products or their enhancements, or the existence of defects in new products or
their enhancements, could be exploited by our competitors. If
we were to lose market share as a result of lapses in our product management,
our business would suffer.

Technical problems with either our internal or our outsourced computer and
communications systems could interrupt our Kana Online service

The success of our Kana Online service depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar adverse events. We have entered into an Internet-hosting agreement
with Exodus Communications, Inc. to maintain all of our Kana Online servers at
Exodus' data center in Santa Clara, California. Our operations depend on
Exodus' ability to protect its and our systems in its data center against
damage or interruption. Exodus does not guarantee that our Internet access will
be uninterrupted, error-free or secure. We have no formal disaster recovery
plan in the event of damage or interruption, and our insurance policies may not
adequately compensate us for any losses that we may incur. Any system failure
that causes an interruption in our service or a decrease in responsiveness
could harm our relationships with our customers and result in reduced revenues.
See "Business--Products and Services--Kana Online".

If we fail to build skills necessary to sell our Kana Online service, we will
lose revenue opportunities and our sales will suffer

The skills necessary to market and sell Kana Online are different than
those relating to our software products. We license our software products for a
fixed fee based on the number of concurrent users and the optional applications
purchased. We license Kana Online based on a fixed fee for installation,
configuration and training, and a variable monthly component depending on
actual customer usage. Our sales force sells both our software products and
Kana Online. Because different skills are necessary to sell Kana Online versus
our software products, our sales and marketing groups may not be able to
maintain or increase the level of sales of either Kana Online or our software
products.

12
<PAGE>

Our pending patents may never be issued and, even if issued, may provide us
with little protection

Our success and ability to compete depend to a significant degree upon the
protection of our software and other proprietary technology rights. We regard
the protection of patentable inventions as important to our future
opportunities. We currently have four U.S. patent applications pending relating
to our software. However, none of our technology is patented outside of the
United States nor do we currently have any international patent applications
pending. It is possible that:

. our pending patent applications may not result in the issuance of
patents;

. any patents issued may not be broad enough to protect our proprietary
rights;

. any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others
from exploiting the inventions claimed in those patents;

. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our patents;
and

. effective patent protection may not be available in every country in
which we do business.

See "Business--Intellectual Property".

We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property

We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. We
currently have a registered trademark, "Kana", and pending trademark
applications for our logo and "KANA COMMUNICATIONS and Design". However, none
of our trademarks is registered outside of the United States, nor do we have
any trademark applications pending outside of the United States. Moreover,
despite any precautions that we have taken:

. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;

. current federal laws that prohibit software copying provide only limited
protection from software "pirates", and effective trademark, copyright
and trade secret protection may be unavailable or limited in foreign
countries;

. other companies may claim common law trademark rights based upon state
or foreign laws that precede the federal registration of our marks; and

. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.

Also, the laws of other countries in which we market our products may offer
little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which would significantly harm our business. See "Business--
Intellectual Property".

We may become involved in litigation over proprietary rights, which could be
costly and time consuming

Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject
to third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents that our
products or technology

13
<PAGE>

infringe. Any of these third parties might make a claim of infringement against
us. Many of our software license agreements require us to indemnify our
customers from any claim or finding of intellectual property infringement. Any
litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement might
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements, which might not be
available on acceptable terms, or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or
license the infringed or similar technology on a timely and cost-effective
basis, our business could be significantly harmed. See "Business--Intellectual
Property".

We may face higher costs and lost sales if our software contains errors

We face the possibility of higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the mission-
critical nature of our products and services, undetected errors are of
particular concern. We have only a few "beta" customers that test new features
and functionality of our software before we make these features and
functionalities generally available to our customers. If our software contains
undetected errors or we fail to meet our customers' expectations in a timely
manner, we could experience:

. loss of or delay in revenues expected from the new product and an
immediate and significant loss of market share;

. loss of existing customers that upgrade to the new product and of new
customers;

. failure to achieve market acceptance;

. diversion of development resources;

. injury to our reputation;

. increased service and warranty costs;

. legal actions by customers against us; and

. increased insurance costs.

We may face liability claims that could result in unexpected costs and damage
to our reputation

Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable and we may be subject to claims
based on errors in our software or mistakes in performing our services
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management.

We intend to expand our international operations, which could divert management
attention and present financial issues

Our international operations are located in the United Kingdom and, to
date, have been limited. We plan to expand our existing international
operations and establish additional facilities in other parts of the world. We
may face difficulties in accomplishing this expansion, including finding
adequate staffing and management resources for our international operations.
The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources. In addition, in order to expand our international
sales operations, we will need to, among other things:

14
<PAGE>

. expand our international sales channel management and support
organizations;

. customize our products for local markets; and

. develop relationships with international service providers and
additional distributors and system integrators.

Our investments in establishing facilities in other countries may not
produce desired levels of revenues. Even if we are able to expand our
international operations successfully, we may not be able to maintain or
increase international market demand for our products. In addition, we have
only licensed our products internationally since January 1999 and we have
limited experience in developing localized versions of our software and
marketing and distributing them internationally. Localizing our products may
take longer than we anticipate due to difficulties in translation and delays we
may experience in recruiting and training international staff.

Our growth could be limited if we fail to execute our plan to expand
internationally

For the six months ended June 30, 1999, we derived approximately 9.6% of
our total revenues from sales outside North America. We also have established
an office in the United Kingdom. As of June 30, 1999 we had five sales persons
in our United Kingdom office. The United Kingdom office oversees and processes
all orders for our products and services in Europe. Non-European international
sales are handled by sales representatives in the United States. As a result,
we face risks from doing business on an international basis, any of which could
impair our internal revenues. Although our international sales have not yet
been materially affected by the following risks, we could, in the future,
encounter greater difficulty in accounts receivable collection, longer sales
cycles and collection periods or seasonal reductions in business activity. In
addition, our international operations could cause our average tax rate to
increase. Any of these events could harm our international sales and results of
operations.

International laws and regulations may expose us to potential costs and
litigation

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

We may suffer foreign exchange rate losses

Our international revenues are denominated in local currency. Therefore, a
strengthening of other currencies versus the U.S. dollar could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities. We have not yet but may in the future experience
foreign exchange rate losses, especially to the extent that we do not engage in
hedging.

Our prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing could affect our ability to pursue
future growth

We may need to raise additional funds to develop or enhance our products or
services, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. We do not have a long
enough operating history to know with certainty whether our existing cash and
the proceeds of this offering will be sufficient to finance our anticipated
growth. Additional financing may not be available on terms that are acceptable
to us. If we raise additional

15
<PAGE>

funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, or otherwise respond to competitive
pressures would be significantly limited.

Our executive officers and directors will exercise control over stockholder
voting matters

After this offering, our executive officers and directors, their affiliates
and other substantial stockholders will together control approximately 57.1% of
the outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring approval of a majority
of our stockholders, including the election of directors and significant
corporate transactions. This concentration of ownership may delay, prevent or
deter a change in control of Kana, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
Kana or its assets and might affect the market price of our common stock.

We have adopted anti-takeover defenses that could delay or prevent an
acquisition of our company

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

Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Kana. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
Kana. Furthermore, our board of directors will be divided into three classes,
only one of which will be elected each year. Directors will only be removable
by the affirmative vote of at least 66 2/3% of all classes of voting stock.
These factors may further delay or prevent a change of control of Kana. See
"Description of Capital Stock--Anti-takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law".

Risks Related to Our Industry

Our failure to manage multiple technologies and technological change could harm
our future product demand

Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. The market for e-Business customer communication software is
characterized by:

. rapid technological change;

. frequent new product introductions;

. changes in customer requirements; and

. evolving industry standards.

Our products are designed to work on a variety of hardware and software
platforms used by our customers. However, our software may not operate
correctly on evolving versions of hardware and software platforms, programming
languages, database environments and other systems that our

16
<PAGE>

customers use. For example, the server component of the current version of our
products runs on the Windows NT operating system from Microsoft, and we must
develop products and services that are compatible with UNIX and other operating
systems to meet the demands of our customers. If we cannot successfully develop
these products in response to customer demands, our business could suffer.
Also, we must constantly modify and improve our products to keep pace with
changes made to these platforms and to database systems and other back-office
applications and Internet-related applications. This may result in uncertainty
relating to the timing and nature of new product announcements, introductions
or modifications, which may cause confusion in the market and harm our
business. If we fail to modify or improve our products in response to evolving
industry standards, our products could rapidly become obsolete, which would
harm our business.

If we fail to respond to changing customer preferences in our market, demand
for our products and our ability to enhance our revenues will suffer

We must continually improve the performance, features and reliability of
our products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to
develop new services, functionality and technology that address the
increasingly sophisticated and varied needs of our prospective customers. If we
do not properly identify the feature preferences of prospective customers, or
if we fail to deliver features that meet the requirements of these customers,
our ability to market our products successfully and to increase our revenues
could be impaired. The development of proprietary technology and necessary
service enhancements entails significant technical and business risks and
requires substantial expenditures and lead time.

If the Internet and e-mail fail to grow and be accepted as a medium of
communication, demand for our products and services will decline

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

Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business

Due to the increasing popularity and use of the Internet, it is possible
that state, federal and foreign regulators could adopt laws and regulations
that impose additional burdens on those companies that conduct business online.
These laws and regulations could discourage communication by e-mail or other
Web-based communications, particularly targeted e-mail of the type facilitated
by the Connectify product, which could reduce demand for our products and
services.

The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,

17
<PAGE>

particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or
otherwise harm our business. Our costs could increase and our growth could be
harmed by any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services.

Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of our products and services

Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.

Any failure of our material systems, our customers' material systems or the
Internet to be Year 2000 compliant would have material adverse consequences for
us. We are currently assessing the Year 2000 readiness of the software,
computer technology and other services that we use that may not be Year 2000
compliant. We have not completed all operational tests on our internal systems.
Accordingly, we are unable to predict to what extent our business may be
affected if our software, the systems that operate in conjunction with our
software or our internal systems experience a material Year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance".

Risks Related to This Offering

We may apply the proceeds of this offering to uses that do not increase our
operating results or market value

We currently estimate that we will use the proceeds from this offering as
follows:

.45% for marketing and distribution activities;

.20% for various product development incentives;

.10% for capital expenditures; and

.25% for working capital and other general corporate purposes.

General corporate purposes include expenditures made in the day to day
operation of our business. The above estimates and our use of proceeds are
subject to change at our management's discretion. The amounts actually expended
for each of the purposes listed above may vary significantly depending upon a
number of factors, including the progress of our marketing programs, capital
spending requirements, and developments in Internet commerce.

We may also use a portion of the proceeds to acquire other businesses,
products or technologies. We will nonetheless have broad discretion in how we
use these proceeds. You will not have the opportunity to evaluate the economic,
financial or other information on which we base our decisions regarding how to
use the proceeds from this offering, and we may spend these proceeds in ways
that do not increase our operating results or market value. Pending any of
these uses, we plan to invest the proceeds of this offering in short-term,
investment-grade, interest-bearing securities. We cannot predict whether these
investments will yield a favorable return. See "Use of Proceeds".

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<PAGE>

Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet

Prior to this offering, our common stock has not been sold in a public
market. After this offering, an active trading market in our stock might not
develop. If an active trading market does develop, it may not continue.
Moreover, if an active market develops, the trading price of our common stock
may fluctuate widely as a result of a number of factors, many of which are
outside our control. In addition, the stock market has experienced extreme
price and volume fluctuations that have affected the market prices of many
technology and computer software companies, particularly Internet-related
companies, and which have often been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations could
adversely affect the market price of our common stock.

The price of our common stock after this offering may be lower than the price
you pay

If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters based
upon a number of factors. The price of our common stock that will prevail in
the market after this offering may be higher or lower than the price you pay.
See "Underwriting".

Future sales by existing security holders could depress the market price of our
common stock

If our existing stockholders sell their shares of our common stock in the
public market following the offering, the market price of our common stock
could decline. Moreover, the perception in the public market that our existing
stockholders might sell shares of common stock could depress the market price
of the common stock. These sales, or the perception of these sales, could make
it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.

Immediately after this offering, we will have outstanding 27,546,388 shares
of our common stock, assuming no exercise of the underwriters' over-allotment
option. Substantially all of these shares are subject to a lock-up period that
expires 180 days after the date of this prospectus. Subject to this lock-up
period and the provisions of Rules 144, 144(k) and 701, additional shares will
be available for sale in the public market as follows:

<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
3,300,000 After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock-up
15,429,947 After 180 days from the date of this prospectus, the 180-day lock-
up terminates and these shares are saleable under Rule 144 (subject
in some cases to volume limitations) or Rule 144(k)
4,486,704 After 180 days from the date of this prospectus, the 180-day lock-
up is released and these shares are saleable under Rule 701
(subject in some cases to a right of repurchase by the Company)
4,329,737 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>

Holders of 19,759,018 shares of our common stock have the right to require
us to register their shares of common stock with the Securities and Exchange
Commission. In addition, after this

19
<PAGE>

offering, we intend to register all shares of our common stock that we may
issue under our stock option plans and employee stock purchase plan. Once we
register these shares, they can be freely sold in the public market upon
issuance, in some instances subject to the lock-up agreements described above.
If these holders cause a large number of securities to be sold in the public
market, the sales could materially and adversely affect the market price of our
common stock. In addition, any of these sales could impede our ability to raise
needed capital. See "Shares Available for Future Sale" and "Underwriting".

Investors will experience immediate and substantial dilution in the book value
of their investment

If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution, in that the price you pay will
be substantially greater than the net tangible book value per share, or the per
share value of our assets after subtracting our liabilities, of the shares you
acquire. Specifically, purchasers of shares of our common stock in this
offering will contribute 55.9% of the total amount paid to fund our company but
will own only 12.1% of our outstanding shares. Additionally, if the holders of
outstanding options exercise their options, you will experience further
dilution. See "Dilution".

Cautionary Note on Forward-Looking Statements

This prospectus contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks" and "estimates", and variations of
these words and similar expressions, are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus. Except as required by
law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.

20
<PAGE>

USE OF PROCEEDS

The net proceeds to Kana from the sale of the 3,300,000 shares of common
stock offered are estimated to be approximately $35.4 million (approximately
$41.0 million if the underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses.
We are conducting this offering primarily to increase our equity capital, to
create a public market for our common stock and to facilitate our future access
to public equity markets. We currently estimate that we will use the net
proceeds as follows:

. 45% for marketing and distribution activities;

. 20% for various product development initiatives;

. 10% for capital expenditures; and

.25% for working capital and other general corporate purposes.

In addition, we may use a portion of the net proceeds to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. Pending these uses, the net proceeds of the
offering will be invested in short-term, interest-bearing, investment-grade
instruments. As of the date of this prospectus, we can only estimate the
particular uses for the net proceeds to be received upon completion of the
offering. However, we currently have no formal plan for use of the expected
offering proceeds, nor have we sought the advice of or received reports from
any of our professional advisors regarding the use of the offering proceeds. In
addition, with the exception of the Connectify merger, we have no agreements or
commitments with respect to any acquisition or investment, and we are not
involved in any negotiations with respect to any similar transaction. As a
result, the above estimates and our use of proceeds are subject to change at
our management's discretion. The amounts actually expended for each of the
purposes listed above may vary significantly depending upon a number of
factors, including the progress of our marketing programs, capital spending
requirements, and developments in Internet commerce. See "Risk Factors--We will
have broad discretion in using the proceeds from this offering".

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.

PREEMPTIVE RIGHTS

As of the date of this prospectus, holders of at least 4,252,555 shares of
our preferred stock have preemptive rights that entitle them to purchase
approximately five percent of the shares to be issued in this offering. The
number of shares that may be purchased under these rights, however, may be
limited at the discretion of the underwriters. Shares purchased by these
stockholders under their preemptive rights will reduce the number of shares
available to new investors in this offering. See "Underwriting".

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<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of Kana as of June 30,
1999 based upon the supplemental consolidated financial statements and notes to
supplemental consolidated financial statements appearing elsewhere in this
prospectus, which gives effect to the issuance of 3,491,271 shares of common
stock in the Connectify Merger:

. on an actual basis;

. on a pro forma basis to give effect to the sale of 838,466 shares of
preferred stock issued in July 1999 for total proceeds of $10.2 million,
the conversion of all shares of convertible preferred stock into
1,769,728 shares of common stock upon the completion of this offering
and the conversion of 11,581,379 shares of convertible perferred stock
at the time of the Connectify merger; and

. as adjusted to reflect the estimated net proceeds from the sale of the
3,300,000 shares of common stock offered by Kana at an assumed initial
public offering price of $12.00 per share and after deducting the
estimated underwriting discount and estimated offering expenses.

<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Notes payable, less current portion............. $ 638 $ 638 $ 638
------- ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par value
per share; 50,000,000, 5,000,000 and 5,000,000
shares authorized actual, pro forma and as
adjusted, respectively; 12,512,641, no shares
and no shares issued and outstanding actual,
pro forma and as adjusted, respectively....... 13 -- --
Common stock, $0.001 par value per share;
60,000,000, 100,000,000 and 100,000,000 shares
authorized actual, pro forma and as adjusted,
respectively; 10,627,617, 23,978,730 and
27,278,730 shares issued and outstanding
actual, pro forma and as adjusted,
respectively.................................. 11 24 27
Additional paid-in capital..................... 39,535 49,735 85,160
Deferred stock-based compensation.............. (13,397) (13,397) (13,397)
Notes receivable from stockholders............. (1,187) (1,187) (1,187)
Accumulated other comprehensive losses......... (37) (37) (37)
Accumulated deficit............................ (18,615) (18,615) (18,615)
------- ------- -------
Total stockholders' equity.................... 6,323 16,523 51,951
------- ------- -------
Total capitalization.......................... $ 6,961 $17,161 $52,589
======= ======= =======
</TABLE>

The number of shares outstanding as of June 30, 1999 excludes:

. 304,017 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.37 per share;

. 864,100 shares of common stock issued or issuable upon exercise of stock
options granted by us between June 30, 1999 and July 31, 1999 at a
weighted average exercise price of $4.76 per share;

. 4,647,618 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan; and

. 490,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.

See "Management--Benefit Plans", "Description of Capital Stock" and Note 4
of Notes to Supplemental Consolidated Financial Statements.

22
<PAGE>

DILUTION

The pro forma net tangible book value of Kana at June 30, 1999, was
approximately $16.5 million, or $0.69 per share. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all outstanding convertible preferred stock. After giving
effect to the sale in July 1999 of 838,466 shares of our Series D preferred
stock and the sale of the 3,300,000 shares of common stock offered by Kana at
an assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses,
Kana's pro forma net tangible book value at June 30, 1999, would have been
$52.0 million, or $1.91 per share. This represents an immediate increase in net
tangible book value of $1.22 per share to existing stockholders and an
immediate dilution of $10.09 per share to new investors purchasing shares of
common stock in this offering. Dilution is defined as the diminution in the
proportion of income, or earnings per share, to which each share is entitled
due to the issuance of additional shares. With the sale and issuance of
3,300,000 shares in this offering, existing stockholders will suffer an
immediate reduction in the net tangible book value of their shares because the
additional shares decrease the percentage of ownership of the existing
stockholders. The following table illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of June 30,
1999........................................................... $0.69
Increase per share attributable to new investors................ 1.22
-----
Pro forma net tangible book value per share after the offering.... 1.91
------
Dilution per share to new investors............................... $10.09
======
</TABLE>

The following table summarizes, as of June 30, 1999, on a pro forma basis,
the total number of shares purchased, the consideration paid to Kana and the
average price per share paid by existing stockholders and by new investors
purchasing shares of common stock in this offering at an assumed initial public
offering price of $12.00 per share, before deducting the estimated underwriting
discount and estimated offering expenses:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 23,978,730 87.9% $31,266,000 44.1% $ 1.36
New investors.................. 3,300,000 12.1 39,600,000 55.9 12.00
---------- ----- ----------- -----
Totals....................... 27,278,730 100.0% $70,866,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing computations are based on the number of shares of common
stock outstanding as of June 30, 1999 and includes 838,466 shares of common
stock issuable upon conversion of preferred stock issued in July 1999 and
3,491,271 shares of common stock issued in the Connectify merger in August 1999
and excludes:

. 304,017 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.37 per share;

. 864,100 shares of common stock issued or issuable upon exercise of stock
options granted by us between June 30, 1999 and July 31, 1999 at a
weighted average exercise price of $4.76 per share;

. 4,647,618 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan; and

. 490,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.

To the extent that any of these options are exercised, there would be
further dilution to new investors. See "Capitalization", "Management--Benefit
Plans", "Description of Capital Stock" and Notes 4 and 7 of Notes to
Supplemental Consolidated Financial Statements.

23
<PAGE>

SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA

You should read the supplemental selected consolidated financial data set
forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the supplemental
consolidated financial statements of Kana Communications, Inc. and the notes to
supplemental consolidated financial statements included elsewhere in this
prospectus.

Kana was incorporated in July 1996 but had no significant operations until
1997. The supplemental consolidated statement of operations data for each of
the years in the two-year period ended December 31, 1998, and the supplemental
consolidated balance sheet data at December 31, 1997 and 1998, are derived from
our supplemental consolidated financial statements. These supplemental
consolidated financial statements have been audited by KPMG LLP, independent
auditors, and are included elsewhere in this prospectus. The supplemental
consolidated statement of operations data for the six-months ended June 30,
1998 and 1999, and the supplemental consolidated balance sheet data at June 30,
1999, are derived from our unaudited interim supplemental consolidated
financial statements included elsewhere in this prospectus. The unaudited
interim supplemental consolidated financial statements have been prepared on
substantially the same basis as the audited supplemental consolidated financial
statements and, in our opinion, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our results
of operations and financial position for these periods. The diluted net loss
per share computation excludes potential shares of common stock (preferred
stock, options to purchase common stock and common stock subject to repurchase
rights held by Kana), since their effect would be antidilutive. See Note 1 of
Notes to Supplemental Consolidated Financial Statements for a detailed
explanation of the determination of the shares used to compute actual and pro
forma basic and diluted net loss per share. Pro forma basic and diluted net
loss per share gives effect to the conversion of preferred stock as if it had
occurred at the beginning of the periods presented. The historical results are
not necessarily indicative of results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Supplemental Consolidated Statement of
Operations Data:
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit............................ -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,938 1,421 4,957
Research and development............... 699 2,835 884 3,320
General and administrative............. 257 1,004 314 986
Amortization of stock-based
compensation.......................... 113 1,263 430 3,063
------- ------- -------- --------
Total operating expenses............. 1,435 9,040 3,049 12,326
------- ------- -------- --------
Operating loss....................... (1,435) (7,564) (2,466) (9,961)
Other income, net....................... 52 186 41 107
------- ------- -------- --------
Net loss............................. $(1,383) $(7,378) $ (2,425) $ (9,854)
======= ======= ======== ========
Basic and diluted net loss per share.... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss per share............. 1,497 2,864 1,535 5,217
======= ======= ======== ========
Pro forma basic and diluted net loss per
share.................................. $ (0.59) $ (0.56)
======= ========
Shares used in computing pro forma basic
and diluted net loss per share......... 12,547 17,729
======= ========

</TABLE>

<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $3,513 $13,115 $8,049
Working capital........................................ 3,281 12,224 4,829
Total assets........................................... 3,824 15,275 12,325
Notes payable, less current portion.................... 51 360 638
Total stockholders' equity............................. 3,504 13,066 6,323
</TABLE>

24
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is based on and should be read in conjunction with
the supplemental consolidated financial statements included elsewhere in this
prospectus.

Overview

We were incorporated in July 1996 but had no significant operations until
1997. Through January 1998, we were a development stage enterprise and had no
revenues. Our operating activities during this period related primarily to
conducting research, developing our initial products, raising capital and
building our sales and marketing organization. In February 1998, we released
the first commercially available version of the Kana platform. To date, we have
derived substantially all of our revenues from licensing our software and
related services. To date, we have sold our products worldwide primarily
through our direct sales force.

On August 13, 1999, we closed a merger with Connectify, Inc. pursuant to
which Connectify became our wholly owned subsidiary. Connectify develops,
markets and supports electronic direct marketing software for e-Businesses.
Connectify's software enables e-Businesses to profile and target potential and
existing customers and then deliver and track personalized e-mails to their
customers. By using electronic direct marketing software in this way, e-
Businesses can build customer loyalty, increase the probability of repeat
transactions and reduce customer attrition. Connectify is based in San Mateo,
California, and has 31 employees.

In connection with the merger, we issued a total of 3,491,271 shares of our
common stock in exchange for all outstanding shares of Connectify capital stock
and reserved 208,345 shares of common stock for issuance upon the exercise of
Connectify options and warrants we assumed in connection with the merger. We
will account for the Connectify merger as a pooling of interests. In addition,
in connection with the Connectify merger, we recorded a significant amount of
deferred compensation that will significantly reduce our earnings and
profitability for the foreseeable future.

We derive our revenues from the sale of software product licenses and from
professional services including implementation, customization, hosting and
maintenance. License revenue is recognized when persuasive evidence of an
agreement exists, the product has been delivered, the arrangement does not
involve significant customization of the software, the license fee is fixed and
determinable and collection of the fee is probable. Service revenue includes
revenues from maintenance contracts, implementation, customization and hosting
services. Revenue from maintenance contracts is recognized ratably over the
term of the contract. Revenue from implementation, customization and hosting
services is recognized as the services are provided. Revenue under arrangements
where multiple products or services are sold together is allocated to each
element based on its relative fair value.

Our cost of license revenue includes royalties due to a third party for
technology integrated into some of our products, the cost of product
documentation, the cost of the media used to deliver our products and shipping
costs. Cost of service revenue consists primarily of personnel-related
expenses, travel costs, equipment costs and overhead associated with delivering
professional services to our customers.

Our operating expenses are classified into three general categories: sales
and marketing, research and development, and general and administrative. We
classify all charges to these operating expense categories based on the nature
of the expenditures. Although each category includes expenses that are unique
to the category, some expenditures, such as compensation, employee benefits,
recruiting costs, equipment costs, travel and entertainment costs, facilities
costs and third-party professional services fees, occur in each of these
categories.

25
<PAGE>

We allocate the total costs for information services and facilities to each
functional area that uses the information services and facilities based on its
relative headcount. These allocated costs include rent and other facility-
related costs for the corporate office, communication charges and depreciation
expense for furniture and equipment.

In connection with the granting of stock options to our employees, we
recorded deferred stock-based compensation totaling approximately $17.8 million
through June 30, 1999. This amount represents the total difference between the
exercise prices of stock options and the deemed fair value of the underlying
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recorded $1.3 million of stock-based compensation amortization expense during
the year ended December 31, 1998, and approximately $3.1 million of stock-based
compensation amortization expense during the six months ended June 30, 1999. As
of June 30, 1999, we had a total of $14.1 million of deferred stock-based
compensation that had not been amortized. We expect to record additional
deferred stock-based compensation of at least $3.0 million for stock option
grants made during the three months ended September 30, 1999. The amortization
of the remaining deferred stock-based compensation will result in additional
charges to operations through July 2003. The amortization of deferred stock-
based compensation is classified as a separate component of operating expenses
in our consolidated statement of operations.

Although revenues have increased consistently from quarter to quarter,
since the beginning of 1997 we have incurred substantial costs to develop our
products and to recruit, train and compensate personnel for our engineering,
sales, marketing, client services and administration departments. As a result,
we have incurred substantial losses since inception and, for the six months
ended June 30, 1999, incurred a net loss of $9.9 million. As of June 30, 1999,
had an accumulated deficit of $18.6 million. We believe our future success is
contingent upon providing superior customer service, increasing our customer
base and developing our products. We intend to invest heavily in sales,
marketing, research and development, client services and infrastructure to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future.

We had 98 full-time employees as of June 30, 1999 and intend to hire a
significant number of employees in the future. From July 1, 1999 to August
13,1999 we add 38 new employees, and 31 new employees are joining us as a
result of the Connectify Merger. This expansion places significant demands on
our management and operational resources. To manage this rapid growth, we must
invest in and implement scaleable operational systems, procedures and controls.
We expect future expansion to continue to challenge our ability to hire, train,
manage and retain employees.

We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being
indicative of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently experienced by companies in
early stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we have experienced significant revenue growth
recently, this trend may not continue. Furthermore, we may not achieve or
maintain profitability in the future.

26
<PAGE>

Results of Operations

The following table presents selected financial data for the periods
indicated as a percentage of total revenues. Data for the year ended December
31, 1997 are not presented because we had no revenues during that period.

<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
------------ ---------------
1998 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Revenues:
License........................................ 87.5 % 93.8 % 78.1 %
Service........................................ 12.5 6.2 21.9
------ ------ ------
Total revenues............................... 100.0 100.0 100.0
Cost of revenues:
License........................................ 2.6 2.4 2.0
Service........................................ 25.3 8.7 31.9
------ ------ ------
Total cost of revenues....................... 27.9 11.1 33.9
------ ------ ------
Gross profit..................................... 72.1 88.9 66.1
Operating expenses:
Sales and marketing............................ 192.2 216.6 138.5
Research and development....................... 138.4 134.8 92.8
General and administrative..................... 49.0 47.9 27.6
Amortization of stock-based compensation....... 61.6 65.5 85.6
------ ------ ------
Total operating expenses..................... 441.2 464.8 344.5
------ ------ ------
Operating loss................................... (369.1) (375.9) (278.4)
Other income, net................................ 9.1 6.3 3.0
------ ------ ------
Net loss..................................... (360.0)% (369.6)% (275.4)%
====== ====== ======
</TABLE>

Six Months Ended June 30, 1998 and 1999

Revenues

Total revenues increased from $656,000 for the six months ended June 30,
1998 to $3.6 million for the six months ended June 30, 1999. License revenue
increased from $615,000 for the six months ended June 30, 1998 to $2.8 million
for the six months ended June 30, 1999. This increase in license revenue was
due primarily to increased market acceptance of our products, expansion of our
product line and increased sales generated by our expanded sales force. Total
headcount in our sales department increased from five people at June 30, 1998
to 29 people at June 30, 1999. License revenue represented 93.8% of total
revenues for the six months ended June 30, 1998 and 78.1% of total revenues for
the six months ended June 30, 1999.

Service revenue increased from $41,000 for the six months ended June 30,
1998 to, $783,000 for the six months ended June 30, 1999. This increase in
service revenue was due primarily to the increased licensing activity described
above, resulting in increased revenue from customer implementations,
customization projects and maintenance contracts and hosted service. Service
revenue represented 6.2% of total revenues for the six months ended June 30,
1998 and 21.9% of total revenues for the six months ended June 30, 1999.

During the six months ended June 30, 1998, two customers each accounted for
more than 10% of total revenues. During the six months ended June 30, 1999, no
customer accounted for more than

27
<PAGE>

10% of total revenues. Revenue from international sales for the six months
ended June 30, 1998 and 1999 were less than 10% of total revenues.

Cost of Revenues

Cost of license revenue includes third party software royalties, product
packaging, documentation and production. Cost of license revenue increased from
$16,000 for the six months ended June 30, 1998 to $72,000 for the six months
ended June 30, 1999. As a percentage of license revenue, cost of license
revenue was 2.4% for the six months ended June 30, 1998 and 1999. The increase
in the cost of license revenue was due primarily to royalties, product
documentation costs and delivery costs for shipments to customers. We
anticipate that the cost of license revenue will increase in absolute dollars
as we license additional technologies, although cost of license revenue will
vary as a percentage of license revenue from period to period.

Cost of service revenue consists primarily of personnel, facilities and
system costs incurred in providing customer support. Cost of service revenue
increased from $57,000 for the six months ended June 30, 1998 to $1.1 million
for the six months ended June 30, 1999. The growth in cost of service revenue
was attributable primarily to an increase in personnel dedicated to support our
growing number of customers and related facility expenses and in system costs.
Cost of service revenue as a percent of service revenue was 139% for the six
months ended June 30, 1998 and 146% for the six months ended June 30, 1999. We
anticipate that cost of service revenue will increase in absolute dollars.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel and
promotional expenditures, including public relations, advertising, trade shows,
and marketing collateral materials. Sales and marketing expenses increased from
$1.4 million for the six months ended June 30, 1998 to $5.0 million for the six
months ended June 30, 1999. This increase was attributable primarily to the
addition of sales and marketing personnel, an increase in sales commissions
associated with increased revenues and higher marketing costs due to expanded
promotional activities. As a percentage of total revenues, sales and marketing
expenses were 217% for the six months ended June 30, 1998 and 139% for the six
months ended June 30, 1999. This decrease in sales and marketing expense as a
percent of total revenues was due primarily to the increase in total revenues
over the period. We expect to continue to increase our marketing and
promotional efforts and hire additional sales personnel. We further expect our
sales and marketing expenses to increase due to the Connectify merger.
Accordingly, we anticipate that sales and marketing expenses will increase in
absolute dollars, but will vary as a percentage of total revenues from period
to period.

Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors and enhancement of existing products and quality
assurance activities. Research and development expenses increased from $884,000
for the six months ended June 30, 1998 to $3.3 million for the six months ended
June 30, 1999. This increase was attributable primarily to the addition of
personnel associated with product development and related benefits, consulting
and recruiting costs. As a percentage of total revenues, research and
development expenses were 135% for the six months ended June 30, 1998 and 93.0%
for the six months ended June 30, 1999. This decrease in research and
development expense as a percent of total revenues was due primarily to the
increase in total revenues over the period. We expect to continue to make
substantial investments in research and development and anticipate that
research and development expenses will continue to increase in absolute
dollars, but will vary as a percentage of total revenues from period to period.
We further expect our research and development expenses to increase due to the
Connectify merger.

28
<PAGE>

General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for administrative personnel,
legal, accounting and other general corporate expenses. General and
administrative expenses increased from $314,000 for the six months ended June
30, 1998 to $986,000 for the six months ended June 30, 1999, due primarily to
increased personnel, consultants and facilities expenses necessary to support
our growth. As a percentage of total revenues, general and administrative
expenses were 47.9% for the six months ended June 30, 1998 and 27.6% for the
six months ended June 30, 1999. This decrease in general and administrative
expenses as a percent of total revenues was due primarily to the increase in
total revenues over the period. We expect that general and administrative
expenses will increase in absolute dollars as we add personnel and incur
additional costs related to the anticipated growth of our business and
operation as a public company. We further expect our general and administrative
expenses to increase due to the Connectify merger. However, we expect that
these expenses will vary as a percentage of total revenues from period to
period.

Other Income, Net

Other income, net consists primarily of interest earned on cash and short-
term investments, offset by interest expense related to a note payable and loss
from disposition of assets. Other income, net was $41,000 for the six months
ended June 30, 1998 and $107,000 for the six months ended June 30, 1999. The
increase in other income, net was due primarily to increased interest income
earned on higher cash balances offset by a loss from disposition of assets and
interest expense.

Net Loss

Our net loss increased from $2.4 million for the six months ended June 30,
1998 to $9.9 million for the comparable period in 1999. We have experienced
substantial increases in our expenditures since our inception consistent with
growth in our operations and personnel, and we anticipate that our expenditures
will continue to increase in the future. Although our revenue has grown in
recent quarters, we cannot be certain that we can sustain this growth or that
we will generate sufficient revenue for profitability.

Years Ended December 31, 1997 and 1998

Revenues

We began recognizing revenues in February 1998. Total revenues in 1998 were
$2.0 million. License revenue was $1.8 million in 1998. License revenue
resulted from introduction of our product line and market acceptance of our
products. License revenue represented 87.5% of total revenues for 1998.

Service revenue was $256,000 in 1998. Service revenue during 1998 consisted
of revenue from customer implementations, customization projects and
maintenance contracts. Service revenue represented 12.5% of total revenues for
1998.

Cost of Revenues

Cost of license revenue was $54,000 in 1998. As a percentage of license
revenue, cost of license revenue was 2.9% in 1998. Cost of license revenue
consisted of royalties paid to a third party, product documentation costs and
delivery costs for shipments to customers.

Cost of service revenue was $519,000 in 1998. As a percent of service
revenue, cost of service revenue was 203% in 1998. Cost of service revenue
consisted primarily of costs associated with building our customer service
organization.

29
<PAGE>

Operating Expenses

Sales and Marketing. Sales and marketing expenses were $366,000 for 1997
and $3.9 million for 1998. The increase was due primarily to the addition of
sales and marketing personnel, increased sales commissions related to increased
total revenues and, to a lesser extent, increased marketing costs. As a
percentage of total revenues, sales and marketing expenses were 192% for 1998.

Research and Development. Research and development expenses were $699,000
for 1997 and $2.8 million for 1998. The increase was attributable primarily to
the addition of personnel associated with product development. As a percentage
of total revenues, research and development expenses were 138% for 1998.

General and Administrative. General and administrative expenses were
$257,000 for 1997 and $1.0 million for 1998. The increase was due primarily to
the addition of management and financial personnel necessary to support our
growth. As a percentage of total revenues, general and administrative expenses
were 49.0% for 1998.

Other Income, Net

Other income, net was $52,000 for 1997 and $186,000 for 1998. The increase
was due primarily to an increase in interest income earned on higher balances
of cash and short-term investments due primarily to our Series C preferred
stock financing in September 1998.

Net Loss

Our net loss increased from $1.4 million in 1997 to $7.4 million in 1998.

Provision for Income Taxes

We have incurred operating losses for all periods from inception through
June 30, 1999, and therefore have not recorded a provision for income taxes. We
have recorded a valuation allowance for the full amount of our gross deferred
tax assets, as the future realization of the tax benefit is not currently
likely.

As of December 31, 1998, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.6 million. These federal and
state loss carryforwards are available to reduce future taxable income. The
federal loss carryforwards expire at various dates into the year 2018. Under
the provisions of the Internal Revenue Code, substantial changes in our
ownership may limit the amount of net operating loss carryforwards that could
be utilized annually in the future to offset taxable income.

30
<PAGE>

Supplemental Quarterly Results of Operations

The following tables set forth a summary of our unaudited supplemental
quarterly operating results for each of the six quarters in the period ended
June 30, 1999. The information has been derived from our supplemental
consolidated unaudited financial statements that, in management's opinion, have
been prepared on a basis consistent with the audited supplemental consolidated
financial statements contained elsewhere in this prospectus and include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of such information when read in conjunction with our audited
consolidated financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Statement
of
Operations Data:
Revenues:
License................ $ 161 $ 454 $ 478 $ 699 $ 1,165 1,630
Service................ 16 25 97 119 258 525
------- ------- ------- ------- ------- -------
Total revenues......... 177 479 575 818 1,423 2,155
------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 4 12 17 21 34 38
Service................ 26 31 189 273 402 739
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 30 43 206 294 436 777
------- ------- ------- ------- ------- -------
Gross profit............ 147 436 369 524 987 1,378
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 498 923 1,159 1,358 1,707 3,250
Research and
development........... 403 481 774 1,177 1,435 1,885
General and
administrative........ 104 210 308 382 435 551
Amortization of
deferred stock-based
compensation.......... 184 246 352 481 435 2,628
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,189 1,860 2,593 3,398 4,012 8,314
------- ------- ------- ------- ------- -------
Operating loss.......... (1,042) (1,424) (2,224) (2,874) (3,025) (6,936)
Other income, net....... 30 11 38 109 139 (32)
------- ------- ------- ------- ------- -------
Net loss................ $(1,012) $(1,413) $(2,186) $(2,765) $(2,886) $(6,968)
======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 91.0% 94.8% 83.1% 85.5% 81.9% 75.6%
Service................ 9.0 5.2 16.9 14.5 18.1 24.4
------- ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 2.3 2.5 3.0 2.6 2.4 1.8
Service................ 14.7 6.7 32.9 33.4 28.3 34.3
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 17.0 9.2 35.9 36.0 30.7 36.1
------- ------- ------- ------- ------- -------
Gross profit............ 83.0 90.8 64.1 64.0 69.3 63.9
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 281.4 192.7 201.6 166.0 120.0 150.9
Research and
development........... 227.7 100.4 134.6 143.9 100.8 87.5
General and
administrative........ 58.8 43.6 53.6 46.7 30.6 25.6
Amortization of
deferred stock-based
compensation.......... 104.0 51.4 61.2 58.8 30.6 122.0
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 671.9 388.1 451.0 451.4 282.0 386.0
------- ------- ------- ------- ------- -------
Operating loss.......... (588.7) (297.3) (386.9) (351.4) (212.7) (322.1)
Other income, net....... 16.9 2.1 6.6 13.3 9.8 (1.4)
------- ------- ------- ------- ------- -------
Net loss................ (571.8)% (295.2)% (380.3)% (338.1)% (202.9)% (323.5)%
======= ======= ======= ======= ======= =======
</TABLE>

The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenues and operating

31
<PAGE>

results are difficult to forecast and will fluctuate, and we believe that
period-to-period comparisons of our operating results will not necessarily be
meaningful. As a result, you should not rely upon them as an indication of
future performance.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $26.6 million and, to a lesser
extent, from bank borrowings and lease financing.

Our operating activities used $1.1 million during 1997, $5.7 million during
1998 and $5.0 million during the six months ended June 30, 1999. This negative
operating cash flow resulted principally from our net losses experienced during
these periods as we invested in the development of our products, expanded our
sales force and expanded our infrastructure to support our growth.

Our investing activities, consisting of purchases of computer equipment,
furniture, fixtures and leasehold improvements to support our growing number of
employees and net purchases of short-term investments, used $498,000 during
1997, $937,000 during 1998 and $3.4 million during the six months ended June
30, 1999.

Our financing activities generated $4.9 million in cash during 1997 and
$16.3 million in cash during 1998 and $1.3 million during the six months ended
June 30, 1999. Of these financing activities, the issuance of convertible
preferred stock generated net proceeds of $4.6 million during 1997 and $15.3
million during 1998. We had proceeds from bank borrowings of $720,000 in 1998
and $1.7 million during the six months ended June 30, 1999.

At June 30, 1999, we had cash and cash equivalents aggregating $5.8 million
and short-term investments totaling $2.2 million. Our short-term investments
secure two letters of credit issued in connection with the lease of our
corporate offices. We have two lines of credit totaling $4.0 million, which are
secured by all of our assets, bear interest at the bank's prime rate (7.75% as
of June 30, 1999), and expire on March 2, 2000 and June 30, 2000. Our total
bank debt was $1.9 million at June 30, 1999.

Our capital requirements depend on numerous factors. We expect to devote
substantial resources to continue our research and development efforts, expand
our sales, support, marketing and product development organizations, establish
additional facilities worldwide and build the infrastructure necessary to
support our growth. We have experienced substantial increases in our
expenditures since our inception consistent with growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase in
the future. We believe that the proceeds of this offering, together with our
current cash and cash equivalents and our borrowing capacity, will be
sufficient to fund our activities for the next 18 months. Thereafter, we may
need to raise additional funds in order to fund more rapid expansion, including
significant increases in personnel and office facilities; to develop new or
enhance existing services or products; to respond to competitive pressures; or
to acquire or invest in complementary businesses, technologies, services or
products. In addition, in order to meet our long-term liquidity needs, we may
need to raise additional funds or seek other financing arrangements. Additional
funding may not be available on favorable terms or at all. In addition,
although there are no present understandings, commitments or agreements with
respect to any acquisition of other businesses, products or technologies, we
may, from time to time, evaluate potential acquisitions of other businesses,
products and technologies. In order to consummate potential acquisitions, we
may issue additional securities or need additional equity or debt financing and
any financing may be dilutive to existing investors.

32
<PAGE>

Year 2000 Compliance

In the fourth quarter of 1998 we initiated a Year 2000 compliance program.
The program is being directed by our quality assurance group. Our quality
assurance group is charged with identifying issues of potential risk within
each department and making the appropriate evaluation, modification, upgrade or
replacement. Members of our quality assurance group have worked with members of
each of our principal internal divisions in the course of assessing our Year
2000 compliance.

Scope of Year 2000 Assessment

The scope of our Year 2000 compliance program includes testing the Kana
platform and the IT and non-IT systems used at our office in Palo Alto,
California. Our other sales offices use the same third-party hardware and
software systems as those in our Palo Alto office. Accordingly, our quality
assurance group determined that it would not conduct an independent review of
those systems. The operational areas under investigation include:

. products;

. software applications;

. facilities;

. suppliers and vendors; and

. computer systems.

We do not currently have any information concerning the Year 2000
compliance status of our customers. If our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures,
especially technology expenditures that were budgeted for our products, to
address Year 2000 compliance problems, our business could suffer.

Budget and Schedule

We have funded our Year 2000 plan from available cash and have not
separately accounted for these expenses in the past. To date, expenditures for
Year 2000 compliance have totaled less than $20,000. Because our products were
designed to be Year 2000 compliant, most of our expenses have related to, and
are expected to continue to relate to, the operating costs associated with time
spent by employees in the evaluation process and Year 2000 compliance matters
generally. We expect to incur no more than an additional $10,000 to verify that
our IT and non-IT systems are capable of properly distinguishing between 20th
century and 21st century dates. However, we may experience unanticipated,
material problems and expenses associated with Year 2000 compliance that could
harm our business. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as Year 2000 compliance failures
by utility or transportation companies and related service interruptions.

We have completed the evaluation of our products and our third-party
software systems. We are in the process of obtaining Year 2000 assurances from
our principal third-party hardware vendors and service providers, and
installing Year 2000 "patch kits", where appropriate. We anticipate concluding
these activities by September 1999.

33
<PAGE>

Products

We have completed testing of the products we have shipped to date. Our
testing has determined that these products are capable of properly
distinguishing between 20th and 21st century dates, when configured and used in
accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software used with these
products are also capable of properly distinguishing between 20th and 21st
century dates.

Third-party Hardware and Software Systems and Services

We are in the process of evaluating all of the material third-party systems
and software we use in our business. We have received written statements of
Year 2000 compliance from substantially all of the providers of hardware used
in our business. We have identified approximately 20 different software vendors
that provide software products in our business. To date, we have not received
compliance statements from the provider of our accounting software, but we
anticipate a Year 2000 upgrade to be received in the next month. If any of the
compliance statements we have received from our third-party software or
hardware providers are false, our internal systems and our ability to ship our
product would by materially harmed.

We are in the process of obtaining written compliance statements as to Year
2000 compliance from our hosting service provider and our other third-party
service providers, including our Internet service providers, cellular telephone
providers and all of our utilities. We expect to receive compliance statements
from such entities without additional expenditures by us.

Contingency Plan

We expect our compliance program to be substantially completed by September
1999. If we encounter delays or are unable to meet this schedule, we will
engage in testing and re-testing of non-compliant areas and develop a back up
plan, which we would expect to complete by October 1999.

We may discover Year 2000 compliance problems in our systems that will
require substantial revision. In addition, third-party software, hardware or
services incorporated into our products and services may need to be revised or
replaced, all of which could be time-consuming and expensive and result in the
following, any of which could adversely affect our business:

. delay or loss of revenue;

. cancellation of customer contracts;

. diversion of development resources;

. damage to our reputation;

. increased service and warranty costs; and

. litigation costs.

Our failure to fix or replace our third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions.

Recently Issued Accounting Standards

The FASB issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133
establishes accounting methods for

34
<PAGE>

derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position or results of operations. We will adopt SFAS No. 133
effective January 1, 2000.

The American Institute of Certified Public Accountants, or AICPA, issued
Statement of Position, or SOP, No. 98-9, Modification of SOP No. 97-2, Software
Revenue Recognition with Respect to Certain Transactions. SOP No. 98-9 amends
SOP No. 97-2 to require an entity to recognize revenue for multiple element
arrangements by means of the "residual method" when:

. there is vendor-specific evidence of the fair values of all of the
undelivered elements that are not accounted for by means of long-term
contract accounting;

. vendor specific evidence of fair value does not exist for one or more of
the delivered elements; and

. all revenue recognition criteria of SOP No. 97-2, other than the
requirement for vendor-specific evidence of the fair value of each
delivered element, are satisfied.

SOP No. 98-9 will be effective for our year beginning January 1, 2000. We
do not expect any material effect from the adoption of SOP No. 98-9.

Qualitative and Quantitative Disclosures About Market Risk

We develop products in the United States and sell these products in North
America, Europe, Asia and Australia. Generally, our sales are made in local
currency. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. We do not currently use derivative instruments to hedge our
foreign exchange risk. Our interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.

35
<PAGE>

BUSINESS

Kana develops, markets and supports customer communication software
products and services for e-Businesses. We define e-Businesses as companies
that leverage the reach and efficiency of the Internet to enhance their
competitive market position, from Internet start-ups to the largest 2,000
companies in the world, commonly known as the "Global 2000". Our products and
services allow these companies to manage high volumes of inbound and outbound
e-mail and Website-based communications, while facilitating the delivery of
specific and personalized information to each customer. By using our software
products and services, e-Businesses can, among other things:

. compile customer and communication history;

. profile and send targeted communications to potential and existing
customers;

. generate automated confirmations, notifications and receipts related to
e-commerce transactions;

. respond to online service and support inquiries; and

. trigger follow-on actions within the e-Business.

As a result, we enable e-Businesses to enhance customer relationships,
generate additional revenue opportunities and reduce the cost of online
communications.

Our software, which consists of applications built upon our technology
platform, is designed with a Web-based architecture. By Web-based, we mean
that our software design is based on the unique characteristics of the
Internet and uses industry standards, such as the Java programming language,
and Extensible Mark-up Language (XML). This Web-based architecture allows our
products to facilitate scaleability and the integration of our platform with
other e-Business and legacy systems. By integrating with databases and other
enterprise systems, our technology platform functions as the online
communications infrastructure for e-Businesses.

We offer our products on both a license and a hosted basis. We also offer
implementation, customization and maintenance services to support our
customers. Kana Online, our hosted application service, allows e-Businesses to
rapidly and efficiently deploy an online customer communication system while
minimizing their up-front investment in hardware, software and services.

We recently acquired Connectify, Inc., a provider of electronic direct
marketing software for e-Businesses. Connectify's software enables e-
Businesses to profile and target potential and existing customers and then
deliver and track personalized e-mails to these individuals. By using
electronic direct marketing software, e-Businesses can build customer loyalty,
increase the probability of repeat transactions and reduce customer attrition.

Our objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve our
objective, we intend to expand our products to enter new markets, increase our
global distribution capabilities and alliances, leverage our hosted
application service and continue to emphasize customer advocacy and
satisfaction.

Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, more than
100 customers had ordered more than $50,000 of our products and services,
including:

. eBay Inc. . Chase Manhattan Bank
. eToys Inc. . Ford Motor Company
. Northwest Airlines
. priceline.com

No customer accounted for 10% or more of our total revenues in 1998 or the
first half of 1999.

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<PAGE>

Industry Background

With the widespread adoption of the Internet, new businesses can enter and
disrupt established markets virtually overnight. In this environment, most
companies' customers have a variety of purchasing options and are only a click
away from the competition. As a result, businesses need to be closer and more
responsive to their customers than ever before. Whether a company is a Global
2000 enterprise, or a newly established Internet-based business, the ability to
provide a high quality customer experience, and thus to establish long-term
customer relationships and loyalty, is more important than ever. In fact, for
many e-Businesses, superior customer service and the brand reputation that
results are becoming key competitive advantages.

Until recently, most customer communications took place in person, by
telephone or by letter. In order to respond to these types of customer
inquiries more effectively, many companies invested substantial resources in
expensive call centers and traditional direct marketing initiatives. Call
centers typically served a customer service function, employed costly
technology and did not scale effectively. Traditional direct marketing is
typically expensive and not effective in terms of conversion and response
rates. With the advent of the Internet and the proliferation of e-mail, the
manner in which businesses communicate with their customers has undergone a
fundamental change: customers are now demanding that businesses be accessible
and communicate online.

Given the emerging shift to online customer interaction, traditional
solutions are not addressing the fundamental changes required by e-Businesses.
The Gartner Group estimates that companies will receive 25% of all customer
inquiries via e-mail and Web-based forms by 2001, so the incorporation of these
new online communications channels is critical to continued success. However,
most companies remain unprepared to address the dramatic growth of e-mail and
Web-based customer communications. A survey of 125 companies with content,
consumer brands, travel, retail and financial services Web sites conducted by
Jupiter Communications in late 1998 found that 42% of the surveyed companies'
Web sites took longer than five days to reply to e-mail inquiries, never
replied or were not accessible by e-mail.

There can be negative consequences for an e-Business if it fails to manage
online customer communications effectively. These consequences can include loss
of customers, increased difficulty in acquiring new customers and a
deterioration of competitive position. In addition, e-Businesses face higher
operating and information technology costs without efficient and reliable
management of online customer communications. Perhaps most significantly, e-
Businesses may lose the opportunity to take advantage of new revenue-generating
opportunities by failing to capitalize upon the wealth of information conveyed
through online customer communications. While addressing these challenges,
e-Businesses must also be able to deploy a customer communications solution
across multiple departments, to integrate the solution with existing e-Business
and legacy systems and databases and to scale the solution as volumes grow.

We believe that in order for companies to compete effectively in today's
rapidly changing e-Business environment, they must differentiate themselves by
providing the highest quality customer experience. To accomplish this,
e-Businesses require a software solution that:

. enables personalized online customer interaction that is timely,
relevant and specific to the needs of the customer;

. reduces operating and information technology costs while integrating
with existing e-Business and legacy systems and databases across
multiple departments; and

. broadens the opportunities for revenue generation through the
extraction, analysis and management of the valuable information
contained within online customer interactions.

37
<PAGE>

The Kana Solution

Our products and services enable e-Businesses to manage their online
customer communications in order to generate additional revenue opportunities,
enhance customer relationships, and reduce operating and information technology
costs. Kana Online, our Web-based service, offers the Kana solution on a hosted
basis.

We believe our products and services provide the following business
benefits:

Increased Revenue Opportunities. Our software enables e-Businesses to
track and manage online customer communications and integrate online customer
information with relevant data contained within existing corporate databases
and systems. By integrating and using information in this way, e-Businesses can
identify and create additional revenue-generating opportunities. For example,
e-Businesses can:

. sell additional products and services, such as product upgrades, during
the response process;

. proactively market and sell existing products and services in a
targeted, individualized fashion using outbound messaging campaigns; and

. identify and develop new product and service offerings.

Enhanced Customer Relationships. Kana's products and services enable e-
Businesses to interact with their customers in a personalized and timely
manner. The ability to collaborate seamlessly across the enterprise facilitates
the generation of comprehensive, accurate responses. Our software provides e-
Businesses with the ability to track and manage online customer communications
and integrate the online customer information with relevant data contained
within existing corporate databases and systems. e-Businesses can then analyze
and report on this information and launch customized initiatives in response to
the gathered information. We believe that the resulting improvements in the
overall customer experience will enable e-Businesses to significantly enhance
customer retention and loyalty.

Reduced Operating and Information Technology Costs. Our products and
services reduce the operating and information technology costs of e-Businesses
by increasing the efficiency and effectiveness of online customer
communications. For instance, an e-Business using our software will be able to
handle significantly greater volumes of customer e-mails, thereby increasing
efficiency and productivity, and reducing costs. Costs are further reduced as a
result of migrating customer communications from expensive telephony-based
environments to the more cost-effective channels of e-mail and the Web.

Our products use a combination of automation, business process and
artificial intelligence workflow and advanced messaging analysis technologies
to allow e-Businesses to respond to customer messages rapidly and accurately,
which can decrease the number of repeat inquiries received and increase the
efficiency of users. Our open, scaleable Web-based architecture is designed to
be integrated readily with e-Businesses' legacy systems, extending these
systems' useful lives and allowing e-Businesses to avoid expensive upgrades. In
addition, our hosted Web-based service, Kana Online, allows e-Businesses to
utilize a customized Kana product while minimizing information technology
infrastructure costs.

In addition to these business benefits, our products and services differ
from those of our competitors, and as a result of the following we believe they
enable us to deliver superior value to e-Businesses:

Advanced Architecture. Our software features a scaleable, Web-based
architecture that incorporates industry standards.

38
<PAGE>

. Web-Based. Kana software is based upon a Web-based architecture that
supports multiple hardware and software platforms and browser-based
interfaces. Our software runs on multiple hardware platforms
simultaneously in order to enhance scaleability. In addition, our
software is readily deployable and performs in demanding operating
environments.

. Scaleable. Our architecture scales to accommodate large numbers of
transactions and concurrent users. For example, by deploying our
advanced message classification technologies, e-Businesses can more
effectively categorize customer messages, automate responses and
increase message volume. Our architecture also scales to accommodate new
functionalities and applications that may be required by e-Businesses.

. Open and Standards-Based. Our software supports open industry standards
such as the Java programming language and Extensible Mark-up Language
(XML), and integrates easily with:

. existing enterprise software environments;

. e-mail, telephony, billing and customer relationship management
systems;

. product and other databases; and

. a broad range of other information systems.

The ability to share data across these multiple applications provides e-
Businesses with a powerful tool for capitalizing on their customer
communications.

Optimize Key Business Processes. Our software is designed to optimize
workflow, information and communications associated with online customer
communications. Our software can be configured to trigger not only a message
response but also other actions within an organization. For example, our
software can alert an e-Business' engineering department if the e-Business
receives repeat inquiries about a software defect or the human resources
department if a resume is attached to a communication.

Enhanced Productivity and Queuing. Our software is designed to automate
key functions of the online communications process while simultaneously
providing high-quality customer communications. Users can customize the
applications and access an integrated knowledge base of corporate information
to handle increased message volume. Our software also provides one-click access
to customer histories and all previous communications so that users can provide
fully informed, accurate and personalized answers that are consistent across
the organization. System administrators can set preferences, routing rules and
user permissions and establish address books and message queues, all on a real-
time basis.

Comprehensive Data Analysis and Reporting. Our software includes an
application that analyzes metrics ranging from system utilization to user
performance and provides a broad range of packaged reports that enable
management to maximize message volume and user productivity. It also enables
e-Businesses to maximize the value of their customer communications by
collecting, extracting and analyzing the large amounts of information contained
within online customer communications. e-Businesses can use this information to
enhance their customer relationships and capitalize on new opportunities by
identifying trends, addressing problems and improving corporate decision-
making. In addition, e-Businesses can use any data created or captured by Kana
software to design custom reports and decision management tools.

Advanced Message Classification. Our software enables e-Businesses to
classify and respond to customer messages rapidly and accurately with the
desired level of human intervention. We are developing advanced message
classification technologies that significantly increase the efficiency of the
message management process. e-Businesses experiencing a high volume of

39
<PAGE>

inbound messages can choose the level of automation appropriate for their
needs, including routing a message to a particular queue or user for response,
categorizing a message for a fully automated response or allowing the creation
of a fully personalized response to the inquiry.

The Kana Strategy

Our objective is to become the leading provider of mission-critical online
customer communication software products and services for e-Businesses. The key
elements of our strategy include:

Extend Market Leadership Position. Our objective is to extend our position
as a leader in the e-Business software market for managing online customer
communications by leveraging our suite of software applications and
establishing ourselves as the solution of choice. We intend to take advantage
of our technological leadership, strategic customer base and distribution
capabilities to extend our current position as a market leader. Moreover, we
believe that, by broadening our platform and suite of applications, we can
expand our market opportunities and solidify our position as a leading provider
of comprehensive e-Business products and services.

Expand Our Suite of Products to Enter New Markets. We intend to expand our
suite of products to include additional e-commerce and content management
applications in order to enter new markets. In developing these applications,
we are working with our customers to identify the strategic and functional
needs of e-Businesses that operate in the rapidly changing Internet
environment. Our focus is to develop applications that address those needs and
integrate them seamlessly with our existing platform to help e-Businesses
establish broader and deeper customer relationships. We believe these
applications will be integrated to merge e-commerce transactions with customer
communications to create further revenue opportunities for us.

Increase Distribution Capabilities. We intend to broaden and increase our
distribution capabilities worldwide by combining the efforts of our direct
sales force and our alliances with leading e-Business service and
infrastructure providers. Our sales alliances are reseller arrangements or
cooperative sales agreements with larger companies, such as MCI Worldcom, Inc.
and Convergys Corporation. By expanding existing alliances and aggressively
developing new ones, we can leverage others' sales, marketing and deployment
capabilities to help establish Kana as a worldwide provider of e-Business
products and services to manage online customer communications.

Establish Technology Leadership with Open, Scaleable Web-based
Architecture. Our objective is to establish the Kana architecture as the
leading technology platform and market standard for e-Business products and
services to manage online customer communications. To deliver the high
performance required in the complex and rapidly changing e-Business
environment, we have designed our products to be highly scaleable, easily
customizable and readily able to integrate with existing enterprise
applications and systems. Because our Web-based architecture is based on
industry standards such as Java and Extensible Mark-up Language (XML), e-
Businesses and third parties are able to develop and deploy new applications on
top of the Kana platform. We intend to continue to develop and enhance our
advanced architecture to efficiently handle the growing volume of online
customer communications while providing increased functionality across
e-Businesses.

Leverage Hosted Web-Based Application Service. We offer Kana Online, our
hosted Web-based application service, for e-Businesses that want to deploy an
online customer communication system rapidly and efficiently while minimizing
their up-front investment in hardware, software and services. Kana Online
allows us to manage important customer data and monitor real-time, hands-on
customer feedback on our software. We intend to continue developing this
service because it allows us to target additional markets that are
complementary to our software-based solution, provides us

40
<PAGE>

with recurring revenue streams and may, in the future, allow us to enter into
new business opportunities. To date, revenues received from Kana Online have
not been material. Although we intend to develop and support this service, as
a result of many factors, including the relative success of sales of our
products and our services, we cannot accurately predict when revenues from
Kana Online will become material.

Emphasize Customer Advocacy and Satisfaction. We believe that delivering
complete customer satisfaction is vital to growing our business. Our emphasis
on customer advocacy and
satisfaction has provided us with a strong base of referenceable customers.
This strategy provides many benefits, including potentially shortened sales
cycles, incremental sales opportunities to our installed-base of customers and
new and improved products resulting from customer feedback. We intend to
remain focused on providing the highest level of satisfaction to our customers
and to continue to design our solutions to address their online customer
communications needs. In addition, we intend to continue to build our
professional services group, which maintains customer relationships beyond the
implementation phase and is responsible for providing a superior customer
experience.

Products and Services

Kana Platform and Suite of Applications

Our products are comprised of a software platform and a suite of customer
communication applications. Together the platform and the applications create
an advanced and scaleable online customer communication system for e-
Businesses. The Kana platform consists of the Kana Core Technology and Kana
Control. The suite of software applications consists of Kana Mail, Kana
Direct, Kana Reports, Kana Link, Kana Classify and Kana Forms. License fees
for our software are typically based on the number of users authorized to
access our software at any given time, and is also dependent upon the specific
application licensed.

[GRAPHIC APPEARS HERE]
The graphic is a three-dimensional diagram comprised of three horizontal
layers. The first layer, labelled "Kana Application Components," is subdivided
into seven equal sized cubes labelled from left to right with the following
titles: "Kana Mail", "Kana Direct", "Kana Reports", "Kana Link", "Kana
Classify", "Kana Forms" and "Third Party App". The second layer, labelled
"Kana Technology Platform", lies directly under the "Kana Application
Components" layer and is subdivided into two sections, labelled from left to
right "Kana Core Technology" and "Kana Control". The third layer, labelled
"Corporate Infrastructre", is an undivided layer positioned directly beneath
the layer "Kana Technology Platform".

Kana Core Technology. The Kana Core Technology has a number of
capabilities, including queue management, collaboration, personalization,
automation, message transport and performance management. The Kana Core
Technology is developed using an open, scaleable, Web-based architecture and
serves as the foundation for the suite of Kana applications.

Kana Control. Kana Control is the business process and content
administration system for our software products. Kana Control enables e-
Businesses to quickly and easily configure and change system content,
automation rules and workflow, user permissions and system parameters.
Managers can make changes in real time to redistribute workload and modify
system content to meet changing business conditions. Managers can also use
Kana Control to monitor and modify different activities associated with each
Kana application.

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<PAGE>

Kana Mail. Kana Mail is our e-mail and Web communications management
application that assists e-Businesses in responding to large numbers of inbound
customer communications. Kana Mail provides rule-based automation, intelligent
workflow, message queuing, specialized user tools and a centralized knowledge
base of issues and responses. Kana Mail supports two high performance user
interfaces: Kana Windows Client and Kana Web Client. Kana Windows Client runs
locally on the Windows operating system, while Kana Web Client runs through a
standard Internet browser. Kana Web Client is particularly useful to remote and
part-time users, managers and organizations standardizing on Web-based
applications.

Kana Direct. Kana Direct is our outbound e-mail application. Kana Direct
enables e-Businesses to use the information obtained through Kana Mail and
other systems to send targeted e-mail to their customers. Using Kana Direct,
administrators can take advantage of the e-mail communication channel to
strengthen customer relationships, improve loyalty and generate revenue. Since
Kana Direct integrates seamlessly with Kana Mail, customer responses to Kana
Direct mailings are automatically processed for maximum efficiency.

Kana Reports. Kana Reports is our reporting application that enables e-
Businesses to maximize the value of their online customer communications by
collecting, extracting and analyzing the large amounts of information contained
within online customer communications. e-Businesses can use this information to
enhance their customer relationships and capitalize on new opportunities by
identifying trends, addressing problems and improving corporate decision-
making. Kana Reports also provides a broad set of performance metrics that
enable managers to optimize the performance of their departments. In addition,
e-Businesses can use any data created or captured by our products and services
to design custom reports and decision management tools.

Kana Link. Kana Link is the part of our software platform that allows e-
Businesses to integrate the Kana platform with their other enterprise
applications such as telephony, customer relationship management systems and e-
commerce infrastructures. This integration allows these applications to
exchange information so that e-Businesses may offer their customers efficient
and consistent communication.

Kana Classify. Kana Classify is our advanced message classification
technology that drives automated actions. Kana Classify categorizes customer
messages and can automatically respond to customers, suggest responses for user
review or route messages to skill-based queues. Kana Classify is currently in
pre-release testing and is scheduled to be released later in 1999.

Kana Forms. Kana Forms is designed to enable e-Businesses to manage their
Web-based customer communications effectively by tracking and storing specific
information collected from their customers via Web forms. By securing highly
targeted information, Kana Forms is designed to enable e-Businesses to respond
to customer communication with greater accuracy and efficiency using simplified
automation rules, precise content searches, highly personalized responses and
targeted reporting. Kana Forms is currently in pre-release testing and is
scheduled to be released later in 1999.

Kana Online

Kana Online is a Web-based application service that offers the Kana
software on a hosted basis. Kana Online provides e-Businesses with access to a
customized version of our software without the need to purchase, install or
maintain their own server or database infrastructure. With Kana Online, Kana
hosts the back-end infrastructure and the customer accesses Kana's powerful
functionality by deploying the core applications of the Kana solution.

The hardware and core technology supporting Kana Online is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management

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<PAGE>

solutions. We believe that Exodus is equipped to provide the security,
reliability and performance required for hosting our solution through its
nationwide network operating centers and high-speed wide area network backbone.

Kana Online offers several key benefits to e-Businesses:

. Low Initial Investment. e-Businesses gain the benefits of the core
components of the Kana software with limited hardware and software
infrastructure costs.

. Low Cost of Ownership. Because we host the back-end infrastructure for
Kana Online, e-Businesses keep IT administration and overhead costs low
while achieving the benefits of the Kana software.

. Rapid Deployment. Since e-Businesses run the Kana software locally, they
are not responsible for purchasing and configuring the appropriate
hardware and the system can often be set up in a matter of days. A Kana
Online representative works with the e-Business to ensure that the
system is configured to meet its specific needs.

In addition, because Kana Online requires a low initial investment, has a
low cost of ownership and is rapidly deployable, it can provide an easy
migration path to our software-based solution. We license Kana Online based on
a fixed fee for installation, configuration and training, and a variable fee
based on actual customer usage.

Professional Services

Our professional services group consists of client services, technical
services and solution services.

Client Services. Our client services group implements the Kana solution,
trains end users and promotes customer independence. We tailor our
implementation services to the varying needs of our customers depending upon
the complexity of their environments. Following implementation, our client
services group is responsible for ongoing account management and customer
satisfaction.

Technical Services. Our technical services group provides "front line"
maintenance and technical support for our customers. This support includes
software and documentation updates, telephone and Web-based support, product
maintenance and emergency response. Most of our customers currently have
maintenance agreements that entitle them to these technical services. The
annual fee for technical services is typically 20% of the current software
license fee.

Solution Services. Our solution services group develops custom solutions
and undertakes integration projects for e-Businesses using the Kana platform.
We typically bill solution services on a time and materials basis.

Technology

Our software incorporates industry standards, such as Java and Extensible
Mark-up Language (XML), in order to facilitate customization and to enable
efficient development cycles. The Kana software offers both Web- and Windows-
based interfaces.

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<PAGE>

Open, Standards-Based Architecture

The architecture of the Kana software is "open" because it relies upon
industry standards that facilitate integration with customers' e-Business and
legacy databases and systems and the development of applications on the Kana
platform. These industry standards include:

. Java;

. JDBC (Java DataBase Connectivity);

. XML (Extensible Mark-up Language);

. standard relational databases from Oracle and Microsoft; and

. Microsoft ASP (Active Server Pages).

The use of industry standards also permits the Kana platform to be readily
customized to users' preferences.

Scaleable Web-Based Architecture

Our software relies on a scaleable Web-based architecture. This
architecture separates the different system components into logical layers,
supports multiple hardware and software platforms, supports browser-based
interfaces and enables the system to run on multiple hardware platforms
simultaneously in order to enhance scaleability. The tiers are the
presentation, user interface, workflow, business object and data layers.

Web- and Windows-Based Interfaces

Our software affords flexibility by providing both Web- and Windows-based
user interfaces. e-Businesses may use a Web interface that is based on the
cross-platform, hypertext mark-up language (HTML) and the JavaScript
programming language. We believe that our Web-based interface facilitates rapid
deployment for users and administrators. e-Businesses may also use a 32-bit
Windows desktop version of the Kana solution. The use of a Windows-based
interface accelerates message volume for e-Businesses with particularly
demanding speed and responsiveness requirements.

Advanced Message Classification Technologies

We have focused our research and development of advanced message
classification technologies on Bayesian Network technology. Bayesian Network
technology is a classification technology approach that combines machine
learning with human expertise to infer conclusions about new data. Using
machine learning, the system automatically builds a classification model from
existing customer messages, thereby reducing the cost and time of installation
and maintenance and allowing the system to improve as new issues arise. With
human expertise, the system enables managers to add their knowledge selectively
to the system in order to improve accuracy and adjust the model to anticipate
new issues or react to them in real time. Bayesian Network technology underlies
Kana Classify, which categorizes customer messages and drives system
automation.

Ease of Platform Upgrade

Our software may be readily upgraded to new versions of the Kana system.
New versions of the software, when installed, are designed to recognize the
historical data and configurations from the previous version of the system and
automatically convert them to the new data format. This enables an e-Business
to upgrade our software without any programming or advanced technical
capability.

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<PAGE>

Sales and Marketing

Sales

Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and our strategic alliances. To date, we have targeted
our sales efforts at the e-Business divisions of Global 2000 companies and at
rapidly growing Internet companies. We maintain direct sales personnel
domestically in California, Connecticut, Georgia, Illinois, Maryland,
Massachusetts, Michigan, New York, Texas and Virginia, and internationally in
the United Kingdom. The direct sales force is organized into regional teams,
which include both sales representatives and systems engineers. Our sales force
in the United Kingdom consisted of five employees at June 30, 1999, and handles
all European sales. Sales managers currently based in the United States handle
non-European international sales and report to our Vice President of
International Sales. Our direct sales force is complemented by telemarketing
representatives based at our headquarters in Palo Alto, California.

We complement our direct sales force with a series of reseller and sales
alliances, such as those with MCI WorldCom, Inc. and Convergys Corporation.
Through these alliances we are able to leverage additional sales, marketing and
deployment capabilities. In the future, we intend to expand our distribution
capabilities by increasing the size of our direct sales force, establishing
additional sales offices both domestically and internationally and broadening
our alliance activities. As of June 30, 1999, 27 of our employees were engaged
in sales activities. See "--Strategic Relationships".

Marketing

Our marketing programs are targeted at e-Businesses and are currently
focused on educating our target market, generating new sales opportunities and
creating awareness for our e-Business customer communications software. We
conduct marketing programs worldwide to educate our target market. In addition,
we engage in a variety of marketing activities, including:

. conducting seminars;

. participating in industry and technology-related conferences and trade
shows;

. establishing and maintaining close relationships with recognized
industry analysts;

. conducting direct mailings and ongoing public relations campaigns;

. managing and maintaining our Web site;

. conducting market research; and

. creating and placing advertisements.

Our marketing organization also serves an integral role in acquiring,
organizing and prioritizing industry and customer feedback in order to help
provide product direction to our development organizations. We have a detailed
product management process that surveys customer and market needs to predict
and prioritize future customer requirements. We also focus on developing a
range of joint marketing strategies and programs in order to leverage their
existing strategic relationships and resources. These alliances provide
collaborative resources to help extend the reach of our presence in the
marketplace. We intend to continue to pursue these alliances in the future. As
of June 30, 1999, eight of our employees were engaged in marketing activities.

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<PAGE>

Strategic Relationships

Kana has three types of strategic relationships: service relationships,
marketing relationships and reseller and strategic sales relationships, that
are designed to leverage our services, software development and sales
capabilities. These relationships are formal or informal agreements with third
parties, and they are typically not exclusive and for a short term. However, we
view these relationships as critical to our success in providing enterprise-
wide e-Business communication software products and services.

Service Relationships. We collaborate with systems integrators such as
Anderson Consulting and Scient Corporation. These collaborations occur on a
project by project basis, and no formal agreements or commitments exist
regarding our relationships with these systems integrators. These systems
integrators are highly trained in our software, and on a project by project
basis provide integration and implementation services.

Marketing Relationships. We have established a series of relationships
with marketing partners across a variety of industries, including providers of
customer relationship management software, sales force automation software,
telephony systems and IT hardware, that allow us to provide a comprehensive
solution to e-Businesses. Our marketing relationships are typically contained
in a written agreement, but these agreements generally may be terminated at any
time by either party and do not contain penalties for nonperformance.

Reseller and Strategic Sales Relationships. We complement our direct sales
force with a series of reseller and strategic sales relationships in targeted
industries such as telecommunications. Our agreements with these companies are
typically in the form of value-added reseller agreements.

In the future, we intend to establish additional strategic relationships to
broaden our product offerings by addressing multiple channels of online
communications and enhancing our distribution channels.

Many of the companies with which we have struck relationships also work
with competing software companies, and our success will depend on their
willingness and ability to devote sufficient resources and efforts to our
products and services. Our arrangements with these parties typically are in the
form of non-exclusive agreements that may be terminated by either party without
cause or penalty and with limited notice. Therefore, we can provide no
guarantee that any of these parties will continue their relationship with us.

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<PAGE>

Customers

Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, we had
licensed our solution to more than 100 customers in a variety of industries
worldwide. The following is a list of our customers that we believe is
representative of our overall customer base:

<TABLE>
<S> <C> <C>
Internet Services Financial e-Tailing

City Index Ameritrade barnesandnoble.com
eBay CBOE CDNOW
eFax.com Datek Cendant
Excite@Home Dime Savings Bank Drugstore.com
InfoBeat Dow Jones eToys
iVendor Financial Engines Furniture.com
iVillage Wit Capital Insweb
JFAX.com Reel.com
priceline.com Tickets.com
The Motley Fool Communications
The Street.com Other
Ameritech
Travel Convergys 1-800-Flowers
Modus Media Drug Emporium
American Airlines NTL Estee Lauder
Canadian Airlines Sprynet (Mindspring) Ford Motor Company
Mapquest.com Stream International General Motors
Northwest TCI.Net Hewlett-Packard
Swedish Railroads Telstra Shell International
Travelocity (Sabre) US West The Gap
Williams-Sonoma
</TABLE>

No customer accounted for 10% or more of our total revenues for 1998 or the
first half of 1999. Although a substantial portion of our license and service
revenues in any given quarter has been, and is expected to continue to be,
generated from a limited number of customers with large financial commitment
contracts, we do not depend on any ongoing commitments from our large
customers.

Research and Development

We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of our product and service offerings. We have invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within Kana and is designed to provide a framework for defining and addressing
the activities required to bring product concepts and development projects to
market successfully. In addition, we have recruited key engineers and software
developers with experience in the customer communications and internetworking
markets and have complemented these individuals by hiring senior management
with experience in enterprise application development, sales and deployment.

Our research and development expenses totaled approximately $699,000 for
the year ended December 31, 1997 and $2.8 million for the year ended December
31, 1998. For the first half of 1999, research and development expenses totaled
$3.3 million. As of June 30, 1999, 29 of our employees were engaged in research
and development activities. Our success depends, in part, on

47
<PAGE>

our ability to enhance our existing customer interactions solutions and to
develop new services, functionality and technology that address the
increasingly sophisticated and varied needs of our prospective customers.
Delays in bringing to market new products or their enhancements, or the
existence of defects in new products or enhancements, could be exploited by our
competitors. If we were to lose market share as a result of lapses in our
product management, our business would suffer.

Competition

The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. We expect the intensity of
competition to increase in the future. We currently face competition for our
products from systems designed by in-house and third-party development efforts.
We expect that these systems will continue to be a principal source of
competition for the foreseeable future. Our competitors include a number of
companies offering one or more products for the e-Business customer
communication market, some of which compete directly with our products. For
example, our competitors include companies providing stand-alone point
solutions, including Annuncio, Inc., Brightware, Inc., eGain Communications
Corp., Mustang Software, Inc. and Responsys.com. In addition, we may compete
with companies providing customer management and communications solutions, such
as Clarify Inc., Digital Impact, Inc., Genesys Telecommunications Laboratories,
Inc., Lucent Technologies, Inc., Message Media, Inc., Oracle Corporation,
Pivotal Corporation, Siebel Systems, Inc., Silknet Software, Inc. and Vantive
Corporation.

We believe that the principal competitive factors affecting our market
include a significant base of referenceable customers, the breadth and depth of
a given solution, product quality and performance, customer service, core
technology, product scaleability and reliability, product features, the ability
to implement solutions and the value of a given solution. Although we believe
that our solution currently competes favorably with respect to these factors,
our market is relatively new and is evolving rapidly. We may not be able to
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations. See "Risk
Factors--We face substantial competition and may not be able to compete
effectively".

Intellectual Property

We rely upon a combination of patent, copyright, trade secret and trademark
laws to protect our intellectual property. We currently have four U.S. patent
applications pending covering:

. A customer communication software product for e-mail and Website-based
communications, using rules and message categories to codify workflow,
including use of standard phrases, response templates, recipient lists
and routing;

. A customer communication software product for e-mail and Website-based
communications in which advanced workflow features are used in
conjunction with rules, queues and timers;

. A customer communication software product for e-mail and Website-based
communications that uses queues and timers to track, route and escalate
the priority of messages; and

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<PAGE>

. A customer communication software product for e-mail and Website-based
communications that combines a rule-based workflow engine with a text
classification system to automate e-mail response.

These patents, if allowed, will cover a material portion of our products
and services.

In addition, we have one U.S. trademark registration and two pending U.S.
trademark applications. Although we rely on patent, copyright, trade secret and
trademark law to protect our technology, we believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. We
can give no assurance that others will not develop technologies that are
similar or superior to our technology.

We generally enter into confidentiality or license agreements with our
employees, consultants and alliance partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology or to develop products with the same functionality as
our products. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not
protect proprietary rights as fully as do the laws of the United States. In
addition, some of our license agreements require Kana to place the source code
for our products into escrow. These agreements generally provide that some
parties will have a limited, non-exclusive right to use this code if:

. there is a bankruptcy proceeding instituted by or against Kana;

. Kana ceases to do business without a successor; or

. Kana discontinues providing maintenance and support.

Substantial litigation regarding intellectual property rights exists in the
software industry. Our software products may be increasingly subject to third-
party infringement claims as the number of competitors in our industry segment
grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for customer communications
software may have filed or may intend to file patent applications covering
aspects of their technology that they may claim Kana's technology infringes.
Some of these competitors may make a claim of infringement against us with
respect to its products and technology.

Employees

As of June 30, 1999, we had 98 full-time employees, 20 of whom were in our
professional services group, 35 in sales and marketing, 29 in research and
development, and 14 in finance, administration and operations. We added 38
employees between July 1, 1999 and August 13, 1999 and 31 new employees as a
result of the Connectify merger. Our future performance depends in significant
part upon the continued service of our key technical, sales and marketing, and
senior management personnel, none of whom is bound by an employment agreement
requiring service for any defined period of time. The loss of the services of
one or more of our key employees could harm our business.

Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where we are headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the
Internet, we can give

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<PAGE>

no assurance that we can retain or attract key personnel in the future. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good. See "Risk
Factors--We may be unable to hire and retain the skilled personnel necessary to
develop our engineering, professional services and support capabilities in
order to continue to grow" and "--We may face difficulties in hiring and
retaining qualified sales personnel to sell our products and services, which
could harm our ability to increase our revenues in the future".

Facilities

Our corporate offices are located in Palo Alto, California, where we lease
approximately 15,600 square feet under a lease that expires in June 2003. As of
June 30, 1999, the annual base rent for this facility was approximately
$608,400. We believe that this facility will not be sufficient to meet our
needs through the next 12 months. To that end, in November 1999, we plan to
move our corporate offices to Redwood City, California, where we will lease
approximately 60,861 square feet under a lease that expires in October 2006.
The annual base rent for this facility for the first year is approximately $1.9
million. We are currently pursuing our options with respect to vacating our
Palo Alto corporate offices. In addition, we lease facilities and offices
domestically in Westport, Connecticut; Chicago, Illinois and Richardson, Texas;
and internationally in London, England. The terms of these leases expire
beginning in August 1999 and ending in January 2000, and automatically renew
unless earlier terminated. We believe that our corporate office space in
Redwood City and the other facilities we currently lease will be sufficient to
meet our needs through at least the next 12 months.

Legal Proceedings

We are not currently a party to any legal proceedings.

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<PAGE>

MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding the executive officers
and directors of Kana as of August 12, 1999:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael J. McCloskey..... 42 Chief Executive Officer and Director
Mark S. Gainey........... 31 President and Chairman of the Board of Directors
Joseph G. Ansanelli...... 29 Vice President, Marketing
Ian Cavanagh............. 33 Vice President, Business Development
Alexander E. Evans....... 42 Vice President, International Sales
Gregory C. Gretsch....... 32 Vice President, Electronic Direct Marketing
Paul R. Holland.......... 38 Vice President, Worldwide Sales
Joseph D. McCarthy....... 34 Vice President, Finance and Operations
William R. Phelps........ 37 Vice President, Professional Services
Michael R. Wolfe......... 30 Vice President, Engineering
David M. Beirne.......... 35 Director
Robert W. Frick.......... 62 Director
Eric A. Hahn............. 39 Director
Charles A. Holloway,
Ph.D.................... 63 Director
Steven T. Jurvetson...... 32 Director
Ariel Poler.............. 32 Director
</TABLE>

Michael J. McCloskey. Mr. McCloskey joined Kana in June 1999 as Chief
Executive Officer and a director. Prior to joining Kana, from September 1996 to
February 1999, Mr. McCloskey served in various positions with Genesys
Telecommunications Laboratories, Inc., a provider of enterprise interaction
management software, including President from July 1998 to December 1998, Chief
Operating Officer from September 1997 to July 1998 and Vice President, Finance
and International, Chief Financial Officer and Secretary from September 1996 to
July 1998. From May 1995 to September 1996, he served as Vice President,
Finance, Chief Financial Officer and Vice President, Operations at Network
Appliance, Inc., a network data storage device company. From September 1993 to
May 1995, Mr. McCloskey served as Executive Vice President and Chief Financial
Officer at Digital Microwave Corporation, a telecommunications company. From
1991 to 1993, Mr. McCloskey was the Chief Operating Officer and a member of the
board of directors of Wavefront Technologies, a 3-D graphics visualization
software development company. Mr. McCloskey holds a B.S. in Business
Administration from Santa Clara University.

Mark S. Gainey. Mr. Gainey co-founded Kana in January 1996, served as
President, Chief Executive Officer and a director of Kana from January 1996 to
June 1999 and currently serves as its President and Chairman of the Board of
Directors. Prior to co-founding Kana, from April 1991 to September 1995, Mr.
Gainey served as an associate with TA Associates, Inc., a venture capital firm,
where he focused primarily on technology and business services investments. Mr.
Gainey holds a B.A. in General Studies from Harvard University.

Joseph G. Ansanelli. Mr. Ansanelli joined Kana in August 1999 as Vice
President, Marketing in connection with Kana's acquisition of Connectify, Inc.
Mr. Ansanelli co-founded Connectify in May 1998 and served as its President and
Chief Executive Officer. From February 1997 to May 1998, Mr. Ansanelli managed
a consulting company where he focused primarily on strategic marketing and
business development services for internet companies. From April 1996 to
January 1997, Mr. Ansanelli served as Director of Internet Product Marketing
for Macromedia, Inc., an Internet and multimedia tools software company. From
May 1992 to March 1996, Mr. Ansanelli held various product marketing positions
at Apple Computer, Inc. Mr. Ansanelli holds a B.S. in Applied Economics with a
concentration in Marketing from the Wharton School at the University of
Pennsylvania.

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<PAGE>

Ian Cavanagh. Mr. Cavanagh joined Kana in July 1999 as Vice President,
Business Development. Prior to joining Kana, from February 1996 to July 1999,
Mr. Cavanagh served in various management roles at Genesys Telecommunications
Laboratories, Inc., a provider of enterprise interaction management software,
most recently as Vice President, Asia Pacific and Managing Director, Canada.
From 1994 to February 1996, Mr. Cavanagh served as Senior Manager-Call Centre
Service Development with the New Brunswick Telephone Company. Prior to 1994,
Mr. Cavanagh served as Senior Manager-Service Development with Stentor Canadian
Network Management, an alliance of Canadian telecommunication service
providers. Previously, Mr. Cavanagh held several engineering positions with
NBTel. Mr. Cavanagh holds a Bachelor of Electrical Engineering from the
Technical University of Nova Scotia and Acadia University.

Alexander E. Evans. Mr. Evans joined Kana in July 1999 as Vice President,
International Sales. Prior to joining Kana, from May 1994 to July 1999, Mr.
Evans served as the Managing Director, Europe for Genesys Telecommunications
Laboratories, Inc., with responsibility for Europe, Middle East and Africa.
Prior to May 1994, Mr. Evans served in various managerial and sales capacities
at Digital Systems Ltd., a company that supplies outbound predictive dialers.
Previously, Mr. Evans served in various managerial, technical and marketing
positions at Digital Equipment Corp. Prior to then, Mr. Evans worked in various
technical and project roles involving MRP, process control and automated
manufacturing systems at Dupont, Mars & Metal Box. Mr. Evans holds a degree in
Electronics from John Moore University, England.

Gregory C. Gretsch. Mr. Gretsch joined Kana in August 1999 as Vice
President, Electronic Direct Marketing in connection with Kana's acquisition of
Connectify. Mr. Gretsch co-founded Connectify in May 1998 and served as its
Chairman of the Board of Directors and Vice President of Business Development.
In August 1996, Mr. Gretsch co-founded GiftONE, an email based direct marketing
service, and served as GiftONE's Chief Executive Officer until its sale in
October 1997. From January 1993 to August 1996, Mr. Gretsch served as the Chief
Executive Officer of Vicarious, Inc., an education and reference CD-ROM
publisher co-founded by Mr. Gretsch. From December 1988 to January 1993, Mr.
Gretsch served in several positions at Apple Computer, Inc. and its IBM joint-
venture Kaleida Labs, Inc., culminating as Manager of Evangelism for Kaleida.
Mr. Gretsch holds a B.B.A. in Management Information Systems from the
University of Georgia.

Paul R. Holland. Mr. Holland joined Kana in December 1997 as Vice
President, Worldwide Sales. Prior to joining Kana, from September 1994 to
September 1997, Mr. Holland worked at Pure Atria Corporation (now Rational
Software Corporation), a software tools company, most recently as its Vice
President, Europe. From June 1992 to September 1994, Mr. Holland held various
sales positions at Pure Atria Corporation (then Pure Software Corporation).
From 1988 to 1992, Mr. Holland was director of marketing and sales for
Rothchild Consultants, a high technology market research company. Mr. Holland
holds a B.S. in Public Administration from James Madison University, an M.A. in
Foreign Affairs from the University of Virginia and an M.B.A. from the
University of California at Berkeley.

Joseph D. McCarthy. Mr. McCarthy joined Kana in March 1998 as Director of
Finance and Operations and has served as Vice President, Finance and Operations
since April 1999. Prior to joining Kana, from September 1997 to March 1998, Mr.
McCarthy served as Vice President, Finance at Reasoning, Inc., a transformation
software company. From March 1995 to September 1997, Mr. McCarthy served as
Corporate Controller of Pure Atria Corporation (now Rational Software
Corporation), a software tools company, and from September 1993 to March 1995
he served as Controller of International Network Services, a network services
company. Mr. McCarthy holds a B.B.A. in Accounting from the University of Notre
Dame.

William R. Phelps. Mr. Phelps joined Kana in December 1998 as Vice
President, Professional Services. Prior to joining Kana, from March 1997 to
November 1998, Mr. Phelps served as Vice

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<PAGE>

President, Professional Services for CrossWorlds Software, Inc., an application
integration software company. From January 1994 to February 1997, Mr. Phelps
served as a principal consultant at Booz, Allen & Hamilton, a management
consulting firm. Mr. Phelps holds a B.S. in Industrial Engineering from
Stanford University.

Michael R. Wolfe. Mr. Wolfe joined Kana in May 1997 as Director of
Engineering and has served as Vice President, Engineering since April 1998.
Prior to joining Kana, from March 1995 to February 1997, Mr. Wolfe served as
Director of Engineering at Internet Profiles Corporation, an internet marketing
company. From February 1994 to March 1995, Mr. Wolfe was an associate at Wells
Fargo Nikko, specializing in software development. From June 1991 to February
1994, Mr. Wolfe was a software programming analyst at Goldman, Sachs & Co. Mr.
Wolfe has taught computer science at Stanford University and the University of
California at Berkeley. Mr. Wolfe holds a B.S. and M.S. in Computer Science
from Stanford University.

David M. Beirne. Mr. Beirne has served as a director of Kana since
September 1997. Mr. Beirne has been a Managing Member of Benchmark Capital
Management Co., L.P., a venture capital firm, since June 1997. Prior to joining
Benchmark, Mr. Beirne founded Ramsey/Beirne Associates, an executive search
firm, and served as its Chief Executive Officer from October 1987 to June 1997.
Mr. Beirne serves on the board of directors of Scient Corporation, an e-
Business systems provider, and several private companies. Mr. Beirne holds a
B.S. in Management from Bryant College.

Robert W. Frick. Mr. Frick has served as a director of Kana since August
1999. Mr. Frick previously served as the Vice Chairman of the Board, Chief
Financial Officer and head of the World Banking Group for Bank of America, as
Managing Director of BankAmerica International, and as President of Bank of
America's venture capital subsidiary. He is now retired. Mr. Frick previously
served as a director of Connectify, Inc. from its founding to its acquisition
by Kana, and he currently serves on the board of directors of five private
companies. Mr. Frick holds a B.S. in Civil Engineering and an M.B.A. from
Washington University in St. Louis, Missouri.

Eric A. Hahn. Mr. Hahn has served as a director of Kana since June 1998.
Mr. Hahn is a founding partner of Inventures Group, a leading "mentor
investment" stage venture capital firm. From November 1996 to June 1998, Mr.
Hahn served as the Executive Vice President and Chief Technical Officer of
Netscape Communications Corporation and served as a member of Netscape's
Executive Committee. Mr. Hahn also served as General Manager of Netscape's
Server Products Division, overseeing Netscape's product development and
marketing activities for enterprise Internet, intranet and extranet servers,
from November 1995 to November 1996. Prior to joining Netscape, from February
1993 to November 1995, Mr. Hahn was founder and Chief Executive Officer of
Collabra Software, Inc., a groupware provider that was acquired by Netscape.
Mr. Hahn holds a B.S. in Computer Science from the Worcester Polytechnic
Institute.

Dr. Charles A. Holloway. Dr. Holloway has served as a director of Kana
since December 1996. Dr. Holloway holds the Kleiner, Perkins, Caufield & Byers
Professorship in Management at the Stanford Graduate School of Business and has
been a faculty member of the Stanford Graduate School of Business since 1968.
Dr. Holloway is also currently co-director of the Stanford Center for
Entrepreneurial Studies at the Graduate School of Business. Dr. Holloway was
the founding co-chair of the Stanford Integrated Manufacturing Association, a
cooperative effort between the Graduate School of Business and the School of
Engineering, which focuses on research and curriculum development in
manufacturing and technology. Dr. Holloway serves on the board of directors of
CMC Industries, Inc., an electronic manufacturing services company, and several
private companies. Dr. Holloway holds a B.S. in Electrical Engineering from the
University of California at Berkeley and an M.S. in Nuclear Engineering and
Ph.D. in Business Administration from the University of California, Los
Angeles.

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<PAGE>

Steven T. Jurvetson. Mr. Jurvetson has served as a director of Kana since
April 1997. Mr. Jurvetson has been a Managing Director of Draper Fisher
Jurvetson, a venture capital firm, since June 1995. Prior to joining Draper
Fisher Jurvetson, from July 1990 to September 1993, Mr. Jurvetson served as a
consultant with Bain & Company, a management consulting firm. Mr. Jurvetson
served as a research and development engineer at Hewlett-Packard during the
summer months from June 1987 to August 1989. Mr. Jurvetson serves on the boards
of directors of Cognigine Corporation, FastParts, Inc., iTv Corp., Tacit
Knowledge Corporation, Third Voice, Inc. and ReleaseNow.com Corporation. Mr.
Jurvetson holds a B.S. and an M.S. in Electrical Engineering from Stanford
University and an M.B.A. from the Stanford Graduate School of Business.

Ariel Poler. Mr. Poler has served as a director of Kana since December
1996. Mr. Poler has been the Chief Executive Officer of Topica Inc., a compiler
and provider of e-mail lists, since January 1998 and has served as a director
of Topica since February 1998. Mr. Poler founded and served as Chief Executive
Officer of Internet Profiles Inc. (IPRO), a Web measurement and auditing
service company, from May 1994 to January 1996. Mr. Poler served on the board
of directors of LinkExchange, Inc., a privately held Web advertising network,
from October 1996 to October 1998. Mr. Poler holds a B.S. in Mathematics with
Computer Science from the Massachusetts Institute of Technology and an M.B.A.
from the Stanford Graduate School of Business.

Board of Directors and Committees

Kana currently has authorized eight directors. Following this offering, the
board will consist of eight directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Messrs. Beirne, Frick and
Jurvetson are Class I directors whose terms will expire in 2000, Messrs. Hahn
and Poler and Dr. Holloway are Class II directors whose terms will expire in
2001 and Messrs. Gainey and McCloskey are Class III directors whose terms will
expire in 2002. The officers serve at the discretion of the board.

Kana has established an audit committee composed of independent directors,
which reviews and supervises Kana's financial controls, including the selection
of its auditors, reviews the books and accounts, meets with its officers
regarding its financial controls, acts upon recommendations of the auditors and
takes any further actions the audit committee deems necessary to complete an
audit of Kana's books and accounts, as well as addressing other matters that
may come before it or as directed by the board. The audit committee currently
consists of two directors, Dr. Holloway and Mr. Jurvetson.

Kana has established a compensation committee, which reviews and approves
the compensation and benefits for Kana's executive officers, administers its
stock plans and performs other duties as may from time to time be determined by
the board. The compensation committee currently consists of two directors,
Messrs. Beirne and Hahn.

Compensation Committee Interlocks and Insider Participation

During 1998, our compensation committee consisted of Messrs. Beirne and
Hahn. Neither Mr. Beirne nor Mr. Hahn was an employee of Kana or its
subsidiaries during 1998 or at any time prior to 1998. None of our executive
officers serves on the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.

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<PAGE>

Director Compensation

Kana currently does not compensate any non-employee member of the board.
Directors who are also employees of Kana do not receive additional compensation
for serving as directors. In 1996, Kana granted options to purchase 166,666
shares of common stock to Mr. Poler at an exercise price of $0.02 per share and
an option to purchase 53,333 shares of common stock to Dr. Holloway at an
exercise price of $0.02 per share. In 1998, Kana granted an option to purchase
26,666 shares of common stock to Dr. Holloway at an exercise price of $0.08 per
share and an option to purchase 75,033 shares of common stock to Mr. Hahn at an
exercise price of $0.08 per share.

Non-employee directors will be eligible to receive discretionary option
grants and stock issuances under the 1999 Stock Incentive Plan. In addition,
under the 1999 Stock Incentive Plan, non-employee directors will receive
automatic option grants upon becoming directors and on the date of each annual
meeting of stockholders. The 1999 Stock Incentive Plan also contains a director
fee option grant program. Should this program be activated in the future, each
non-employee board member would have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of an
option with an exercise price below the then fair market value. See
"Management--Benefit Plans".

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<PAGE>

Executive Compensation

Summary Compensation Table

The following table sets forth information concerning compensation during
the year ended December 31, 1998 for Kana's Chief Executive Officer and each of
the four other most highly compensated executive officers who earned an
annualized salary of more than $100,000 for that year, referred to in this
prospectus as the Named Executive Officers. In June 1999, Mr. Michael J.
McCloskey joined Kana as its Chief Executive Officer. Mr. McCloskey's
annualized salary for 1999 is $150,000. In June 1999, the compensation
committee approved an increase in Mr. Gainey's annual salary to $150,000. No
individual who would otherwise have been includable in the table on the basis
of salary and bonus earned during 1998 has resigned or otherwise terminated
their employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constituted less than 10% of the total annual salary and bonus of each of the
Named Executive Officers in 1998.

<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
-------------------- ------------
Securities
Year Underlying
Name and Principal Position Ended Salary Bonus Options (#)
--------------------------- ----- -------------------- ------------
<S> <C> <C> <C> <C>
Mark S. Gainey......................... 1998 $ 72,500 -- --
President and former Chief Executive
Officer
Joseph D. McCarthy(1).................. 1998 92,917 -- 106,666
Vice President, Finance and Operations
Paul R. Holland........................ 1998 75,000 $ 139,022 --
Vice President, Worldwide Sales
William R. Phelps(2)................... 1998 8,917 -- --
Vice President, Professional Services
Christopher M. Noble(3)................ 1998 109,374 -- 233,333
Former Vice President, Marketing
</TABLE>
- --------
(1) Mr. McCarthy joined Kana in March 1998. His annualized salary for 1998 was
$120,000.
(2) Mr. Phelps joined Kana in December 1998. His annualized salary for 1998 was
$130,000.
(3) Mr. Noble joined Kana in February 1998. His annualized salary for 1998 was
$125,000. Mr. Noble left Kana in March 1999.

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<PAGE>

Option Grants in Last Fiscal Year

The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers in 1998, including the
potential realizable value over the 10-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. No
stock appreciation rights were granted during 1998.

Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Number of Appreciation for Option
Securities Exercise Term at Public
Underlying Percent of Total Price Offering Price
Options Options Granted Per Expiration --------------------------
Name Granted(#) in 1998 Share Date 5% 10%
- ---- ---------- ---------------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Mark S. Gainey.......... -- -- -- --
Joseph D. McCarthy...... 106,666 9.2% $0.08 03/19/08 $ 804,980 $ 2,039,977
Paul R. Holland......... -- -- -- --
William R. Phelps....... -- -- -- --
Christopher M. Noble.... 233,333 20.2 0.08 02/12/08 1,760,902 4,462,472
</TABLE>

In 1998, Kana granted options to purchase up to a total of 1,156,366 shares
to employees, directors and consultants under Kana's 1997 Stock Option/Stock
Issuance Plan at exercise prices equal to the fair market value of Kana's
common stock on the dates of grant, as determined in good faith by the board of
directors. Options granted were immediately exercisable in full, but any shares
purchased under these options that are not vested are subject to repurchase by
Kana at the option exercise price. Generally this repurchase right lapses as to
25% of the shares after one year of service and as to the remaining shares in
equal monthly installments over an additional three-year period.

The potential realizable value is calculated based on the assumed initial
offering price assuming the aggregate exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised and sold on the last day of its term at the appreciated
price. All options listed have a term of 10 years. Stock price appreciation
rates of 5% and 10% are assumed pursuant to the rules of the Securities and
Exchange Commission. Kana can give no assurance that the actual stock price
will appreciate over the 10-year option term at the assumed 5% and 10% levels
or at any other defined level. Actual gains, if any, on stock option exercises
will be dependent on the future performance of Kana's common stock. Unless the
market price of the common stock appreciates over the option term, no value
will be realized from the option grants made to the Named Executive Officers.

In June 1999, Kana granted to Mr. McCloskey, Kana's Chief Executive
Officer, an option to purchase 933,333 shares of common stock at an exercise
price of $0.68 per share. The option was immediately exercisable, but any
shares purchased under this option that are not vested are subject to
repurchase by Kana at the option exercise price. This repurchase right lapsed
as to 186,666 shares on June 17, 1999 and lapses as to the remaining shares in
equal monthly installments over the 48-month period following June 17, 1999.
The option expires on June 16, 2009.

In June 1999, Kana granted to Mr. McCarthy an option to purchase 50,000
shares of common stock and granted to Mr. Phelps an option to purchase 23,333
shares of common stock, each at an exercise price of $0.68 per share. Each
option was immediately exercisable, but any shares purchased under these
options that are not vested are subject to repurchase by Kana at the option
exercise price. The repurchase right lapses for each of the grants as to 25% of
the shares after one year of service from June 17, 1999 and as to the remaining
shares in equal monthly installments over the 36-month period following June
17, 2000. Each option expires on June 16, 2009.

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<PAGE>

Aggregated Option Exercises in Last Fiscal Year

The following table sets forth the number of shares acquired by the Named
Executive Officers through the exercise of options in 1998 and the value
realized on those exercises. No stock appreciation rights were exercised during
1998 and no stock options or stock appreciation rights granted to the Named
Executive Officers were outstanding as of December 31, 1998. The value realized
is based on the fair market value of Kana's common stock on the date of
exercise, as determined by the board, less the exercise price payable for the
shares.

<TABLE>
<CAPTION>
Number of
Shares Acquired Value
Name on Exercise Realized
---- --------------- --------
<S> <C> <C>
Mark S. Gainey.................................... -- --
Joseph D. McCarthy................................ 106,666 $ 0
Paul R. Holland................................... 405,705 0
William R. Phelps................................. -- --
Christopher M. Noble.............................. 233,333 0
</TABLE>

In February and June 1999, Mr. Phelps exercised options to purchase a total
of 206,666 shares of common stock. The exercise price for each grant equaled
the fair market value on the date of exercise and, accordingly, Mr. Phelps did
not realize any value on the exercises. In June 1999, Mr. McCloskey exercised
an option to purchase 933,333 shares of common stock. The exercise price
equaled the fair market value on the date of exercise and, accordingly, Mr.
McCloskey did not realize any value on the exercise. In June 1999, Mr. McCarthy
exercised an option to purchase 50,000 shares of common stock. The exercise
price equaled the fair market value on the date of exercise and, accordingly,
Mr. McCarthy did not realize any value on the exercise.

Benefit Plans

1999 Stock Incentive Plan

Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1997 Stock Option/Stock Issuance Plan. The 1999 plan
was adopted by the board in July 1999 and we expect it to be approved by the
stockholders in August 1999. The 1999 plan will become effective when the
underwriting agreement for this offering is signed. At that time, all
outstanding options under our existing 1997 plan will be transferred to the
1999 plan, and no further option grants will be made under the 1997 plan. The
transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
1999 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 1999 plan.

Share Reserve. We have authorized 4,700,000 shares of our common stock for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1997 plan including the shares
subject to outstanding options under the 1997 plan that will be transferred to
our 1999 plan plus an additional 3,565,000 shares. The share reserve under our
1999 plan will automatically increase on the first trading day in January each
year, beginning with calendar year 2000, by an amount equal to 4.25% of the
total number of shares of our common stock outstanding on the last trading day
of December in the prior year, but in no event will this annual increase exceed
2,000,000 shares. No participant in the 1999 plan may be granted stock options
or direct stock issuances for more than a total of 1,000,000 shares of common
stock in any calendar year.

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<PAGE>

Programs. Our 1999 plan has five separate programs:

. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;

. the stock issuance program, under which eligible individuals may be
issued shares of common stock that will vest upon the attainment of
performance milestones or upon the completion of a period of service or
that are fully vested at issuance as a bonus for past services;

. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of below-market stock option grants;

. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and

. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash to the acquisition of
below-market option grants.

Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our board members and any consultants
we hire.

Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.

Plan Features. Our 1999 plan will include the following features:

. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.

. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1997 plan, in return for the grant of new
options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.

. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1997 plan has any stock appreciation rights.

59
<PAGE>

Change in Control. The 1999 plan includes the following change in control
provisions, which may result in the accelerated vesting of outstanding option
grants and stock issuances:

. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.

. The compensation committee will have complete discretion to grant one or
more options that will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.

. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the
majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.

. The options currently outstanding under our 1997 plan will immediately
vest in the event we are acquired and the acquiring company does not
assume those options. Most of those options, however, contain an
additional vesting acceleration feature that will result in the
immediate vesting of 25% of unvested option shares if the optionee is
not offered employment by the acquiring company and those options are
assumed.

Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
such an election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. As a result, the option will be structured so
that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount of the
salary reduction. The option will become exercisable in a series of 12 equal
monthly installments over the calendar year for which the salary reduction is
to be in effect.

Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant for 20,000 shares of common stock on the date such
individual joins the board. In addition, on the date of each annual meeting of
stockholders held after the effective date of this offering, each non-employee
board member who is to continue to serve as a non-employee board member,
including each of our current non-employee board members, will automatically be
granted an option to purchase 5,000 shares of common stock, provided such
individual has served on the board for at least six months.

Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per

60
<PAGE>

share, any shares purchased under the option that are not vested at the time of
the optionee's cessation of board service. The shares subject to each annual
automatic grant will be fully vested when granted. The shares subject to each
initial 20,000 share automatic option grant will vest upon the optionee's
completion of each six-months of board service over the 48-month period
measured from the grant date. However, the shares will immediately vest in full
upon changes in control or ownership or upon the optionee's death or disability
while a board member.

Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of 12 equal monthly installments over the calendar year
for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a board member.

Additional Program Features. Our 1999 plan will also have the following
features:

. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.

. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.

. The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than June 30, 2009.

Connectify, Inc. 1998 Stock Plan

In connection with the Connectify merger, we assumed the outstanding
options issued under the Connectify 1998 Stock Plan and reserved 208,345 shares
of our common stock for issuance upon exercise of these assumed options. The
terms of the Connectify options are generally similar to the terms of options
issuable under our 1997 Stock Option/Stock Issuance Plan.

1999 Employee Stock Purchase Plan

Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board in July 1999 and we expect it to be approved by the stockholders in
August 1999. The plan will become effective immediately upon the signing of the
underwriting agreement for this offering. The plan is designed to allow our
eligible employees and the eligible employees of our participating subsidiaries

61
<PAGE>

to purchase shares of common stock, at semi-annual intervals, with their
accumulated payroll deductions.

Share Reserve. We have initially reserved 500,000 shares of our common
stock. The reserve will automatically increase on the first trading day in
January each year, beginning in calendar year 2000, by an amount equal to 0.75%
of the total number of outstanding shares of our common stock on the last
trading day of December in the prior year. In no event will any such annual
increase exceed 333,333 shares.

Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for this offering is signed
and will end on the last business day in October 2001. The next offering period
will start on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.

Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that offering period. Semi-
annual entry dates will occur on the first business day of May and November
each year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.

Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 750
shares on any purchase date, and not more than 125,000 shares may be purchased
in total by all participants on any purchase date. The plan administrator may
increase or decrease the per-participant and total participant amounts at its
discretion as of the start of any new offering period under the plan.

Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.

Change in Control. Should we be acquired by merger or sale of all or
substantially all of our assets or more than 50% of our voting securities, then
all outstanding purchase rights will automatically be exercised immediately
prior to the effective date of the acquisition. The purchase price will be
equal to 85% of the market value per share on the participant's entry date into
the offering period in which an acquisition occurs or, if lower, 85% of the
fair market value per share immediately prior to the acquisition.

Plan Provisions. The following provisions will also be in effect under the
plan:

. The plan will terminate no later than the last business day of October
2009.

. The board may at any time amend, suspend or discontinue the plan,
subject to any required stockholder approval.

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<PAGE>

Employment Arrangements, Termination of Employment Arrangements
and Change in Control Arrangements

In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase 53,333 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement, if
Kana is acquired by merger or asset sale, Kana's right to repurchase all of the
unvested shares will automatically lapse in its entirety and the shares will
vest in full unless the repurchase right is assigned to the successor entity.

Also in February 1997, Mr. Poler, one of Kana's directors, exercised
options to purchase a total of 166,666 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, if Kana is acquired by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity.

In April 1997, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 2,500,000 shares of common stock at a purchase price of
$0.02 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in a series of equal monthly installments over a four-year
period measured from June 4, 1996. In addition, Kana's right to repurchase 50%
of any unvested shares will lapse if Kana is acquired by merger or asset sale
and if Mr. Gainey is not offered employment or is terminated without cause by
Kana or its successor.

In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 405,705 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, if Kana is acquired by merger or asset sale and
Mr. Holland is not offered comparable employment by the successor entity,
Kana's right to repurchase all of the unvested shares will automatically lapse
and the shares will vest in full.

In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 106,666 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, if Kana is acquired by merger or asset sale and
Mr. McCarthy is not offered employment by the successor entity, Kana's right to
repurchase 50% of the unvested shares will automatically lapse and the shares
will vest in full.

In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 75,033 shares of common stock and entered into a stock purchase
agreement for the purchase of the shares. These shares are subject to a right
of repurchase granted to Kana. Under the stock purchase agreement, if Kana is
acquired by merger or asset sale, Kana's right to repurchase all of the
unvested shares will automatically lapse in its entirety and the shares will
vest in full.

Also in July 1998, Dr. Holloway exercised an option to purchase 26,666
shares of common stock and entered into a stock purchase agreement for the
purchase of the shares. These shares are subject to a right of repurchase
granted to Kana. Under the stock purchase agreement, upon an acquisition of
Kana by merger or asset sale, Kana's right to repurchase all of the unvested
shares

63
<PAGE>

will automatically lapse in its entirety and the shares will vest in full
unless the repurchase right is assigned to the successor entity. In addition,
if Kana is acquired by merger or asset sale and Dr. Holloway does not provide
services to the successor entity, Kana's right to repurchase 25% of the
unvested shares will automatically lapse and the shares will vest in full.

In February and June 1999, Mr. Phelps, Kana's Vice President, Professional
Services, exercised options to purchase a total of 206,666 shares of common
stock and entered into a stock purchase agreement for the purchase of the
shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, if Kana is
acquired by merger or asset sale and Mr. Phelps is not offered employment by
the successor entity, Kana's right to repurchase 25% of the unvested shares
will automatically lapse and the shares will vest in full.

In June 1999, Kana entered into an employment arrangement with Mr.
McCloskey, Kana's Chief Executive Officer. In connection with this arrangement,
Kana granted Mr. McCloskey an option to purchase 933,333 shares of common
stock, which Mr. McCloskey exercised in June 1999. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement and
the terms of Mr. McCloskey's employment arrangement, this stock is subject to
vesting, which accelerates upon change of control under the following
circumstances:

. if Mr. McCloskey is not offered full-time employment with the successor
corporation, all of his then unvested shares of common stock will
accelerate and vest in full;

. if Mr. McCloskey is offered full-time employment with the successor
corporation as that corporation's chief executive officer, all of his
then unvested shares of common stock will continue to vest in accordance
with their original terms;

. if Mr. McCloskey is offered full-time employment with the successor
corporation as other than that corporation's chief executive officer,
the rate at which his then unvested shares of common stock vest will
double, such that his shares of common stock will vest at a rate
equivalent to 31,112 shares of common stock per month;

. if Mr. McCloskey is offered full-time employment with the successor
corporation as set forth in the second and third points above and he
does not accept the position, his shares of common stock will be subject
to immediate repurchase; and

. if Mr. McCloskey is terminated without cause by the successor
corporation following the change in control, all of his then unvested
shares of common stock will accelerate and vest in full.

Also in June 1999, Mr. McCarthy exercised an option to purchase 50,000
shares of common stock and entered into a stock purchase agreement for the
purchase of the shares. These shares are subject to a right of repurchase
granted to Kana. Under the stock purchase agreement, upon an acquisition of
Kana by merger or asset sale, Kana's right to repurchase all of the unvested
shares will automatically lapse in its entirety and the shares will vest in
full unless the repurchase right is assigned to the successor entity. In
addition, if Kana is acquired by merger or asset sale and Mr. McCarthy is not
offered employment by the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.

Generally, Kana's option grants to employees provide that if Kana is
acquired by merger or asset sale and the employee is not offered employment by
the successor entity, Kana's right to repurchase 25% of any unvested shares
will automatically lapse.

64
<PAGE>

Limitation of Liability and Indemnification

Kana's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, directors' personal liability
to Kana or its stockholders for monetary damages for breaches of fiduciary
duties. The certificate of incorporation does not, however, eliminate or limit
the personal liability of a director for the following:

. any breach of the director's duty of loyalty to Kana or its
stockholders;

. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

. any transaction from which the director derived an improper personal
benefit.

Kana's bylaws provide that Kana must indemnify its directors and executive
officers to the fullest extent permitted under the Delaware General Corporation
Law and may indemnify its other officers, employees and other agents as set
forth in the Delaware General Corporation Law. In addition, Kana has entered
into an indemnification agreement with each of its directors and executive
officers. The indemnification agreements contain provisions that require Kana,
among other things, to indemnify its directors and executive officers against
liabilities (other than liabilities arising from willful misconduct of a
culpable nature) that may arise by reason of their status or service as
directors or executive officers of Kana or other entities to which they provide
service at the request of Kana and to advance expenses they may incur as a
result of any proceeding against them as to which they could be indemnified.
Kana believes that these bylaw provisions and indemnification agreements are
necessary to attract and retain qualified directors and executive officers.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Kana where indemnification would be
required or permitted, and Kana is not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.

65
<PAGE>

TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES

Sales of Securities

Since July 1996, Kana has raised capital primarily through the sale of its
securities, including:

. In July 1996, Kana sold to Mark S. Gainey 2,500,000 shares of common
stock for a total consideration of $375. In April 1997, Kana repurchased
those shares for $37,500 and sold to Mr. Gainey 2,500,000 shares of
common stock for total consideration of $37,500.

. In July 1996, Kana sold to Michael T. Horvath 833,333 shares of common
stock for a total consideration of $125. In April 1997, Kana repurchased
those shares for $6,250 and sold to Mr. Horvath 416,666 shares of common
stock for total consideration of $6,250.

. In April 1997, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson, a total of 3,948,718 shares of
Series A preferred stock for total consideration of $770,000.

. In September 1997, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson and entities affiliated with
Benchmark Capital, a total of 4,969,136 shares of Series B preferred
stock for total consideration of $4,025,000.

. In June 1998, Kana sold to Eric A. Hahn 112,549 shares of Series B
preferred stock for total consideration of $91,165.

. In August and September 1998, Kana sold to various investors, including
entities affiliated with Draper Fisher Jurvetson, entities affiliated
with Benchmark Capital, entities affiliated with Amerindo Investment
Advisors, Inc. and Eric A. Hahn, a total of 3,414,098 shares of Series C
preferred stock for total consideration of $11,625,006.

. In July 1999, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson, entities affiliated with
Benchmark Capital and entities affiliated with Amerindo Investment
Advisors, a total of 838,472 shares of Series D preferred stock for
total consideration of $10,200,004.

The following table summarizes the shares of preferred stock purchased by
Kana's executive officers, directors and five percent stockholders and persons
associated with them since July 1996. The number of total shares on an as-
converted basis reflects a one-to-one conversion to common stock ratio for
each share of Series A, Series B, Series C and Series D preferred stock.

<TABLE>
<CAPTION>
Total Shares
of Preferred Stock
Series A Series B Series C Series D on an As-
Preferred Preferred Preferred Preferred Converted
Investor Stock Stock Stock Stock Basis
-------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Draper Fisher
Jurvetson.............. 3,020,191 1,310,864 620,264 164,405 5,115,725
Entities affiliated with
Benchmark Capital...... 0 3,455,802 675,477 180,846 4,312,125
Entities affiliated with
Amerindo Investment
Advisors............... 0 0 1,174,744 246,610 1,421,354
Eric A. Hahn............ 0 112,549 29,368 0 141,917
</TABLE>

Holders of shares of preferred stock have registration rights in respect
of the common stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights".

In June 1998, in connection with option exercises, Kana issued 166,666
shares of common stock to Mr. Poler, one of Kana's directors, for an aggregate
exercise price of $2,500.

66
<PAGE>

Loans to and Other Arrangements with Officers and Directors

In connection with the option exercises described under "--Employment
Arrangements, Termination of Employment Arrangements and Change of Control
Arrangements," the following officers and directors delivered five-year full
recourse promissory notes, bearing interest at an annual rate of 5.7%, in
amounts and with the balances indicated:

<TABLE>
<CAPTION>
Original Amount of Amount Outstanding
Officer or Director Promissory Note at June 30, 1999
- ------------------- ------------------ ------------------
<S> <C> <C>
Michael J. McCloskey...................... $630,000 $630,000
Paul R. Holland........................... 30,428 32,452
Joseph D. McCarthy........................ 41,750 42,206
William R. Phelps......................... 79,000 80,202
Charles A. Holloway....................... 2,000 2,105
</TABLE>

Kana has entered into an employment arrangement with its Chief Executive
Officer. See "Management--Employment Arrangements, Termination of Employment
Arrangements and Change in Control Arrangements".

Kana has granted options to its executive officers and directors. See
"Management--Executive Compensation" and "--Director Compensation".

Kana has entered into an indemnification agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its executive officers and directors against
liabilities that may arise by reason of their status or service as executive
officers or directors (other than liabilities arising from willful misconduct
of a culpable nature) and to advance expenses incurred as a result of any
proceeding against them as to which they could be indemnified. See
"Management--Limitation of Liability and Indemnification".

Transactions with Promoters

Each of Mr. Gainey, Kana's President and Chairman of the Board, and Michael
T. Horvath, the former Treasurer and a former director of Kana, is a co-founder
of Kana and may be deemed a promoter for purposes of the federal securities
laws. In July 1996, Kana sold to Mr. Gainey 2,500,000 shares of common stock at
a purchase price of $0.0002 per share. In April 1997, Kana repurchased those
shares and sold to Mr. Gainey 2,500,000 shares of common stock at a purchase
price of $0.02 per share. In July 1996, Kana sold to Mr. Horvath 833,333 shares
of common stock at a purchase price of $0.0002 per share. In April 1997, Kana
repurchased those shares and sold to Mr. Horvath 416,666 shares of common stock
at a purchase price of $0.02 per share. All other material transactions with
Mr. Gainey and Mr. Horvath are described in this section or elsewhere in this
prospectus. See "Management--Executive Compensation".

In April 1997, Kana entered into a consulting agreement with Mr. Horvath.
Under the agreement, Mr. Horvath agreed to provide up to 20 hours of consulting
services to Kana per month, at a rate of $25.00 per hour, until July 1, 2000.
In connection with the agreement, Mr. Horvath was granted a right to purchase
416,666 shares of common stock, which he purchased in April 1997, as described
above.

Kana believes that all of the transactions set forth above were made on
terms no less favorable to Kana than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between Kana and its officers, directors and principal stockholders and their
affiliates and any transactions between Kana and any entity with which its
officers, directors or five percent stockholders are affiliated will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to Kana than could be obtained from
unaffiliated third parties.

67
<PAGE>

RECENT DEVELOPMENTS

The Connectify Merger

On August 13, 1999, a new subsidiary of ours merged with Connectify so that
Connectify became our wholly owned subsidiary. The following description sets
forth the material terms of the merger agreement, the merger and related
transactions. The merger agreement and related agreements are included as
exhibits to the registration statement of which this prospectus forms a part.

We will account for the merger using the pooling method of accounting. The
merger is intended to qualify as a tax-free reorganization under Section 368 of
the Internal Revenue Code. At the closing of the merger, we issued 3,491,271
shares of our common stock in exchange for the 11,004,906 outstanding shares of
Connectify capital stock. We also reserved 208,345 shares of our common stock
for issuance upon exercise of the 653,394 Connectify options and warrants that
we assumed. The exchange ratio is 0.3172478 shares of our common stock for each
share of Connectify capital stock. Upon completion of the offering, the shares
of our common stock issued and reserved for issuance in connection with the
merger will constitute approximately 15% of our common stock.

Each Connectify option we assume will continue to have, and be subject to,
the same terms and conditions as set forth in the incentive stock plan of
Connectify and the option agreements governing the option immediately prior to
the merger, except that the option will be exercisable for shares of our common
stock and the number of shares subject to the option and the exercise price
will be adjusted to reflect the exchange ratio in the merger. The Connectify
options that we assumed generally vest at the rate of 1/4th of the total number
of shares subject to the options 12 months after the date of grant, and 1/48th
of the total number of shares each month thereafter.

Under the merger agreement, Connectify made representations and warranties
regarding matters including its corporate good standing, capital structure,
intellectual property ownership, pending litigation, assets and liabilities,
employee relations, material contracts, tax good standing, compliance with laws
and regulations and customers. We also made representations and warranties to
Connectify regarding matters including our corporate good standing, our
authority to enter into the merger, the disclosures set forth in the
registration statement of which this prospectus forms a part, and our
compliance with laws and regulations.

Connectify has agreed to indemnify us and each of our officers, directors
and affiliates with respect to breaches of any representations, warranties,
covenants or other agreements made by Connectify in the merger agreement. These
indemnification obligations are subject to minimum threshold limitations
specified in the merger agreement. To secure these indemnification obligations,
306,524 of the shares of our common stock issued to Connectify stockholders are
held in escrow until the date that is the earlier of

. the one year anniversary of the closing of the merger;

. six months following the closing of this offering or

. the final date of the report issued by Kana's auditors for the year
ended December 31, 1999.

In connection with the merger, one of Connectify's directors, Mr. Robert
Frick, was appointed to our board of directors.

68
<PAGE>

Connectify has agreed that its stockholders and optionholders will enter
into lock-up agreements similar to those entered into by our directors,
officers and stockholders. Up to 3,491,271 shares of our common stock to be
issued in exchange for outstanding shares of Connectify capital stock will be
eligible for sale in the public market beginning in August 2000, in accordance
with the restrictions of Rule 144 under the Securities Act. In addition, we
intend to register on Form S-8 the shares of Common Stock issuable upon options
assumed by us in the merger.

In connection with the Connectify merger, each of Mr. Ansanelli, our Vice
President, Marketing, and Mr. Gretsch, our Vice President, Electronic Direct
Marketing, entered into a non-competition agreement, under which he agreed,
until August 2001, not to

. compete with our or Connectify's business;

. solicit any of our or Connectify's employees;

. own any shares in an entity that competes with us or Connectify; or

. permit his name to be used in connection with any entity that competes
with us or Connectify.

In addition, we granted to the former Connectify stockholders registration
rights similar to those held by our current preferred stockholders. See
"Description of Capital Stock--Registration Rights".

Recent Option Grants

In July 1999, we granted under our 1997 Stock Option/Stock Issuance Plan
options to purchase an aggregate of 864,100 shares of our common stock at an
exercise price of $4.76 per share. We granted most of these options to new
employees. The options granted in July 1999 have been considered to be
compensatory. Deferred compensation associated with these options
is approximately $3.0 million. This amount will be amortized to expense on a
straight-line basis over the four-year vesting periods of the applicable
options through the fiscal year ending December 31, 2003.

69
<PAGE>

PRINCIPAL STOCKHOLDERS

The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of July 30, 1999, by the following individuals or
groups:

. each person or entity who is known by Kana to own beneficially more than
five percent of Kana's outstanding stock;

. each of the Named Executive Officers;

. each director of Kana; and

. all directors and executive officers as a group.

Applicable percentage ownership in the following table is based on
24,246,388 shares of common stock outstanding as of July 30, 1999, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering and treating as outstanding all options exercisable
within 60 days of July 30, 1999 held by the particular stockholder and that are
included in the first column. The numbers shown in the table below assume no
exercise by the underwriters of their over-allotment option.

Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Kana Communications, Inc., 87 Encina Avenue, Palo
Alto, CA 94301. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.

<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Name and Address of Number of Shares ------------------------------------
Beneficial Owner Beneficially Owned Prior to Offering After the Offering
------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Entities affiliated with
Draper Fisher
Jurvetson (1).......... 5,115,724 21.1% 18.6%
Entities affiliated with
Benchmark Capital
Partners L.P. (2)...... 4,312,125 17.8 15.7
Entities affiliated with
Amerindo Investment
Advisors, Inc. (3)..... 1,421,354 5.9 5.2
Mark S. Gainey (4)...... 2,376,000 9.8 8.6
Michael J. McCloskey
(5).................... 933,333 3.9 3.4
Paul R. Holland (6)..... 405,705 1.7 1.5
William R. Phelps (7)... 206,666 * *
Joseph D. McCarthy (8).. 156,666 * *
Christopher M. Noble.... 63,194 * *
Steven T. Jurvetson
(1).................... 5,115,724 21.1 18.6
David M. Beirne (2)..... 4,312,125 17.8 15.7
Eric A. Hahn (9)........ 216,949 * *
Ariel Poler (10)........ 165,665 * *
Dr. Charles A. Holloway
(11)................... 79,999 * *
Robert W. Frick ........ 40,184 * *
All directors and
executive officers as a
group (16 persons)..... 16,293,446 67.2 59.1
</TABLE>
- --------
* Less than one percent.
(1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
Includes 3,740,832 shares of common stock held by Draper Fisher Associates
Fund IV, L.P. and 281,569 shares of common stock held by Draper Fisher
Partners IV, LLC. Mr. Jurvetson disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest in the Draper
Fisher Jurvetson Funds. Also includes 1,093,328 shares of common stock
held by the Draper 1999 Grandchildren's Trust.

70
<PAGE>

(2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
Represents 3,783,347 shares of common stock held by Benchmark Capital
Partners, L.P., and 528,779 shares of common stock held by Benchmark
Founders' Fund L.P. Mr. Beirne, one of Kana's directors, is a Managing
Member of Benchmark Capital Management Co., LLC. Mr. Beirne disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest in the Benchmark funds.
(3) Principal address is 399 Park Avenue, 22nd Floor, New York, NY 10022.
Represents 1,102,744 shares of common stock held by ATGF II, a Panamanian
corporation, 121,666 shares of common stock held by Emeric McDonald,
87,877 shares of common stock held by the Litton Master Trust, 50,000
shares of common stock held by Pivotal Partners L.P., 33,333 shares of
common stock held by the Ralph H. Cechettini 1995 Trust, 8,333 shares of
common stock held by Mathew D. Fitzmaurice, 7,333 shares of common stock
held by Anthony Ciulla, 6,666 shares of common stock held by James
Stableford, 3,000 shares of common stock held by Joaquin Garcia-Larrieu,
233 shares of common stock held by William Slattery and 166 shares of
common stock held by Daniel Chapey.
(4) Represents shares of common stock held by the Mark and Elisabeth Gainey
Family Trust. Includes 468,750 shares of common stock subject to Kana's
right of repurchase. This repurchase right lapses with respect to 52,083
shares per month.
(5) Includes 731,112 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 15,554 shares per
month.
(6) Includes 13,333 shares of common stock held by The Paul Holland Grantor
Retained Annuity Trust, 13,333 shares of common stock held by The Linda
Yates Holland Grantor Retained Annuity Trust, 26,666 shares of common
stock held by the Yates/Holland 1999 Irrevocable Trust, 285,705 shares of
common stock held by The Yates/Holland Family Trust and 66,666 shares of
common stock held by Paul Holland and Linda Yates as community property.
Includes 228,210 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 8,451 shares per
month.
(7) Includes 13,333 shares of common stock held by The William Phelps Grantor
Retained Annuity Trust, 13,333 shares of common stock held by The Margaret
Phelps Grantor Retained Annuity Trust and 180,000 shares of common stock
held by The Phelps Family Trust. Includes 156,945 shares of common stock
subject to Kana's right of repurchase. This repurchase right lapses with
respect to 7,638 shares per month. Also includes 23,333 shares of common
stock subject to Kana's right of repurchase, which lapses with respect to
5,833 shares in June 2000 and 486 shares per month thereafter.
(8) Includes 16,666 shares of common stock held by The Joseph McCarthy Grantor
Retained Annuity Trust, 16,666 shares of common stock held by Siobhan
Lawlor Grantor Retained Annuity Trust. Includes 66,667 shares of common
stock subject to Kana's right of repurchase. This repurchase right lapses
with respect to 2,222 shares per month. Also includes 50,000 shares of
common stock subject to Kana's right of repurchase, which lapses with
respect to 12,500 shares in June 2000 and 1,042 shares per month
thereafter.
(9) Includes 50,021 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 1,564 shares per
month.
(10) Includes 3,333 shares of common stock held by Alejandro W. Poler and 1,666
shares of common stock held by Noel Poler. Includes 18,518 shares of
common stock subject to Kana's right of repurchase. This repurchase right
lapses with respect to 4,629 shares per month.
(11) Includes 17,778 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 2,222 shares per
month.

71
<PAGE>

DESCRIPTION OF CAPITAL STOCK

At the closing of this offering, the authorized capital stock of Kana will
consist of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Kana's certificate of incorporation to delete references to the
existing preferred stock following conversion of that stock. The following
description of the material terms of Kana's capital stock gives effect to the
certificate of incorporation to be filed upon the closing of this offering.
Immediately following the completion of this offering, and assuming no exercise
of the underwriters' over-allotment option, an aggregate of 27,546,388 shares
of common stock will be issued and outstanding, and no shares of preferred
stock will be issued and outstanding.

Common Stock

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
apply to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if
any, that may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy". In the event of
liquidation, dissolution or winding up of Kana, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Upon completion of this offering, the common stock will have no
preemptive or conversion rights or other subscription rights. No redemption or
sinking fund provisions apply to the common stock. All outstanding shares of
common stock are fully paid and nonassessable, and the shares of common stock
to be sold in this offering will be fully paid and nonassessable.

Preferred Stock

Kana's board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of preferred stock of Kana with any dividend,
redemption, conversion and exchange provisions that may be provided in the
particular series. Any series of preferred stock may possess voting, dividend,
liquidation, redemption and other rights superior to those of the common stock.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching Kana's board of
directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of Kana. Kana has no present plans to issue any shares of or designate
any series of preferred stock.

Warrants

In August 1999, in connection with the Connectify merger, we assumed
warrants to purchase a total of 24,157 shares of our common stock at an
exercise price of $0.80 per share. These warrants expire in August 2005. They
are exercisable for shares of common stock on a net exercise basis without
tender of cash.

72
<PAGE>

Registration Rights

Upon completion of the offering, the holders of 19,759,018 shares of common
stock will be entitled to rights with respect to the registration of those
shares under the Securities Act. Under the terms of the registration rights
agreement, if Kana proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, these holders are entitled to notice of
the registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in the registration. Holders of these
rights may also require Kana to file a registration statement under the
Securities Act of 1933 at its expense with respect to their shares of common
stock, and Kana is required to use its best efforts to effect the registration,
subject to conditions and limitations. Furthermore, stockholders with
registration rights may require Kana to file additional registration statements
on Form S-3, subject to conditions and limitations.

Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law

Kana's certificate of incorporation authorizes the board to establish one
or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance. See "--Preferred Stock". The
certificate of incorporation also provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by written consent.
In addition, the certificate of incorporation and bylaws do not permit
stockholders of Kana to call a special meeting of stockholders. Only Kana's
Chief Executive Officer, President, Chairman of the Board or a majority of the
board of directors are permitted to call a special meeting of stockholders. The
certificate of incorporation also provides that the board of directors is
divided into three classes, with each director assigned to a class with a term
of three years, and that the number of directors may only be determined by the
board of directors. The bylaws also require that stockholders give advance
notice to Kana's Secretary of any nominations for director or other business to
be brought by stockholders at any meeting of stockholders, and that the
Chairman of the Board has the authority to adjourn any meeting of stockholders.
The bylaws also require a supermajority vote of members of the board of
directors and/or stockholders to amend specified bylaw provisions. These
provisions of the certificate of incorporation and the bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of Kana. These provisions also may have the effect of preventing changes in the
management of Kana. See "Risk Factors--Our executive officers and directors
will exercise significant control over stockholder voting matters" and "--We
have adopted anti-takeover defenses that could delay or prevent an acquisition
of our company".

Kana is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:

.prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;

.upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned:

(i) by persons who are directors and also officers; and

(ii) by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or

73
<PAGE>

. on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.

Section 203 defines "business combination" to include the following:

. any merger or consolidation involving the corporation and the interested
stockholder;

. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;

. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; and

. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. Its address is 235 Montgomery Street, 23rd Floor,
San Francisco, California 94109, and its telephone number at this location is
(415) 743-1444.

74
<PAGE>

SHARES AVAILABLE FOR FUTURE SALE

Prior to this offering, there has been no public market for Kana's common
stock, and Kana cannot predict the effect, if any, that market sales of shares
of common stock or the availability of shares of common stock for sale will
have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market
could adversely affect the market price of Kana's common stock and could impair
Kana's future ability to raise capital through the sale of Kana's equity
securities.

Upon the completion of this offering, Kana will have 27,546,388 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in this offering will be freely tradable, except
that any shares held by Kana's "affiliates," as that term is defined in Rule
144 promulgated under the Securities Act, may only be sold in compliance with
the limitations described below. The remaining 24,246,388 shares of common
stock will be deemed "restricted securities" as defined under Rule 144.
Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:

Rule 144

In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate of
Kana, who has beneficially owned shares for at least one year is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then-outstanding shares of Kana's common stock, which will be
approximately 285,424 shares immediately after this offering, or the average
weekly trading volume in Kana's common stock during the four calendar weeks
preceding the date on which notice of the sale is filed. In addition, a person
who is not deemed to have been an affiliate at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell these shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from one of Kana's affiliates, a person's holding period for the
purpose of effecting a sale under Rule 144 would commence on the date of
transfer from the affiliate.

75
<PAGE>

Stock Options

As of July 31, 1999, options to purchase a total of 776,466 shares of
common stock were outstanding, all of which were currently exercisable. In
August 1999, we assumed options to purchase 184,188 shares of common stock in
connection with the Connectify merger. Kana intends to file a Form S-8
registration statement under the Securities Act to register all shares of
common stock subject to outstanding options and all shares of common stock
issuable under its 1999 Stock Incentive Plan and its 1999 Employee Stock
Purchase Plan. Accordingly, shares of common stock issued under these plans
will be eligible for sale in the public markets, subject to vesting
restrictions and the lock-up agreement described below. See "Management--
Benefit Plans".

Lock-up Agreements

Kana, each of its officers and directors and substantially all of its
securityholders have agreed, subject to specified exceptions, not to, without
the prior written consent of Goldman, Sachs & Co., sell or otherwise dispose of
any shares of Kana's common stock or options to acquire shares of Kana's common
stock during the 180-day period following the date of this prospectus. Goldman,
Sachs & Co. may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. See
"Underwriting".

Following this offering, subject to specified blackout periods, holders of
19,759,018 shares of Kana's outstanding common stock will have two demand
registration rights with respect to their shares of common stock, subject to
the 180-day lock-up arrangement described above, to require Kana to register
their shares of common stock under the Securities Act, or rights to participate
in any future registration of securities by Kana. If the holders of these
registrable securities request that Kana register their shares, and if the
registration is effected, these shares will become freely tradable without
restriction under the Securities Act. Any sales of securities by these
stockholders could have a material adverse effect on the trading price of
Kana's common stock. See "Description of Capital Stock--Registration Rights".

76
<PAGE>

UNDERWRITING

Kana and the underwriters named below will enter into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter will severally agree to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Hambrecht &
Quist LLC and Wit Capital Corporation are the representatives of the
underwriters.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Hambrecht & Quist LLC.......................................
Wit Capital Corporation.....................................
---------
Total.......................................................
=========
</TABLE>

----------------

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Kana to cover these sales. They may exercise that option for 30
days. If any shares are purchased upon exercise of this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

Kana will sell the shares to the underwriters at a per share price of $ ,
which represents a % discount from the initial public offering price set
forth on the cover page of this prospectus. This discount is the underwriters'
compensation. The following table shows the per share and total underwriting
discount to be paid to the underwriters by Kana. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares. Apart from the underwriting discount set forth
below, Kana knows of no other type of compensation that the National
Association of Securities Dealers, Inc. will consider to be underwriting
compensation.

<TABLE>
<CAPTION>
Paid by Kana
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
------ ------
Total.............................................. $ $
====== ======
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all of the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.

Kana, its officers and directors and substantially all of its
securityholders have agreed with the underwriters not to dispose of or hedge
any of their common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written

77
<PAGE>

consent of Goldman, Sachs & Co. on behalf of the underwriters. See "Shares
Available for Future Sale" for a discussion of these and other transfer
restrictions.

Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Kana and the representatives. Kana and the representatives
expect that the principal factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, include Kana's historical performance, estimates of Kana's business
potential and earnings prospects, an assessment of Kana's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.

Kana has applied to have the common stock listed on the Nasdaq National
Market under the symbol "KANA".

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of that underwriter in stabilizing or short-sale
covering transactions.

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

At the request of Kana, the underwriters have reserved for sale, at the
initial public offering price, up to 264,000 shares of common stock in the
offering to directors, officers, employees of Kana and their families, and
other parties with whom Kana has business relationships, through a directed
share program. Indications of interest from parties identified by Kana will be
solicited by Hambrecht & Quist LLC. Of the 264,000 shares, 99,000 shares have
been reserved for individuals and entities affiliated with Amerindo Investment
Advisors and a total of 66,000 shares has been reserved for holders of our
Series A and Series B preferred stock. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any
reserved shares not purchased by these persons to the general public on the
same basis as other shares in the offering.

A prospectus in electronic format will be made available on the web sites
maintained by one or more of the lead managers of this offering and may also be
made available on web sites maintained by other underwriters. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make Internet distributions on the
same basis as other allocations.

78
<PAGE>

Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997.

Kana estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $1,305,000.

Kana has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.

LEGAL MATTERS

The validity of the common stock offered will be passed upon for Kana by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 18,666 shares
of Kana's common stock. Specified legal matters in connection with the offering
will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto,
California.

CHANGE IN ACCOUNTANTS

PricewaterhouseCoopers LLP was previously the principal accountant for
Kana. On July 29, 1998, PricewaterhouseCoopers LLP was dismissed as principal
accountant and KPMG LLP was engaged to audit Kana's financial statements. The
board of directors has approved the appointment of KPMG LLP as principal
accountant for Kana.

In connection with the audits for the year ended December 31, 1997 and for
the period from July 11, 1996 (inception) through December 31, 1996, there were
no disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which, if not resolved to PricewaterhouseCoopers LLP's
satisfaction, would have caused them to reference the subject matter of the
disagreement in their opinion.

The audit report of PricewaterhouseCoopers LLP on Kana's financial
statements as of and for the year ended December 31, 1997 did not contain any
adverse opinion or disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope or accounting principles.

EXPERTS

The consolidated financial statements of Kana Communications, Inc. and
subsidiary as of December 31, 1997 and 1998 and for each of the years then
ended have been included in this prospectus and in the registration statement
in reliance upon the report of KPMG LLP, independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.

The financial statements of Connectify, Inc. as of December 31, 1998 and
for the period from May 14, 1998 (date of inception) to December 31, 1998 have
been included in this prospectus and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.

79
<PAGE>

The supplemental consolidated financial statements of Kana Communications,
Inc. and subsidiaries as of December 31, 1997 and 1998 and for each of the
years then ended have been included in this prospectus and in the registration
statement in reliance upon the report of KPMG LLP, independent auditors,
appearing elsewhere in this prospectus, and upon the authority of said firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating
to the common stock offered. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits. For
further information with respect to Kana and the common stock we are offering
under this prospectus you should refer to the registration statement and its
exhibits. Statements contained in this prospectus as to the contents of any
contract, agreement or other document to which reference is made are not
necessarily complete, and you should refer to the copy of that contract or
other document filed as an exhibit to the registration statement. You may read
or obtain a copy of the registration statement at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a Web site that contains
reports, proxy statements and other information that registrants file
electronically with the Commission. The address of this Web site is
http://www.sec.gov.

Kana intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. Kana intends to furnish other reports as it
may determine or as may be required by law.

Information contained in Kana's Web site is not a prospectus and does not
constitute a part of this prospectus.

80
<PAGE>

INDEX TO FINANCIAL STATEMENTS

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Supplemental Consolidated Financial Statements:
Form of Independent Auditors' Report.................................... F-2
Supplemental Consolidated Balance Sheets................................ F-3
Supplemental Consolidated Statements of Operations and Comprehensive
Loss................................................................... F-4
Supplemental Consolidated Statements of Stockholders' Equity............ F-5
Supplemental Consolidated Statements of Cash Flows...................... F-6
Notes to Supplemental Consolidated Financial Statements................. F-7
</TABLE>

<TABLE>
<S> <C>
Historical Consolidated Financial Statements:
Form of Independent Auditors' Report..................................... F-19
Consolidated Balance Sheets.............................................. F-20
Consolidated Statements of Operations and Comprehensive Loss............. F-21
Consolidated Statements of Stockholders' Equity.......................... F-22
Consolidated Statements of Cash Flows.................................... F-23
Notes to Consolidated Financial Statements............................... F-24

CONNECTIFY, INC.

Report of Independent Accountants.......................................... F-35
Balance Sheet.............................................................. F-36
Statement of Operations.................................................... F-37
Statement of Stockholders' Equity.......................................... F-38
Statement of Cash Flows.................................................... F-39
Notes to Financial Statements.............................................. F-40
</TABLE>

F-1
<PAGE>

FORM OF INDEPENDENT AUDITORS' REPORT

The Board of Directors
Kana Communications, Inc.

When the reincorporation described in Note 7(b) is consummated, we will be in
the position to render the following report.

/s/ KPMG LLP

We have audited the accompanying supplemental consolidated balance
sheets of Kana Communications, Inc. and subsidiaries (the Company) as
of December 31, 1997 and 1998, and the related supplemental
consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for each of the years then ended.
These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial
statements based on our audits. We did not audit the financial
statements of Connectify, Inc. for the year ended December 31, 1998,
which statements reflect total assets constituting 22% as of December
31, 1998 of the related supplemental consolidated total. The
statements of Connectify, Inc. were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Connectify, Inc. for the year
ended December 31, 1998, is based solely upon the report of the other
auditors.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The supplemental consolidated financial statements give
retroactive effect to the merger of the Company and Connectify, Inc.
on August 13, 1999, which has been accounted for as a pooling of
interests as described in Note 2 to the supplemental consolidated
financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These
supplemental financial statements do not extend through the date of
consummation. However, they will become the historical consolidated
financial statements of the Company after financial statements
covering the date of consummation of the business combination are
issued.

In our opinion, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of
the years then ended, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a
period which includes the date of consummation of the business
combination.

Mountain View, California
August 13, 1999, except as to
Note 8, which is as of August
, 1999

F-2
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

<TABLE>
<CAPTION>
December 31, June 30, 1999
---------------- --------------------
1997 1998 Historical Pro forma
------- ------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 3,303 $12,955 $ 5,798 15,998
Short-term investments................ 210 160 2,251 2,251
Accounts receivable................... -- 817 1,409 1,409
Prepaid expenses and other current
assets............................... 37 141 735 735
------- ------- ------- -------
Total current assets................ 3,550 14,073 10,193 20,393
Property and equipment, net............. 261 1,041 1,946 1,946
Other assets............................ 13 161 186 186
------- ------- ------- -------
Total assets........................ $ 3,824 $15,275 $12,325 22,525
======= ======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable...... $ 34 $ 360 $ 1,241 1,241
Accounts payable...................... 130 330 1,139 1,139
Accrued payroll and related expenses.. 37 353 1,012 1,012
Other accrued liabilities............. 68 355 839 839
Deferred revenue...................... -- 450 1,133 1,133
------- ------- ------- -------
Total current liabilities........... 269 1,849 5,364 5,364
Notes payable, less current portion..... 51 360 638 638
------- ------- ------- -------
Total liabilities................... 320 2,209 6,002 6,002
------- ------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001
par value; 29,000,000, 50,000,000,
and 50,000,000 shares authorized
(5,000,000 pro forma); 8,917,855,
12,512,641 and 12,512,641 shares
issued and outstanding (none pro
forma); aggregate liquidation
preference of $4,795, $16,524, and
$16,524 (none pro forma)............. 9 13 13 --
Common stock, $0.001 par value;
40,000,000, 60,000,000, and
60,000,000 shares authorized
(100,000,000 pro forma); 2,970,667,
8,861,227, and 10,627,617 shares
issued and outstanding (23,978,730
pro forma)........................... 3 9 11 24
Additional paid-in capital............ 5,659 23,760 39,535 49,735
Deferred stock-based compensation..... (784) (1,795) (,397) (13,397)
Notes receivable from stockholders.... -- (155) (1,187) (1,187)
Accumulated other comprehensive
losses............................... -- (5) (37) (37)
Accumulated deficit................... (1,383) (8,761) (18,615) (18,615)
------- ------- ------- -------
Total stockholders' equity.......... 3,504 13,066 6,323 16,523
------- ------- ------- -------
Total liabilities and stockholders'
equity............................. $ 3,824 $15,275 $12,325 $22,525
======= ======= ======= =======
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-3
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit......................... -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,938 1,421 4,957
Research and development............... 699 2,835 884 3,320
General and administrative............. 257 1,004 314 986
Amortization of deferred stock-based
compensation.......................... 113 1,263 430 3,063
------- ------- -------- --------
Total operating expenses............. 1,435 9,040 3,049 12,326
------- ------- -------- --------
Operating loss....................... (1,435) (7,564) (2,466) (9,961)
Other income, net........................ 52 186 41 107
------- ------- -------- --------
Net loss............................. (1,383) (7,378) (2,425) (9,854)
Other comprehensive loss................. -- (5) -- (32)
------- ------- -------- --------
Comprehensive loss................... $(1,383) $(7,383) $ (2,425) $ (9,886)
======= ======= ======== ========
Net loss per share:
Basic and diluted...................... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Weighted-average shares used in
computation........................... 1,497 2,864 1,535 5,217
======= ======= ======== ========
Pro forma net loss per share (unaudited):
Basic and diluted...................... $ (0.59) $ (0.56)
======= ========
Weighted-average shares used in
computation........................... 12,547 17,729
======= ========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-4
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other
----------------- ------------------ Paid-in Stock-based from Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Losses Deficit
---------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
Kana founders... -- $-- 3,333,333 $ 3 $ (2) $ -- $ -- $-- $ --
Issuance of
common stock
upon exercise of
stock options... -- -- 53,333 -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- (416,666) -- -- -- -- -- --
Issuance of
Series A
convertible
preferred stock,
net............. 3,948,719 4 -- -- 756 -- -- -- --
Issuance of
shares of common
stock in
exchange for
services ....... -- 667 -- 7 -- -- -- --
Issuance of
Series B
convertible
preferred stock,
net............. 4,969,136 5 -- -- 4,008 -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 106 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (1,383)
---------- ---- ---------- --- ------- -------- -------- ---- --------
Balances,
December 31,
1997............ 8,917,855 9 2,970,667 3 5,659 (784) -- -- (1,383)
Issuance of
common stock to
Connectify
founders........ -- -- 1,586,240 2 13 -- -- -- --
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 2,657,312 3 176 -- (155) -- --
Issuance of
common stock for
intellectual
property........ -- -- 36,512 -- 5 -- -- -- --
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... 68,139 -- -- -- -- -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- -- 35 -- -- -- --
Issuance of
common stock.... -- -- 1,610,496 1 3,975 -- -- -- --
Issuance of
Series B
convertible
preferred stock,
net............. 112,549 1 -- -- 90 -- -- -- --
Issuance of
Series C
convertible
preferred stock,
net............. 3,414,098 3 -- -- 11,534 -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- 2,273 (2,273) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,262 -- -- --
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) --
Net loss........ -- -- -- -- -- -- -- -- (7,378)
---------- ---- ---------- --- ------- -------- -------- ---- --------
Balances,
December 31,
1998............ 12,512,641 13 8,861,227 9 23,760 (1,795) (155) (5) (8,761)
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- 1,766,390 2 1,110 -- (1,032) --
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- 14,665 (14,665) -- -- --
Amortization of
deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- 3,063 -- -- --
Other
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- (32)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (9,854)
---------- ---- ---------- --- ------- -------- -------- ---- --------
Balances, June
30, 1999
(unaudited)..... 12,512,641 $ 13 10,627,617 $11 $39,535 $(13,397) $(1,187) $(37) $(18,615)
========== ==== ========== === ======= ======== ======== ==== ========
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of
common stock to
Kana founders... $ 1
Issuance of
common stock
upon exercise of
stock options... --
Repurchase of
founders' common
stock, net...... --
Issuance of
Series A
convertible
preferred stock,
net............. 760
Issuance of
shares of common
stock in
exchange for
services ....... 7
Issuance of
Series B
convertible
preferred stock,
net............. 4,013
Deferred stock-
based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 106
Net loss........ (1,383)
-------------
Balances,
December 31,
1997............ 3,504
Issuance of
common stock to
Connectify
founders........ 15
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... 24
Issuance of
common stock for
intellectual
property........ 5
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... --
Issuance of
warrants to
purchase common
stock........... 35
Issuance of
common stock.... 3,976
Issuance of
Series B
convertible
preferred stock,
net............. 91
Issuance of
Series C
convertible
preferred stock,
net............. 11,537
Deferred stock-
based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 1,262
Other
comprehensive
loss............ (5)
Net loss........ (7,378)
-------------
Balances,
December 31,
1998............ 13,066
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... 80
Deferred stock-
based
compensation
(unaudited)..... --
Amortization of
deferred stock-
based
compensation
(unaudited)..... 3,063
Other
comprehensive
loss
(unaudited)..... (32)
Net loss
(unaudited)..... (9,854)
-------------
Balances, June
30, 1999
(unaudited)..... $ 6,323
=============
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-5
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
----------------- ------------------
1997 1998 1998 1999
------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(1,383) $ (7,378) $ (2,426) $ (9,854)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 27 233 79 293
Loss on disposal of assets............ -- -- -- 105
Amortization of stock-based
compensation and other stock-based
items ............................... 113 1,302 430 3,063
Changes in operating assets and
liabilities:
Accounts receivable.................. -- (817) (474) (592)
Prepaid expenses and other assets.... (50) (252) (245) (619)
Accounts payable and accrued
liabilities......................... 235 787 296 1,906
Deferred revenue..................... -- 450 108 682
------- -------- -------- --------
Net cash used in operating
activities.......................... (1,058) (5,675) (2,232) (5,016)
------- -------- -------- --------
Cash flows from investing activities:
Property and equipment purchases....... (288) (987) (299) (1,303)
(Purchases) sales of short-term
investments........................... (210) 50 -- (2,091)
------- -------- -------- --------
Net cash used in investing
activities.......................... (498) (937) (299) (3,394)
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock
and warrants.......................... 1 3,744 23 80
Proceeds from issuance of convertible
preferred stock, net.................. 4,603 11,628 -- --
Proceeds from convertible notes
payable............................... 170 265 -- 50
Proceeds from notes payable............ 85 750 467 1,685
Payments on notes payable.............. -- (118) (3) (530)
------- -------- -------- --------
Net cash provided by financing
activities.......................... 4,859 16,269 487 1,285
------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents................... -- (5) -- (32)
------- -------- -------- --------
Net change in cash and cash
equivalents............................ 3,303 9,652 (2,044) (7,157)
Cash and cash equivalents at beginning
of period.............................. -- 3,303 3,303 12,955
------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ 3,303 $ 12,955 $ 1,259 $ 5,798
======= ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during period for interest... $ 3 $ 36 $ 13 $ 27
======= ======== ======== ========
Noncash investing and financial
activities:
Issuance of Series A convertible
preferred stock upon conversion of
stockholder loan..................... $ 170 $ -- $ -- $ --
======= ======== ======== ========
Issuance of common stock in exchange
for notes receivable from
stockholders......................... $ -- $ 155 $ 107 $ 1,032
======= ======== ======== ========
Grant of options to purchase common
stock with an exercise price below
fair value........................... $ 890 $ 2,273 $ 1,060 $ 14,665
======= ======== ======== ========
Issuance of common stock upon
conversion of convertible note
payable.............................. $ -- $ 300 $ -- $ --
======= ======== ======== ========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-6
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(1) Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

Kana Communications, Inc. and subsidiaries (the Company or Kana) were
incorporated on July 11, 1996, but did not commence operations until 1997. The
Company develops, markets and supports customer communications software
products and services for e-Businesses. The Company sells its products
primarily in the United States and, to a lesser extent, in Europe, through its
direct sales force.

(b) Basis of Presentation

The accompanying supplemental consolidated financial statements of the
Company have been prepared to give retroactive effect to the August 13, 1999
merger with Connectify, Inc. Generally accepted accounting principles proscribe
giving effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the
date of consummation. These supplemental financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued.

The accompanying supplemental consolidated financial statements have been
prepared using an inception date of January 1, 1997, as no significant
operating activities occurred between July 11, 1996 and December 31, 1996. The
consolidated financial statements include the financial statements of Kana
Communications, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

(d) Interim Supplemental Financial Statements

The unaudited interim supplemental consolidated financial statements of the
Company as of June 30, 1999 and for the six months ended June 30, 1998 and 1999
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note 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 relating to interim
financial statements.

In the opinion of management, the accompanying unaudited interim
supplemental consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of the Company as of June 30, 1999, and the results of
its operations and its cash flows for the six months ended June 30, 1998 and
1999. Results for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.

(e) Use of Estimates

The preparation of supplemental financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the

F-7
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

(f) Foreign Currency Translation

The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenues,
expenses, gains, and losses are translated at the exchange rate on the date
those elements are recognized. Any translation adjustments are included in
other comprehensive loss.

(g) Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. As of
December 31, 1997 and 1998 and June 30, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$12,780,000, and $5,081,000, respectively. The contractual maturities for the
auction-rate securities exceed 10 years; however, the Company has the option of
adjusting the interest rates or liquidating these investments on their
respective reset dates, which generally occur every 30 days.

The Company has classified its cash equivalents and short-term investments
as "available for sale." These items are carried at fair value, based on the
quoted market prices, and unrealized gains and losses, if material, are
reported as a separate component of accumulated other comprehensive income
(losses) in stockholders' equity. Because of the short-term nature of the
Company's cash equivalents and short-term investments, realized and unrealized
gains and losses have been immaterial to date. The Company's short-term
investments consisted of certificates of deposit with contractual maturities of
less than one year.

(h) Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the related
lease term or the life of the improvement.

The Company evaluates long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of
disposal.

F-8
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(i) Fair Value of Financial Instruments

The fair values of the Company's cash, cash equivalents, short-term
investments, accounts receivable, accounts payable and notes payable
approximate their carrying values due to the short maturity or variable rate
structure of those instruments.

(j) Concentration of Credit Risk

Financial instruments subjecting the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
trade accounts receivable. The Company maintains cash and cash equivalents with
two domestic financial institutions. From time to time, the Company's cash
balances with its financial institutions may exceed Federal Deposit Insurance
Corporation insurance limits.

The Company's customers are currently concentrated in the United States.
The Company performs ongoing credit evaluations, generally does not require
collateral and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and other
information. To date, such losses have been immaterial.

(k) Revenue Recognition

The Company recognizes revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. SOP No. 97-2 requires that
revenue recognized from software arrangements be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation, or training. Under SOP No. 97-2, the determination of fair value
is based on objective evidence that is specific to the vendor. If evidence of
fair value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time as evidence of fair value does
exist or until all elements of the arrangement are delivered.

License revenue is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, provided the arrangement
does not require significant customization of the software, the fee is fixed
and determinable, and collectibility is considered probable. Maintenance
contracts generally call for the Company to provide technical support and
software updates and upgrades to customers. Revenue from maintenance contracts
is recognized ratably over the term of the maintenance contract, on a straight-
line basis.

(l) Software Development Costs

Software development costs are expensed as incurred until technological
feasibility of the underlying software product is achieved. After technological
feasibility is established, software development costs are capitalized.
Capitalized costs are then amortized on a straight-line basis over the
estimated product life, or based on the ratio of current revenue to total
projected product revenue, whichever is greater. To date, the period between
achieving technological feasibility and general availability of such software
has been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs.

F-9
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(m) Income Taxes

The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in the statement of operations in the period that includes the enactment date.

(n) Stock-Based Compensation

The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method. Deferred stock-based compensation
is recorded on the date of grant when the deemed fair value of the underlying
common stock exceeds the exercise price for stock options or the purchase price
for the shares of common stock.

Deferred stock-based compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, generally four years, in accordance with Financial
Accounting Standards Board Interpretation No. 28.

(o) Comprehensive Loss

As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS 130
establishes standards of reporting and display of comprehensive income and its
components of net income and "Other Comprehensive Loss" in a full set of
general purpose financial statements. Other comprehensive loss refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly to stockholders' equity. Other comprehensive loss
recorded by the Company for the year ended December 31, 1998 and the six months
ended June 30, 1999 was attributable to foreign currency translation
adjustments for the Company's U.K. subsidiary. Tax effects of comprehensive
loss are not material.

(p) Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the as-if converted basis. All potential common
shares have been excluded from the computation of diluted net loss per share
for all periods presented because the effect would have been antidilutive.

F-10
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------- ---------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Stock options and warrants........ 1,788,316 281,119 335,565 328,174
Common stock subject to
repurchase....................... 1,822,915 4,162,840 4,549,337 5,009,333
Convertible preferred stock ...... 8,917,855 12,512,641 9,098,543 12,512,641
---------- ---------- ---------- ----------
12,529,086 16,956,600 13,983,445 17,850,148
========== ========== ========== ==========
</TABLE>

(q) Segment Reporting

During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 establishes annual and interim reporting standards for operating segments
of a company. SFAS No. 131 requires disclosures of selected segment-related
financial information about products, major customers, and geographic areas.
The Company is organized in a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions, and allocates resources
based on financial data consistent with the presentation in the accompanying
consolidated financial statements.

The Company's revenues have been earned primarily from customers in the
United States. In addition, all significant operations and assets are based in
the United States. No customer accounted for more than 10% of revenues for the
year ended December 31, 1998 and the three month period ended June 30, 1999. In
the six month period ended June 30, 1998, two customers each accounted for more
than 10% of total revenues.

(r) Pro Forma Stockholders' Equity (unaudited)

The accompanying unaudited pro forma stockholders' equity at June 30, 1999
reflects the issuance of 838,466 shares of Series D Convertible Preferred Stock
at a purchase price of $12.17 per share on July 8, 1999 and the conversion of
all outstanding shares of preferred stock, including the Series D Convertible
Preferred Stock, as if such events occurred on June 30, 1999.

(s) Pro Forma Net Loss Per Share (unaudited)

Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999, is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on January 1, 1998, or at the
date of issuance, if later. Pro forma common equivalent shares, comprised of
incremental common shares issuable upon the exercise of stock options and
warrants are not included in pro forma diluted net loss per share because they
would be anti-dilutive.

F-11
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(t) Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities, effective for fiscal years beginning after June 15, 1999.
This standard requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measures those instruments at
fair value. The type and use of the derivative, and whether it qualifies for
hedge accounting, will determine the treatment of gains or losses resulting
from changes in the derivative. The Company believes the adoption of SFAS No.
133 will not have a material effect on its results of operations, financial
position, or cash flows. The statement will be effective for the Company
beginning January 1, 2001.

In December 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition
with Respect to Certain Transactions. SOP No. 98-9 amends SOP No. 97-2 to
require the entity to recognize revenue for multiple element arrangements by
means of the "residual method" when: 1) there is vendor-specific evidence of
the fair values of all of the undelivered elements that are not accounted for
by means of long-term contract accounting; 2) vendor-specific evidence of fair
value does not exist for one or more of the delivered elements; and 3) all
revenue recognition criteria of SOP No. 97-2, other than the requirement for
vendor-specific evidence of the fair value of each delivered element, are
satisfied. SOP No. 98-9 will be effective beginning January 1, 2000. The
Company believes the adoption of SOP No. 98-9 will not have a material effect
on its results of operations, financial position or cash flows.

In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which provides
guidance for determining whether computer software is internal-use software and
for accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1 also provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The adoption of SOP 98-1 did not have a
material effect on the consolidated financial statements.

On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities which
provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 was adopted by the Company on January 1, 1999. As the
Company had not capitalized such costs, the adoption of SOP 98-5 did not have
an impact on the consolidated financial statements of the Company.

(2) Business Combination

On August 13, 1999, the Company issued approximately 3,491,271 shares of
its common stock to the shareholders of Connectify, Inc. (Connectify) in
exchange for all of the outstanding capital stock of Connectify. Prior to the
consummation of the merger, 5,095,819 shares of the outstanding Kana preferred
stock were converted to an equal number shares of Kana common stock. As a
result of the conversion, the Company created a controlling class of common
stock. The merger has been accounted for as a pooling of interests, and,
accordingly, the Company's supplemental consolidated financial statements have
been restated for all periods prior to the merger to include the results of

F-12
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

operations, financial position, and cash flows of Connectify. No significant
adjustments were required to conform the accounting policies of the Company and
Connectify.

In connection with the merger with Connectify, the Company will record a
nonrecurring charge for merger integration costs ranging from $1,000,000 to
$2,000,000, consisting primarily of transaction fees for attorneys,
accountants, and financial printing, employee severance benefits, and facility
related costs during the third quarter of 1999.

Connectify has not reported revenues in any of the periods presented. Net
loss for the individual entities as previously reported were as follows (in
thousands):

<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
------------ ----------------
1998 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Kana.......................................... $(6,337) $(2,351) $(7,227)
Connectify.................................... (1,041) (74) (2,627)
------- ------- -------
(7,378) (2,425) (9,854)
======= ======= =======
</TABLE>

(3) Property and Equipment

Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Computer equipment.............................................. $220 $ 896
Furniture and fixtures.......................................... 20 164
Leasehold improvements.......................................... 48 241
---- ------
288 1,301
Less accumulated depreciation and amortization.................. 27 260
---- ------
$261 $1,041
==== ======
</TABLE>

(4) Notes Payable

As of December 31, 1997, notes payable of $85,000 consisted of amounts due
under a $100,000 line of credit with a bank. The line of credit was fully paid
during 1998.

The Company holds various lines of credit providing for borrowings of up to
$2,000,000 and $4,000,000 as of December 31, 1998 and June 30, 1999,
respectively, to be used for qualified equipment purchases or working capital
needs. Borrowings under the lines of credit are collateralized by all of the
Company's assets and bear interest at the bank's prime rate (7.75% as of
December 31, 1998 and June 30, 1999). Total borrowings as of December 31, 1998
and June 30, 1999 were $720,000 and $1,194,000, respectively.

F-13
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

On May 18, 1999, the Company entered into two term loan obligations
totaling $685,000. The loans bear interest at a fixed rate of approximately
14.5% and mature in June 2002. The aggregate principal payments due under these
obligations are as follows (in thousands):

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.................................................................. $ 36
2000.................................................................. 232
2001.................................................................. 268
2002.................................................................. 149
----
$685
====
</TABLE>

(5) Stockholders' Equity

(a) Convertible Preferred Stock

Convertible preferred stock as of December 31, 1998, consisted of the
following:

<TABLE>
<CAPTION>
Noncumulative Liquidation
Shares Dividend Preference
Outstanding per Share per Share
----------- ------------- -----------
<S> <C> <C> <C>
Series A............................... 4,016,858 $0.02 $0.20
Series B............................... 5,081,685 0.06 0.81
Series C............................... 3,414,098 0.27 3.41
----------
12,512,641
==========
</TABLE>

Each share of Series A, B, and C preferred stock is convertible at the
option of the holder into one share of common stock at any time, subject to
adjustment for antidilution. Each share of Series A, B, and C preferred stock
will be automatically converted upon written consent or agreement of holders of
at least two-thirds of the outstanding preferred shares or upon an initial
public offering of the Company's common stock. Each share of Series A, B, and C
preferred stock has voting rights equal to one share of common stock on an as-
if converted basis.

No dividends have been declared or paid on either preferred stock or common
stock since inception of the Company.

In connection with the Series A preferred stock issuance, the Company
issued a warrant to two investors to purchase 89,744 shares of Series A
preferred stock with an exercise price of $0.20 per share. The warrants were
exercisable any time prior to April 7, 1998. The fair value of the warrants
computed using the Black-Scholes option pricing model on the date of grant was
not material. In lieu of paying cash upon exercise of the warrants in 1998, the
warrant holders surrendered 21,605 shares of Series A preferred stock back to
the Company.

(b) Common Stock

The Company has issued to the Company's founders 4,919,973 shares of common
stock, which are subject to repurchase on termination of employment. Such
repurchase rights lapse in a series of equal monthly installments over a four
year period ending in June 2000 and May 2002. As of December 31, 1998,
2,177,151 shares were subject to repurchase. During 1997, the Company
repurchased a net of 416,666 shares from one founder at the original exercise
price of $0.0001 per share.

F-14
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year full recourse promissory
notes. The notes bear interest at 5.7% and expire on various dates through
2004. The Company has the right to repurchase all unvested shares purchased by
the notes at the original exercise price in the event of employee termination.
The number of shares subject to this repurchase right decreases as the shares
vest under the original option terms, generally over four years. As of December
31, 1998, there were 2,045,691 shares subject to repurchase. These options were
exercised at prices ranging from $0.02 to $0.35 with a weighted-average
exercise price of $0.06 per share. The options exercised through December 31,
1998 have a weighted-average fair value of $1.05 per share.

In connection with the issuance of convertible notes payable of $300,000,
the Company issued warrants to purchase 24,157 shares of common stock for $2.49
per share in August 1998. Such warrants are outstanding at December 31, 1998
and expire in August 2005. Using the Black-Scholes pricing model, the Company
determined that the fair value of the warrants was $35,000 at the date of
grant. Accordingly, following the conversion of the convertible notes payable
to Series A convertible preferred stock, the Company recorded $35,000 of
interest expense associated with the warrants.

The Company's 1997 Stock Option/Stock Issuance Plan (the 1997 Plan)
provides for stock options to be granted to employees, independent contractors,
officers, and directors. Options are generally granted at an exercise price
equivalent to the estimated fair market value per share at the date of grant,
as determined by the Company's Board of Directors. All options are granted at
the discretion of the Company's Board of Directors and have a term not greater
than 10 years from the date of grant. Options are immediately exercisable and
generally vest over four years, 25% one year after the grant date and the
remainder at a rate of 1/36 per month thereafter. Connectify's 1998 Stock Plan
has similar terms as those of the 1997 Plan. Outstanding options under
Connectify's 1998 Stock Plan were assumed in the merger.

A summary of stock option activity follows:

<TABLE>
<CAPTION>
Years Ended
-------------------------------------------- Six Months Ended
1997 1998 June 30, 1999
--------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- --------- ----------- --------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $-- 1,698,572 $0.05 281,117 $0.17
Options granted........ 1,751,905 0.05 1,456,483 0.12 2,028,119 0.15
Options exercised...... (53,333) 0.02 (2,697,315) 0.08 (1,963,862) 0.58
Options canceled....... -- -- (176,623) 0.11 (41,357) 0.29
--------- ---------- ----------
Outstanding at end of
period................. 1,698,572 0.05 281,117 0.09 304,017 0.37
========= ========== ==========
Shares available for
future grant........... 1,238,761 358,688 902,732
========= ========== ==========
</TABLE>

F-15
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.03 to $0.35 and 9.47
years, respectively.

At December 31, 1997 and 1998, the number of vested shares under options
was 213,165 and 113,267, respectively, and the weighted-average exercise price
of those options was $0.05 and $0.08, respectively.

The Company uses the intrinsic-value method in accounting for its stock-
based compensation plans. Accordingly, compensation cost has been recognized in
the financial statements for those options issued with exercise prices at less
than fair value at date of grant. With respect to the stock options granted
from inception through June 30, 1999, the Company recorded deferred stock-based
compensation of $17,828,000 for the difference at the grant date between the
exercise price and the fair value of the common stock underlying the options.
Had compensation costs been determined in accordance with SFAS No. 123 for all
of the Company's stock-based compensation plans, net loss and basic and diluted
net loss per share would not have been materially impacted.

The Company calculated the fair value of each option grant on the grant
date using the minimum value method with the following assumptions: dividend
yield at 0%; weighted-average expected option term of three years; risk-free
interest rate of 6.22% and 5.15% for the years ended December 31, 1997 and
1998, respectively. The weighted-average fair value of options granted during
1997 and 1998 was $0.51 and $1.57 per share, respectively.

(6) Commitments

The Company leases its facilities under noncancelable operating leases with
various expiration dates through June 30, 2003. The Company also subleases its
previous facility under a noncancelable sublease expiring in January 2003. On
June 18, 1999, the Company entered into a lease agreement for a new facility.
Payments under this lease will begin in November 1999. In connection with this
lease, the Company entered into a letter for credit in July 1999 for
$1,400,000, expiring in July 2000. The letter of credit is secured by a
certificate of deposit.

Future minimum lease payments under noncancelable operating leases,
including the lease signed in June 1999 and subleases, as of December 31, 1998,
were as follows (in thousands):

<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases Subleases
------------ --------- ---------
<S> <C> <C>
1999................................................... $ 1,344 $293
2000................................................... 2,933 231
2001................................................... 2,993 218
2002................................................... 2,910 227
2003................................................... 2,464 --
Thereafter............................................. 6,418 --
------- ----
$19,062 $969
======= ====
</TABLE>

Rent expense, net of sublease payments, was $37,000 and $360,000 for the
years ended December 31, 1997 and 1998, respectively. Sublease payments
approximated $113,000 in the year ended December 31, 1998.

F-16
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(7) Income Taxes

The 1997 and 1998 income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result
of the following (in thousands):

<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Federal tax benefit at statutory rate...................... $(424) $(2,090)
Current year net operating loss and temporary differences
for which no benefit has been recognized.................. 424 2,090
----- -------
Total.................................................... $ -- $ --
===== =======
</TABLE>

The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands):

<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards.................. $567 $2,892
Capitalized startup costs.................................... -- 169
Accruals and reserves........................................ 23 130
---- ------
Total gross deferred tax assets............................ 590 3,191
Valuation allowance.......................................... (590) (3,191)
---- ------
Total deferred tax assets.................................. $-- $ --
==== ======
</TABLE>

Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward periods.

As of December 31, 1998, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately $6,670,000 and
$6,682,000, respectively. The federal net operating loss carryforwards, if not
offset against future taxable income, will expire from 2011 through 2018. The
California net operating loss carryforwards, if not offset against future
taxable income, expire from 2004 through 2006.

As of December 31, 1998, unused research and development tax credits of
approximately $60,000 and $41,000 were available to reduce future federal and
California income taxes, respectively. Federal credit carryforwards expire from
2011 through 2018; California credits will carry forward indefinitely.

The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Some of the U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair the
Company's ability to utilize the affected carryforward items. If there should
be a subsequent ownership change, as defined, of the Company, its ability to
utilize its carryforwards could be reduced.

F-17
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(8) Subsequent Events

(a) Initial Public Offering

On July 7, 1999, the Company's Board of Directors authorized the filing of
a registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed initial
public offering (IPO). If the IPO is consummated under the terms presently
anticipated, upon the closing of the proposed IPO all of the then outstanding
shares of the Company's convertible preferred stock will automatically convert
into shares of common stock based on their respective conversion ratios.

(b) Reincorporation

On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware, a two for three
reverse stock split of the Company's common stock and preferred stock and an
increase of the Company's authorized common stock to 100,000,000 shares. As
part of the reincorporation the common stock will be assigned a par value equal
to $0.001 per share. The accompanying financial statements have been
retroactively restated to reflect the effect of this reincorporation and
reverse stock split.

On July 7, 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan (the 1999 Plan), which will serve as the successor plan to the
1997 Plan. The Board of Directors also approved a 1999 Employee Stock Purchase
Plan (the 1999 ESPP). These plans will become effective immediately prior to
the anticipated IPO. The common stock reserved for future issuances under these
plans will be 18% of the shares of common stock outstanding immediately after
the IPO. Additionally, the share reserve in each plan will automatically
increase on the first trading day in January each year, beginning with calendar
year 2000, equal to the lesser of (i) the number of shares initially reserved
for such increase in each respective plan, (ii) 4.25% and 0.75% of the then
outstanding shares for the 1999 Plan and the 1999 ESPP, respectively, or (iii)
an amount determined by the Board of Directors.

(d) Series D Convertible Preferred Stock

On July 8, 1999, the Company issued 838,466 shares of Series D Convertible
Preferred Stock at a purchase price of $12.17 per share for total proceeds of
approximately $10.2 million. Holders of Series D Preferred Stock are entitled
to receive annual noncumulative dividends at a rate of $0.97 per share. Each
outstanding share is convertible into common stock on a one-for-one basis. Upon
liquidation, the holders of the Series D Preferred Stock will be entitled to
receive $12.17 per share. Holders of the Series D Preferred stock are subject
to all other rights and preferences of the previously issued series of
preferred stock.

F-18
<PAGE>

FORM OF INDEPENDENT AUDITORS' REPORT

The Board of Directors
Kana Communications, Inc.

When the reincorporation described in Note 7(b) is consummated, we will be
in a position to render the following report.

/s/ KPMG LLP

We have audited the accompanying consolidated balance sheets of
Kana Communications, Inc. and subsidiary (the Company) as of
December 31, 1997 and 1998, and the related consolidated
statements of operations and comprehensive loss, stockholders'
equity, and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Kana Communications, Inc. and subsidiary as of
December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.

Mountain View, California
June 25, 1999, except as to Note 7,
which is as of August , 1999

F-19
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 3,303 $ 9,792 $ 4,632
Short-term investments......................... 210 160 1,560
Accounts receivable............................ -- 817 1,278
Prepaid expenses and other current assets...... 37 96 646
------- ------- -------
Total current assets......................... 3,550 10,865 8,116
Property and equipment, net...................... 261 943 1,697
Other assets..................................... 13 161 154
------- ------- -------
Total assets................................. $ 3,824 $11,969 $ 9,967
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable............... $ 34 $ 360 $ 341
Accounts payable............................... 130 253 938
Accrued payroll and related expenses........... 37 285 952
Other accrued liabilities...................... 68 263 588
Deferred revenue............................... -- 410 968
------- ------- -------
Total current liabilities.................... 269 1,571 3,787
Notes payable, less current portion.............. 51 360 538
------- ------- -------
Total liabilities............................ 320 1,931 4,325
------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
29,000,000, 50,000,000, and 50,000,000 shares
authorized; 8,917,855, 12,512,641, and
12,512,641 shares issued and outstanding;
aggregate liquidation preference of $4,795,
$16,524, and $16,524.......................... 9 13 13
Common stock, $0.001 par value; 40,000,000,
60,000,000, and 60,000,000 shares authorized;
2,970,667, 5,525,405, and 7,139,932 shares
issued and outstanding ....................... 3 6 7
Additional paid-in capital..................... 5,659 19,343 34,018
Deferred stock-based compensation.............. (784) (1,444) (12,225)
Notes receivable from stockholders............. -- (155) (1,187)
Accumulated other comprehensive losses......... -- (5) (37)
Accumulated deficit............................ (1,383) (7,720) (14,947)
------- ------- -------
Total stockholders' equity................... 3,504 10,038 5,642
------- ------- -------
Total liabilities and stockholders' equity... $ 3,824 $11,969 $ 9,967
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-20
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit......................... -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,796 1,398 4,407
Research and development............... 699 2,254 865 1,836
General and administrative............. 257 721 282 596
Amortization of deferred stock-based
compensation.......................... 113 1,230 430 2,826
------- ------- -------- --------
Total operating expenses............. 1,435 8,001 2,975 9,665
------- ------- -------- --------
Operating loss....................... (1,435) (6,525) (2,392) (7,300)
Other income, net........................ 52 188 41 73
------- ------- -------- --------
Net loss............................. (1,383) (6,337) (2,351) (7,227)
Other comprehensive loss................. -- (5) -- (32)
------- ------- -------- --------
Comprehensive loss................... $(1,383) $(6,342) $ (2,351) $ (7,259)
======= ======= ======== ========
Net loss per share:
Basic and diluted...................... $ (0.92) $ (3.72) $ (1.72) $ (2.52)
======= ======= ======== ========
Weighted-average shares used in
computation........................... 1,497 1,704 1,367 2,868
======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-21
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other Total
----------------- ----------------- Paid-in Stock-based from Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Stockholders Losses Deficit Equity
---------- ------ --------- ------ ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders........ -- $-- 3,333,333 $ 3 $ (2) $ -- $ -- $-- $ -- $ 1
Issuance of
common stock
upon exercise of
stock options... -- -- 53,333 -- -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- (416,666) -- -- -- -- -- -- --
Issuance of
Series A
convertible
preferred stock,
net............. 3,948,719 4 -- -- 756 -- -- -- -- 760
Issuance of
shares of common
stock in
exchange for
services ....... -- 667 -- 7 -- -- -- -- 7
Issuance of
Series B
convertible
preferred stock,
net............. 4,969,136 5 -- -- 4,008 -- -- -- -- 4,013
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 106 -- -- -- 106
Net loss........ -- -- -- -- -- -- -- -- (1,383) (1,383)
---------- ---- --------- --- ------- -------- ------- ---- -------- -------
Balances,
December 31,
1997............ 8,917,855 9 2,970,667 3 5,659 (784) -- -- (1,383) 3,504
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 2,554,738 3 170 -- (155) -- -- 18
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... 68,139 -- -- -- -- -- -- -- -- --
Issuance of
Series B
convertible
preferred stock,
net............. 112,549 1 -- -- 90 -- -- -- -- 91
Issuance of
Series C
convertible
preferred stock,
net............. 3,414,098 3 -- -- 11,534 -- -- -- -- 11,537
Deferred stock-
based
compensation.... -- -- -- -- 1,890 (1,890) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,230 -- -- -- 1,230
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) -- (5)
Net loss........ -- -- -- -- -- -- -- -- (6,337) (6,337)
---------- ---- --------- --- ------- -------- ------- ---- -------- -------
Balances,
December 31,
1998............ 12,512,641 13 5,525,405 6 19,343 (1,444) (155) (5) (7,720) 10,038
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- 1,614,527 1 1,068 -- (1,032) -- 37
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- 13,607 (13,607) -- -- -- --
Amortization of
deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- 2,826 -- -- -- 2,826
Other
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- (32) (32)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (7,227) (7,227)
---------- ---- --------- --- ------- -------- ------- ---- -------- -------
Balances, June
30, 1999
(unaudited)..... 12,512,641 $ 13 7,139,932 $ 7 $34,018 $(12,225) $(1,187) $(37) $(14,947) $ 5,642
========== ==== ========= === ======= ======== ======= ==== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-22
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(1,383) $(6,337) $ (2,352) $ (7,227)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 27 222 78 259
Loss on disposal of equipment.......... -- -- -- 105
Amortization of deferred stock-based
compensation.......................... 113 1,230 430 2,825
Changes in operating assets and
liabilities:
Accounts receivable................... -- (817) (474) (462)
Prepaid expenses and other assets..... (50) (207) (236) (543)
Accounts payable and accrued
liabilities.......................... 235 571 249 1,678
Deferred revenue...................... -- 410 108 557
------- ------- -------- --------
Net cash used in operating
activities........................... (1,058) (4,928) (2,197) (2,806)
------- ------- -------- --------
Cash flows from investing activities:
Property and equipment purchases........ (288) (904) (291) (1,118)
(Purchases) sales of short-term
investments............................ (210) 50 -- (1,400)
------- ------- -------- --------
Net cash used in investing
activities........................... (498) (854) (291) (2,518)
------- ------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.. 1 13 8 37
Proceeds from issuance of convertible
preferred stock, net................... 4,603 11,628 -- --
Proceeds from convertible notes
payable................................ 170 -- -- --
Proceeds from notes payable............. 85 720 437 685
Payments on notes payable............... -- (85) (3) (526)
------- ------- -------- --------
Net cash provided by financing
activities........................... 4,859 12,276 442 196
------- ------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents.................... -- (5) -- (32)
------- ------- -------- --------
Net change in cash and cash equivalents.. 3,303 6,489 (2,046) (5,160)
Cash and cash equivalents at beginning of
period.................................. -- 3,303 3,303 9,792
------- ------- -------- --------
Cash and cash equivalents at end of
period.................................. $ 3,303 $ 9,792 $ 1,257 $ 4,632
======= ======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during period for interest.... $ 3 $ 36 $ 13 $ 27
======= ======= ======== ========
Noncash investing and financial
activities:
Issuance of Series A convertible
preferred stock upon conversion of
stockholder loan...................... $ 170 $ -- $ -- $ --
======= ======= ======== ========
Issuance of common stock in exchange
for notes receivable from
stockholders.......................... $ -- $ 155 $ 107 $ 1,032
======= ======= ======== ========
Grant of options to purchase common
stock with an exercise price below
fair value............................ $ 890 $ 1,890 $ 1,060 $13,607
======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-23
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(1) Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

Kana Communications, Inc. and subsidiary (the Company or Kana) were
incorporated on July 11, 1996, but did not commence operations until 1997. The
Company develops, markets and supports customer communications software
products and services for e-Business. The Company sells its products primarily
in the United States and, to a lesser extent, in Europe, through its direct
sales force.

(b) Basis of Presentation

The accompanying consolidated financial statements have been prepared using
an inception date of January 1, 1997, as no significant operating activities
occurred between July 11, 1996 and December 31, 1996. The consolidated
financial statements include the financial statements of Kana Communications,
Inc. and its wholly owned subsidiary, Kana Communications Europe Ltd., in the
United Kingdom. All significant intercompany balances and transactions have
been eliminated in consolidation.

The unaudited interim consolidated financial statements of the Company as
of June 30, 1999 and for the six months ended June 30, 1998 and 1999 included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Certain information and note
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 relating to interim financial
statements.

In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company as of June 30, 1999, and the results of its operations
and its cash flows for the three months ended June 30, 1998 and 1999. Results
for the six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the entire year.

(d) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(e) Foreign Currency Translation

The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenues,
expenses, gains and losses are translated at the exchange rate on the date
those elements are recognized. Any translation adjustments are included in
other comprehensive loss.

F-24
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(f) Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. As of
December 31, 1997 and 1998 and June 30, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$9,647,000, and $3,979,000, respectively. The contractual maturities for the
auction-rate securities exceed 10 years; however, the Company has the option of
adjusting the interest rates or liquidating these investments on their
respective reset dates, which generally occur every 30 days.

(g) Property and Equipment

(h) Fair Value of Financial Instruments

(i) Concentration of Credit Risk

The Company's customers are currently concentrated in the United States.
The Company performs ongoing credit evaluations, generally does not require
collateral and establishes an

F-25
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been immaterial.

(j) Revenue Recognition

The Company recognizes revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. SOP No. 97-2 requires that
revenue recognized from software arrangements be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation or training. Under SOP No. 97-2, the determination of fair value
is based on objective evidence that is specific to the vendor. If evidence of
fair value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time as evidence of fair value does
exist or until all elements of the arrangement are delivered.

Software Development Costs

(l) Income Taxes

(m) Stock-Based Compensation

F-26
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(n) Comprehensive Loss

(o) Net Loss Per Share

Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------- ---------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Stock options and warrants........ 1,788,316 150,200 335,567 179,867
Common stock subject to
repurchase....................... 1,822,915 3,139,437 3,392,704 4,019,606
Convertible preferred stock ...... 8,917,855 12,512,641 9,098,543 12,512,641
---------- ---------- ---------- ----------
12,529,086 15,802,278 12,826,814 16,712,114
========== ========== ========== ==========
</TABLE>

(p) Segment Reporting

During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 establishes annual and interim reporting standards for operating segments
of a company. SFAS No. 131 requires disclosures of selected segment-related
financial information about products, major customers and geographic areas. The
Company is organized in a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions and allocates resources
based on financial data consistent with the presentation in the accompanying
consolidated financial statements.

F-27
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

The Company's revenues have been earned primarily from customers in the
United States. In addition, all significant operations and assets are based in
the United States. No customer accounted for more than 10% of total revenues
for the year ended December 31, 1998 and the six months ended June 30, 1999. In
the six months ended June 30, 1998, two customers each accounted for more than
10% of total revenues.

(q) Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. This standard requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The type and use of the derivative, and whether it
qualifies for hedge accounting, will determine the treatment of gains or losses
resulting from changes in the derivative. The Company believes the adoption of
SFAS No. 133 will not have a material effect on its results of operations,
financial position or cash flows. The statement will be effective for the
Company beginning January 1, 2001.

In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. SOP No. 98-9 amends SOP No.
97-2 to require the entity to recognize revenue for multiple element
arrangements by means of the "residual method" when: 1) there is vendor-
specific evidence of the fair values of all of the undelivered elements that
are not accounted for by means of long-term contract accounting; 2) vendor-
specific evidence of fair value does not exist for one or more of the delivered
elements; and 3) all revenue recognition criteria of SOP No. 97-2, other than
the requirement for vendor-specific evidence of the fair value of each
delivered element, are satisfied. SOP No. 98-9 will be effective beginning
January 1, 2000. The Company believes the adoption of SOP No. 98-9 will not
have a material effect on its results of operations, financial position or cash
flows.

In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which provides
guidance for determining whether computer software is internal-use software and
for accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended December 31, 1999, also provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. The adoption of SOP 98-1 did not have a material
effect on the consolidated financial statements.

On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities, which
provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. The Company adopted SOP 98-5 on January 1, 1999. As the Company had
not capitalized such costs, the adoption of SOP 98-5 did not have an impact on
the consolidated financial statements of the Company.

F-28
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(2) Property and Equipment

Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Computer equipment.............................................. $220 $ 810
Furniture and fixtures.......................................... 20 141
Leasehold improvements.......................................... 48 241
---- ------
288 1,192
Less accumulated depreciation and amortization.................. 27 249
---- ------
$261 $ 943
==== ======
</TABLE>

(3) Notes Payable

As of December 31, 1997, notes payable of $85,000 consisted of amounts due
under a $100,000 line of credit with a bank. The line of credit was fully paid
during 1998.

On January 23, 1998, the Company obtained a $1,000,000 line of credit from
a bank, of which up to $750,000 could be used for qualified property and
equipment purchases and $250,000 for working capital financing. Borrowings
under the line of credit are collateralized by all of the Company's assets and
bear interest at the bank's prime rate (7.75% as of December 31, 1998). The
Company was able to draw against the line of credit through January 22, 1999,
after which all borrowings are to be repaid in 24 equal monthly installments.
As of December 31, 1998, $720,000 was outstanding under this agreement. As of
June 30, 1999, the borrowings under this line of credit were repaid in full.

On May 28, 1999, the Company entered into two term loan obligations
totaling $685,042. The loans bear interest at a fixed rate of approximately
14.5% and mature in June 2002. The aggregate principal payments due under these
obligations are as follows:

<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999............................................................. $ 35,599
2000............................................................. 232,366
2001............................................................. 268,461
2002............................................................. 148,616
--------
$685,042
========
</TABLE>

In June 1999, the Company entered into a line of credit secured by all
assets of the Company, bearing interest at the bank's prime rate (7.75% as of
June 30, 1999) and expiring in March 2000. As of June 30, 1999, borrowings
under the line of credit amounted to approximately $194,000.

F-29
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(4) Stockholders' Equity

(a) Convertible Preferred Stock

Convertible preferred stock as of December 31, 1998, consisted of the
following:

Each share of Series A, B and C preferred stock is convertible at the
option of the holder into one share of common stock at any time, subject to
adjustment for antidilution. Each share of Series A, B and C preferred stock
will be automatically converted upon written consent or agreement of holders of
at least two-thirds of the outstanding preferred shares or upon an initial
public offering of the Company's common stock. Each share of Series A, B and C
preferred stock has voting rights equal to one share of common stock on an as-
if converted basis.

No dividends have been declared or paid on either preferred stock or common
stock since inception of the Company.

In connection with the Series A preferred stock issuance, the Company
issued a warrant to two investors to purchase 89,744 shares of Series A
preferred stock with an exercise price of $0.20 per share. The warrants were
exercisable any time prior to April 7, 1998. The fair value of the warrants
computed using the Black-Scholes option pricing model on the date of grant was
not material. In lieu of paying cash upon exercise of the warrants in 1998, the
warrant holders surrendered 43,209 shares of Series A perferred stock back to
the Company.

(b) Common Stock

The Company issued to the Company's founders 3,333,333 shares of common
stock, which are subject to repurchase on termination of employment. Such
repurchase rights lapse in a series of equal monthly installments over a four
year period ending June 4, 2000. As of December 31, 1998, 1,033,333 shares were
subject to repurchase. During 1997, the Company repurchased a net of 416,666
shares from one founder at the original exercise price of $0.0002 per share.

F-30
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

A summary of stock option activity follows:

<TABLE>
<CAPTION>
Years Ended
-------------------------------------------- Six Months Ended
1997 1998 June 30, 1999
--------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- --------- ----------- --------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 1,698,572 $0.05 150,200 $0.09
Options granted........ 1,751,905 0.05 1,156,367 0.11 1,855,000 0.63
Options exercised...... (53,333) 0.02 (2,594,739) 0.08 (1,812,000) 0.60
Options canceled....... -- -- (110,000) 0.08 (13,333) 0.35
--------- ---------- ----------
Outstanding at end of
period................. 1,698,572 0.05 150,200 0.09 179,867 0.52
========= ========== ==========
Shares available for
future grant........... 1,238,761 799,063 488,201
========= ========== ==========
</TABLE>

At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.03 to $0.35 and 9.18
years, respectively.

The Company uses the intrinsic-value method in accounting for its stock-
based compensation plans. Accordingly, compensation cost has been recognized in
the financial statements for those options issued with exercise prices at less
than fair value at date of grant. With respect to the stock options granted
from inception through June 30, 1999, the Company recorded deferred stock-based
compensation of approximately $16,387,000 for the difference at the grant date
between the exercise price and the fair value of the common stock underlying
the options. Had compensation costs been determined in accordance with SFAS No.
123 for all of the Company's stock-based compensation plans, net loss and basic
and diluted net loss per share would not have been materially impacted.

F-31
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

(5) Commitments

The Company leases its facilities under noncancelable operating leases with
various expiration dates through June 30, 2003. The Company also subleases its
previous facility under a noncancelable sublease expiring in January 2003. On
June 18, 1999, the Company entered into a lease agreement for a new facility.
Payments under this lease will begin in November 1999. In connection with this
lease, the Company entered into a letter of credit in July 1999 for $1,400,000,
expiring in July 2000. The letter of credit is secured by a certificate of
deposit.

Future minimum lease payments under noncancelable operating leases,
including the lease signed in June 1999, and subleases, as of December 31,
1998, were as follows (in thousands):

<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases Subleases
------------ --------- ---------
<S> <C> <C>
1999................................................... $ 1,111 $244
2000................................................... 2,723 209
2001................................................... 2,815 218
2002................................................... 2,910 227
2003................................................... 2,464 --
Thereafter............................................. 6,418 --
------- ----
$18,441 $898
======= ====
</TABLE>

(6) Income Taxes

The 1997 and 1998 income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result
of the following (in thousands):

<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Federal tax benefit at statutory rate...................... $(424) $(1,736)
Current year net operating loss and temporary differences
for which no benefit has been recognized.................. 424 1,736
----- -------
Total.................................................... $ -- $ --
===== =======
</TABLE>

The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands):

<TABLE>
<CAPTION>
1997 1998
---- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards................. $567 $2,682
Accruals and reserves....................................... 23 77
---- -------
Total gross deferred tax assets........................... 590 2,759
Valuation allowance......................................... (590) (2,759)
---- -------
Total deferred tax assets................................. $-- $ --
==== =======
</TABLE>

F-32
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

Management has established a full valuation allowance against its gross
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward periods.

As of December 31, 1998, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately $6,146,000 and
$6,143,000, respectively. The federal net operating loss carryforwards, if not
offset against future taxable income, will expire from 2011 through 2018. The
California net operating loss carryforwards, if not offset against future
taxable income, expire in 2004.

As of December 31, 1998, unused research and development tax credits of
approximately $27,000 and $23,000 were available to reduce future federal and
California income taxes, respectively. Federal credit carryforwards expire from
2011 through 2012; California credits will carry forward indefinitely.

(7) Subsequent Events

(a) Initial Public Offering

(b) Reincorporation

On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware, a two for three
reverse stock split of the Company's common and preferred stock and an increase
of the Company's authorized common stock to 100,000,000 shares. As part of the
reincorporation the common stock will be assigned a par value equal to $0.001
per share. The accompanying financial statements have been retroactively
restated to reflect the effect of this reincorporation and reverse stock split.

F-33
<PAGE>

KANA COMMUNICATIONS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)

under these plans will be 18% of the shares of common stock outstanding
immediately after the IPO. Additionally, the share reserve in each plan will
automatically increase on the first trading day in January each year, beginning
with calendar year 2000, by an amount equal to the lesser of (i) the number of
shares initially reserved for such increase in each respective plan, (ii) 4.25%
and 0.75% of the then outstanding shares for the 1999 Plan and the 1999 ESPP,
respectively, or (iii) an amount determined by the Board of Directors.

(d) Series D Convertible Preferred Stock

On July 8, 1999, the Company issued 838,472 shares of Series D Convertible
Preferred Stock at a purchase price of $12.17 per share for total proceeds of
approximately $10.2 million. Holders of Series D Preferred Stock are entitled
to receive annual noncumulative dividends at a rate of $0.97 per share. Each
outstanding share is convertible into common stock on a one-for-one basis. Upon
liquidation, the holders of the Series D Preferred Stock will be entitled to
receive $12.17 per share. Holders of the Series D Preferred stock are subject
to all other rights and preferences of the previously issued series of
preferred stock.

(e) Business Combination

On August 13, 1999, the Company issued approximately 3,491,271 shares of
its common stock to the stockholders of Connectify, Inc. (Connectify) in
exchange for all of the outstanding capital stock of Connectify. Prior to the
consummation of the merger, 5,095,819 shares of preferred stock of the Company
were converted into an equal number of shares of common stock. As a result of
the conversion, the Company created a controlling class of common stock. The
merger will be accounted for as a pooling of interests, and, accordingly, the
Company's historical consolidated financial statements presented in future
periods will be restated to include the results of operations, financial
position, and cash flows of Connectify. No significant adjustments will be
required to conform the accounting policies of the Company and Connectify.

F-34
<PAGE>

Report of Independent Accountants

To the Board of Directors and
Stockholders of
Connectify, Inc. (formerly
Connectify.com, Inc.)

In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Connectify, Inc. (formerly
Connectify.com, Inc.) (a company in the development stage) at December 31,
1998, and the results of its operations and its cash flows for the period from
May 14, 1998 (date of inception) to December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

San Jose, California
May 19, 1999 except for Note 8 for
which the date is August 13, 1999.

F-35
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

BALANCE SHEETS
(in thousands, except share data)

<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 3,163 $ 1,166
Short-term investments.............................. -- 691
Accounts receivable................................. -- 131
Prepaid expenses and other current assets........... 45 89
------- -------
Total current assets.............................. 3,208 2,077
Property and equipment, net........................... 98 249
Other assets.......................................... -- 32
------- -------
Total assets...................................... $ 3,306 $ 2,358
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of borrowings under line of credit.. $ -- $ 900
Convertible note payable............................ -- 50
Accounts payable.................................... 78 201
Accrued liabilities................................. 138 243
Deferred revenue.................................... 40 165
Capital lease obligations, current.................. 7 7
------- -------
Total current liabilities......................... 263 1,566
Other liabilities:
Borrowings under line of credit, less current
portion............................................ -- 100
Capital lease obligations, less current portion..... 15 11
------- -------
Total liabilities................................. 278 1,677
------- -------
Commitments (Note 4)
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 8,200,000 shares
Issued and outstanding: 7,614,696 shares at
December 31, 1998
and June 30, 1999 (unaudited)..................... 8 8
(Liquidation value: $4,000)
Common stock, $0.001 par value
Authorized: 25,000,000 shares
Issued and outstanding: 8,157,634 shares at
December 31, 1998
and 8,875,665 at June 30, 1999 (unaudited)........ 8 9
Additional paid-in capital.......................... 4,404 5,504
Unearned stock-based compensation................... (351) (1,172)
Deficit accumulated during the development stage.... (1,041) (3,668)
------- -------
Total stockholders' equity........................ 3,028 681
------- -------
Total liabilities and stockholders' equity...... $ 3,306 $ 2,358
======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-36
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

STATEMENTS OF OPERATIONS
(in thousands, except share data)

<TABLE>
<CAPTION>
From May 14,
1998 From May 14, From May 14,
(date of 1998 1998
inception) (date of (date of
to inception) Six Months inception)
December 31, to June 30, Ended June to June 30,
1998 1998 30, 1999 1999
------------ ------------ ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Research and
development............. $ 582 $ 19 $ 1,484 $ 2,066
Selling, general and
administrative.......... 426 55 940 1,366
Stock-based
compensation............ 32 -- 237 269
--------- ------- --------- ---------
Total operating
expenses.............. 1,040 74 2,661 3,701
--------- ------- --------- ---------
Operating loss............. (1,040) (74) (2,661) (3,701)
Interest income (expense),
net....................... (1) -- 34 33
--------- ------- --------- ---------
Net loss................... $ (1,041) $ (74) $ (2,627) $ (3,668)
========= ======= ========= =========
Net loss attributable to
common stockholders....... $ (1,041) $ (74) $ (2,627) $ (3,668)
========= ======= ========= =========
Net loss per common share--
basic and diluted......... $ (0.42) $ (0.09) $ (0.75) $ (1.25)
========= ======= ========= =========
Weighted average common
shares--basic and
diluted................... 2,453,623 797,872 3,497,761 2,933,631
========= ======= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-37
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Unearned During the Total
---------------- ---------------- Paid-In Stock-based Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
--------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
in June 1998 for cash
at $0.002 per share.... -- $ -- 7,500,000 $ 7 $ 8 $ -- $ -- $ 15
Issuance of common stock
in August 1998 for
intellectual property
at $0.03 per share..... -- -- 172,634 -- 5 -- -- 5
Issuance of warrants to
purchase Series A
convertible preferred
stock in August 1998... -- -- -- -- 35 -- -- 35
Issuance of Series A
convertible preferred
stock in September 1998
for cash at $0.5253 per
share, net of issuance
costs of $24........... 7,043,596 7 -- -- 3,669 -- -- 3,676
Issuance of Series A
convertible preferred
stock in September
1998, on conversion of
notes payable.......... 571,100 1 -- -- 299 -- -- 300
Issuance of common stock
in August through
October 1998 for cash
at $0.01 to $0.03 per
share under stock
option plan............ -- -- 485,000 1 5 -- -- 6
Unearned employee stock-
based compensation..... -- -- -- -- 324 (324) -- --
Amortization of employee
stock-based
compensation........... -- -- -- -- -- 20 -- 20
Unearned service
provider stock-based
compensation........... -- -- -- -- 59 (59) -- --
Amortization of stock-
based compensation for
service provider....... -- -- -- -- -- 12 -- 12
Net loss................ -- -- -- -- -- -- (1,041) (1,041)
--------- ----- --------- ---- ------ ------- ------- -------
Balances, December 31,
1998................... 7,614,696 8 8,157,634 8 4,404 (351) (1,041) 3,028
Issuance of common stock
in February through May
1999 for cash at $0.01
to $0.06 per share
under stock option plan
(unaudited)............ -- -- 718,031 1 42 -- -- 43
Unearned employee stock-
based compensation
(unaudited)............ -- -- -- -- 912 (912) -- --
Amortization of employee
stock-based
compensation
(unaudited)............ -- -- -- -- -- 183 -- 183
Unearned service
provider stock-based
compensation
(unaudited)............ -- -- -- -- 146 (146) -- --
Amortization of stock-
based compensation for
service provider
(unaudited)............ -- -- -- -- -- 54 -- 54
Net loss (unaudited).... -- -- -- -- -- -- (2,627) (2,627)
--------- ----- --------- ---- ------ ------- ------- -------
Balances, June 30, 1999
(unaudited)............ 7,614,696 $ 8 8,875,665 $ 9 $5,504 $(1,172) $(3,668) $ 681
========= ===== ========= ==== ====== ======= ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-38
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
From May 14,
1998 (date of From May 14, Six Months From May 14,
inception) to 1998 (date of Ended 1998 (date of
December 31, inception) to June 30, inception) to
1998 June 30, 1998 1999 June 30, 1999
------------- ------------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(1,041) $(74) $(2,627) $(3,668)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 11 1 34 45
Stock-based
compensation......... 32 -- 237 269
Non-cash interest
expense.............. 35 -- -- 35
Common stock issued
for intellectual
property............. 5 -- -- 5
Change in operating
assets and
liabilities:
Accounts receivable... -- -- (131) (131)
Prepaid expenses and
other current
assets............... (45) (9) (44) (89)
Other assets.......... -- -- (32) (32)
Accounts payable...... 78 -- 123 201
Accrued liabilities... 138 47 105 243
Deferred revenue...... 40 -- 125 165
------- ---- ------- -------
Net cash used in
operating
activities.......... (747) (35) (2,210) (2,957)
------- ---- ------- -------
Cash flows from
investing activities:
Acquisition of property
and equipment......... (83) (8) (185) (268)
Purchase of short-term
investments........... -- -- (691) (691)
------- ---- ------- -------
Net cash used in
investing
activities.......... (83) (8) (876) (959)
------- ---- ------- -------
Cash flows from
financing activities:
Proceeds from issuance
of common stock....... 21 15 43 64
Principal payments on
capital lease
obligations........... (4) -- (4) (8)
Proceeds from issuance
of convertible
preferred stock, net
of issuance costs..... 3,676 -- -- 3,676
Proceeds from the
issuance of
convertible notes
payable............... 265 -- 50 315
Proceeds from the
issuance of warrants.. 35 -- -- 35
Proceeds from issuance
of notes payable to
founders.............. 30 30 -- 30
Principal payments on
notes payable to
founders ............. (30) -- -- (30)
Proceeds from line of
credit................ -- -- 1,000 1,000
------- ---- ------- -------
Net cash provided by
financing
activities.......... 3,993 45 1,089 5,082
------- ---- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ 3,163 2 (1,997) 1,166
Cash and cash
equivalents, beginning
of period.............. -- -- 3,163 --
------- ---- ------- -------
Cash and cash
equivalents, end of
period................. $ 3,163 $ 2 $ 1,166 $ 1,166
======= ==== ======= =======
Supplemental disclosure
of cash flow
information:
Taxes paid............. $ 1 $ -- $ 2 $ 3
======= ==== ======= =======
Supplemental non-cash
financing and investing
activities:
Conversion of
convertible promissory
notes payable into
Series A convertible
preferred stock....... $ 300 $ -- $ -- $ 300
======= ==== ======= =======
Acquisition of property
and equipment under
capital lease......... $ 26 $ 11 $ -- $ 26
======= ==== ======= =======
Unearned stock-based
compensation.......... $ 383 $ -- $ 1,058 $ 1,441
======= ==== ======= =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-39
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1999 and 1998 is unaudited)

1. Formation and Business of the Company

Connectify, Inc. (the "Company") was incorporated in the state of Delaware
on May 14, 1998 originally under the name Connectify.com, Inc. The Company is
an electronic direct marketing software provider. Through December 31, 1998,
the Company was active in developing its initial product technology, raising
capital and recruiting personnel; accordingly, the Company was in the
development stage.

The Company's operations are currently funded by proceeds from the issuance
of Series A convertible preferred stock and a $1,000,000 line of credit
provided by Silicon Valley Bank. The Company plans to enter into a merger
agreement with Kana Communications, Inc. and for the surviving corporation to
raise approximately $40,000,000 in an initial public offering of its common
stock. The Company has obtained an unconditional commitment from Kana
Communications, Inc. that they will provide financial support and assistance to
Connectify for the period to August 7, 2000.

2. Summary of Significant Accounting Policies

Unaudited interim results

The accompanying interim financial statements as of June 30, 1999, and for
the period ended June 30, 1998 and six months ended June 30, 1999, are
unaudited. The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and its cash flows as of June 30, 1999 and for the period
ended June 30, 1998 and six months ended June 30, 1999. The financial data and
other information disclosed in these notes to financial statements related to
these periods are unaudited. The results for the six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.

Use of estimates

Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.

Revenue

Revenue consists primarily of license fees received under the terms of
license agreements with customers to provide the Company's product, which is
customized to each customer's process. Therefore, in accordance with Statement
of Position 97-2, "Software Revenue Recognition", the Company recognizes
revenue on the percentage of completion method over the period of
customization. Under certain initial contracts, where the costs of completion
cannot be estimated, the completed contract method is utilized whereby the
revenue is initially deferred and recognized when the Company completes
customization.

The Company also derives revenues from services and maintenance which are
recognized as the services are provided and ratably over the maintenance period
respectively.

F-40
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Comprehensive income (loss)

Effective on the date of inception, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during
a period from non-owner sources. For the period ended December 31, 1998, the
Company had no sources of other comprehensive income (loss).

Financial instruments

The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents and accounts payable approximate fair value
due to their short-term maturities.

Cash and cash equivalents and certain risks and concentrations

The Company considers all highly liquid investments with original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents.

The Company's cash and cash equivalents are deposited with one major
financial institution in the United States. At times, such deposits may be in
excess of the amount of insurance provided on such deposits. The Company has
not experienced any losses on its deposits of cash and cash equivalents.

Property and equipment

Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three years.

Research and development

Research and development costs are charged to operations as incurred.

Net loss per common share

Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share is
computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of common shares issuable upon the exercise of
stock options and warrants and upon conversion of Series A convertible
preferred stock, are included in the diluted net loss per share computation to
the extent such shares are dilutive. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted net loss per common
share follows (in thousands, except per share data):

F-41
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
From May 14, From May 14, From May 14,
1998 (date of 1998 (date of Six Months 1998 (date of
inception) to inception) to Ended inception) to
December 31, June 30, June 30, June 30,
1998 1998 1999 1999
------------- ------------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator
Net loss attributable
to common
stockholders......... $ (1,041) $ (74) $ (2,627) $ (3,668)
----------- ----------- ----------- -----------
Denominator
Weighted average
common shares........ 8,058,633 3,191,489 8,466,127 8,237,653
Less shares subject to
repurchase........... (5,605,010) (2,393,617) (4,968,366) (5,304,022)
----------- ----------- ----------- -----------
Denominator for basic
and diluted
calculation............ 2,453,623 797,872 3,497,761 2,933,631
----------- ----------- ----------- -----------
Net loss per-share--
basic and diluted...... $ (0.42) $ (0.09) $ (0.75) $ (1.25)
=========== =========== =========== ===========
</TABLE>

The following table summarizes common stock equivalents that are not
included in the diluted net loss per share calculation of the denominator above
because to do so would be antidilutive for the periods indicated:

Stock-based compensation

The Company has adopted the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented. Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of the Company's stock and the
exercise price. Stock issued to non-employees has been accounted for in
accordance with SFAS No. 123 and valued using the Black-Scholes model.

Software development costs

Software development costs are expensed as incurred until technological
feasibility of the underlying software product is achieved. After technological
feasibility is established, software

F-42
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

development costs are capitalized. Capitalized costs are then amortized on a
straight-line basis over the estimated product life, or based on the ratio of
current revenue to total projected product revenue, whichever is greater. To
date, the period between achieving technological feasibility and general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.

Income taxes

Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax basis of assets and
liabilities, measured at tax rates that will be in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

Recent accounting pronouncements

In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect that the adoption of SOP No. 98-1 will have a material impact on its
financial statements.

In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-5 will have a material
impact on its financial statements.

In June 1998, FASB issued SFAS No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component
of comprehensive income, depending on the type of hedging relationship that
exists. SFAS No. 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or engage
in hedging activities.

3. Balance sheet accounts

<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Property and equipment (in thousands)
Computer equipment............................................ $ 86
Furniture and fixtures........................................ 23
----
109
Less accumulated depreciation and amortization.................. (11)
----
$ 98
====
</TABLE>

F-43
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Property and equipment includes $26,000 of computer equipment under capital
leases at December 31, 1998. Accumulated amortization of assets under capital
leases totaled $4,000 at December 31, 1998.

<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Accrued liabilities (in thousands)
Accrued salaries and benefits................................. $ 97
Other accrued expenses........................................ 41
----
$138
====
</TABLE>

4. Commitments

Leases

The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through November 2001. The
Company has subleased certain property for the period from February 1999 to
June 2000. Rent expense for the period ended December 31, 1998 was $43,000.

Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1998 and future minimum sub-lease rental receipts under noncancelable operating
leases are as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating Sublease
Year Ended December 31, Leases Leases Leases
----------------------- ------- --------- --------
<S> <C> <C> <C>
1999........................................... $10 $233 $49
2000........................................... 10 210 22
2001........................................... 8 178 --
--- ---- ---
Total minimum lease payments and sublease
income........................................ 28 $621 $71
==== ===
Less: Amount representing finance costs........ (6)
---
Present value of capital lease obligations..... 22
Less: Current portion.......................... (7)
---
Long-term portion of capital lease
obligations................................. $15
===
</TABLE>

5. Borrowings

Line of credit

At December 31, 1998, the Company had an unutilized line of credit with
Silicon Valley Bank (the "Bank") for equipment purchases and operating
expenses. The line of credit provides for borrowings of up to $1,000,000 which
are collateralized by any property of any and every kind belonging to the
Company. The line of credit is repayable in monthly installments of principal
plus interest commencing, at the earliest, on July 31, 1999 and bears interest
at the Bank's prime rate (7.75% at December 31, 1998).

F-44
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

6. Stockholders' Equity

Convertible preferred stock

Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each share. At December 31,
1998, the amounts, terms and liquidation values of Series A convertible
preferred stock are as follows:

<TABLE>
<CAPTION>
Shares
Shares Issued and Liquidation
Authorized Outstanding Value
---------- ----------- -----------
<S> <C> <C> <C>
Series A..................................... 8,200,000 7,614,696 $ 4,000,000
========= ========= ===========
</TABLE>

Dividends

The holders of Series A convertible preferred stock are entitled to receive
dividends, out of any assets legally available, prior and in preference to any
declaration or payment of any dividend on the common stock of the Company, at
the rate of 8% per share per annum. Such dividends are payable when, as and if
declared by the Board of Directors, and are not cumulative. At December 31,
1998, no dividends have been declared or paid.

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the then outstanding Series A
convertible preferred stock are entitled to receive, prior and in preference to
any distribution of any of the assets of the Company to the holders of the
common stock, the amount of $0.5253 per share for Series A convertible
preferred stock plus any declared but unpaid dividends prior to and in
preference to any distribution to the holders of common stock. If, upon
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A convertible preferred stock shall be insufficient to
permit the payment to such holders of the full preferential amount, then the
entire assets and funds of the Company legally available for distribution will
be distributed ratably among the holders of the Series A convertible preferred
stock in proportion to the number of such shares owned by each stockholder.

Voting

Each share of convertible preferred stock entitles the holder to voting
rights equal to the number of shares of common stock into which it is
convertible.

Conversion

Each share of Series A convertible preferred stock is convertible into such
number of shares of common stock as determined by dividing $0.5253 by the
conversion price at the time in effect for each such share of preferred stock.
The initial conversion price shall be $0.5253 per share for Series A
convertible preferred stock. Conversion is either at the option of the holder
or is automatic upon the closing date of a public offering of the Company's
common stock for which the price per share is not less than $2.00 and the
aggregate offering price is not less than $7,500,000.

F-45
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Warrants for convertible preferred stock

In connection with the issuance of convertible notes payable of $300,000,
the Company issued warrants to purchase 114,218 shares of Series A convertible
preferred stock for $0.5253 per share in August 1998. Such warrants are
outstanding at December 31, 1998 and expire at the earlier of an initial public
offering of the Company's common stock, a consolidation pursuant to which the
stockholders of the Company own less than 50% of the voting securities of the
surviving company or August 2005. Using the Black-Scholes pricing model, the
Company determined that the fair value of the warrants was $35,000 at the date
of grant. Accordingly, following the conversion of the convertible notes
payable to Series A convertible preferred stock, the Company recorded $35,000
interest expense associated with the warrants.

Common stock

The Company's Articles of Incorporation, as amended, authorize the Company
to issue 25,000,000 shares of $0.001 par value common stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a four year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1998, there were 5,124,464 common shares outstanding subject to
repurchase.

Each share of common stock is entitled to one vote. The holders of common
stock are entitled to receive dividends whenever funds are legally available
and declared by the Board of Directors subject to the prior rights of holders
of all classes of stock. No dividends have been declared or paid as of December
31, 1998.

Stock Option Plan

In 1998, the Company adopted the 1998 Stock Plan (the Plan) under which
3,750,000 shares of the Company's common stock were reserved for issuance to
employees, directors and consultants. Options granted under the Plan may be
incentive stock options or non-statutory stock options. Incentive stock options
may only be granted to employees.

The Plan is administered by a committee appointed by the Board of Directors
which identifies optionees and determines the terms of options granted,
including the exercise price, number of shares subject to the option grant and
the exercisability thereof.

Each stock option agreement shall specify the date when all or any
installment of the option is to become exercisable. To the extent required by
applicable law, an option shall become exercisable no less rapidly than the
rate of 20% per year for each of the first five years from the grant date.

The exercise price of incentive stock options and non-statutory stock
options shall be no less than 100% and 85%, respectively, of the fair market
value per share of the Company's common stock on the grant date. If an
individual owns stock representing more than 10% of the outstanding shares, the
price of each share shall be at least 110% of fair market value, as determined
by the Board of Directors. The maximum term of the options is ten years.

F-46
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Activity under the Plan (period from January 1, 1999 to June 30, 1999 is
unaudited) is as follows:

<TABLE>
<CAPTION>
Outstanding Options
------------------------------- Weighted
Shares Aggregate Average
Available Number Price Exercise Exercise
for Grant of Shares Per Share Price Price
---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception............... 2,500,000
Options authorized....... 1,250,000
Options granted.......... (1,419,000) 1,419,000 $0.01-0.06 $46,000 $0.03
Options exercised........ -- (485,000) 0.01-0.06 (6,000) 0.01
Options cancelled........ 315,000 (315,000) 0.03-0.06 (9,000) 0.03
---------- --------- ------- -----
Balances, December 31,
1998.................... 2,646,000 619,000 0.01-0.06 31,000 0.05
Options granted.......... (818,531) 818,531 0.06 49,000 0.06
Options exercised........ -- (718,031) 0.01-0.06 (43,000) 0.06
Options cancelled........ 132,500 (132,500) 0.03-0.06 (7,000) 0.05
---------- --------- ------- -----
Balances, June 30, 1999.. 1,959,969 587,000 $0.01-0.06 $30,000 $0.05
========== ========= ======= =====
</TABLE>

The weighted average fair value of options granted in the period ended
December 31, 1998 was $0.12.

The following table summarizes information about stock options outstanding
and currently exercisable by price at December 31, 1998:

<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01.............. 87,000 9.65 $0.01 417 $0.01
$0.03.............. 59,500 9.67 $0.03 2,000 $0.03
$0.06.............. 472,500 9.84 $0.06 250,313 $0.06
------- -----
$0.01-$0.06........ 619,000 9.80 $0.05 252,730 $0.06
</TABLE>

The Company has agreements with certain key employees whereby options
granted become immediately exercisable, subject to repurchase by the Company.
The repurchase rights lapse over the options vesting period of four years. Of
the options exercisable at December 31, 1998, 250,000 would be subject to
repurchase if exercised.

F-47
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
and currently exercisable by price at June 30, 1999 (unaudited):

<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01.............. 82,000 9.15 $0.01 1,042 $0.01
$0.03.............. 22,000 9.17 $0.03 2,000 $0.03
$0.06.............. 483,000 9.56 $0.06 18,604 $0.06
------- -----
$0.01-$0.06........ 587,000 9.49 $0.05 21,646 $0.05
</TABLE>

None of the options exercisable at June 30, 1999 would be subject to
repurchase if exercised.

Fair value disclosures

The Company calculated the minimum fair value of each option grant on the
date of grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:

<TABLE>
<S> <C>
Risk-free interest rate......................................... 4.4%-5.5%
Expected life................................................... 5 years
Dividend yield.................................................. 0%
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows (in thousands):

<TABLE>
<CAPTION>
From May 14,
1998 (date of Six Months
inception) to Ended
December 31, June 30,
1998 1999
------------- -----------
(unaudited)
<S> <C> <C>
Net loss as reported............................ $(1,041) $(2,627)
------- -------
Net loss--SFAS 123 adjusted..................... $(1,043) $(2,636)
------- -------
Net loss per share--as reported (Note 2)
Basic and diluted.............................. $ (0.42) $ (0.75)
------- -------
Net loss per share--SFAS 123 adjusted
Basic and diluted.............................. $ (0.42) $ (0.75)
------- -------
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are
anticipated.

F-48
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.Com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Stock-based compensation

In connection with certain stock option grants to employees during the
period ended December 31, 1998, the Company recorded unearned stock-based
compensation totaling $324,000, which is being amortized over the vesting
periods of the related options which is generally four years. Amortization of
this stock-based compensation recognized during the period ended December 31,
1998 totaled approximately $20,000.

Additionally, the Company recorded unearned stock-based compensation for
restricted common stock granted to service providers of $59,000, which is being
amortized over four years. Amortization of the fair value of this restricted
common stock resulted in stock-based compensation of $12,000 during the period
ended December 31, 1998.

Stock-based compensation (unaudited)

In connection with certain stock option grants to employees during the six
months ended June 30, 1999, the Company recorded unearned stock-based
compensation totalling $912,000, which is being amortized over the vesting
period which is generally four years. Amortization of stock-based compensation,
for these and the 1998 option grants, recognized during the six months ended
June 30, 1999 totalled $183,000.

Additionally, the Company recorded unearned stock-based compensation for
restricted common stock granted to service providers of $146,000, which is
being amortized over four years. Amortization of stock-based compensation, for
these and the 1998 restricted stock grants, recognized during the six months
ended June 30, 1999 totalled $54,000.

The remaining unearned stock-based compensation for both option and
restricted stock grants will be amortized as follows: $355,000 for the
remainder of 1999, $449,000 in 2000; $243,000 in 2001, $108,000 in 2002 and
$17,000 in 2003.

7. Income Taxes

The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using the current tax laws and rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.

The principal items accounting for the difference between income taxes
computed at the U.S. statutory rate and the provision for income taxes are as
follows:

<TABLE>
<S> <C>
U.S. statutory rate.................................................. 34%
Operating losses not benefited....................................... -34%
---
0%
---
</TABLE>

F-49
<PAGE>

CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)

NOTES TO FINANCIAL STATEMENTS--(Continued)

Temporary differences which give rise to significant portions of the
deferred tax asset at December 31, 1998 are as follows (in thousands):

<TABLE>
<S> <C>
Net operating loss carryforwards................................... $ 210
Capitalized startup costs.......................................... 169
Research and development credit carry over......................... 45
Other.............................................................. 8
-----
Total deferred tax asset........................................... 432
Less valuation allowance........................................... (432)
-----
Net deferred tax asset............................................. $ --
=====
</TABLE>

The Company has established a 100% valuation allowance because at this time
it appears more likely than not that the benefit will not be realized for its
deferred tax asset.

At December 31, 1998, the Company had federal and state net operating loss
carry-forwards of approximately $524,000 and $539,000, respectively, available
to offset future regular and alternative minimum taxable income. The Company's
federal and state net operating loss carry forwards expire in 2006 through
2018.

At December 31, 1998, the Company had federal and state research and
development and other credits of approximately $33,000 and $18,000,
respectively. The research and development credit carry-forwards expire in
2018, if not utilized.

The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carry-forwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carry-forwards could be restricted.

8. Subsequent Events

At June 30, 1999, the line of credit with Silicon Valley Bank of $1,000,000
(unaudited) was fully utilized.

On August 13, 1999, the Company entered into a merger agreement with Kana
Communications, Inc. ("Kana"). Under the terms of the agreement, Kana will
acquire all the Company's outstanding capital stock and all unexpired and
unexercised options and warrants in return for 15% of the total post closing
capital stock of Kana on a fully-diluted basis.

F-50
<PAGE>

Inside Back Cover

A large logo in the center of the page is the Kana logo, which is a large K with
a semi-circle around the K with stylized letters.
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, and only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Preemptive Rights........................................................ 21
Capitalization........................................................... 22
Dilution................................................................. 23
Supplemental Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 36
Management............................................................... 51
Transactions and Relationships with Related Parties...................... 66
Recent Developments...................................................... 68
Principal Stockholders................................................... 70
Description of Capital Stock............................................. 72
Shares Available for Future Sale......................................... 75
Underwriting............................................................. 77
Legal Matters............................................................ 79
Change in Accountants.................................................... 79
Experts.................................................................. 79
Additional Information................................................... 80
Index to Consolidated Financial Statements............................... F-1
</TABLE>

-----------

Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,300,000 Shares

Kana Communications, Inc.

Common Stock

-----------

[LOGO OF KANA COMMUNICATIONS]

-----------

Goldman, Sachs & Co.

Hambrecht & Quist

Wit Capital Corporation

Representatives of the Underwriters

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than the
underwriting discount payable by Kana in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market Listing Fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 13,700
NASD Filing Fee.................................................. 5,500
Nasdaq National Market Listing Fee............................... 17,000
Printing and Engraving Expenses.................................. 225,000
Legal Fees and Expenses.......................................... 600,000
Accounting Fees and Expenses..................................... 400,000
Blue Sky Fees and Expenses....................................... 15,000
Transfer Agent Fees.............................................. 25,000
Miscellaneous.................................................... 98,800
----------
Total.......................................................... $1,400,000
==========
</TABLE>

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit this
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Kana's Bylaws
provides for mandatory indemnification of its directors and executive officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Kana's Certificate
of Incorporation provides that, subject to Delaware law, its directors will
not be personally liable for monetary damages for breach of the directors'
fiduciary duty as directors to Kana and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the directors' fiduciary
duty, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to Kana or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. Kana has entered into
indemnification agreements with its officers and directors, a form of which
has been filed with the Securities and Exchange Commission (the "Commission")
as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-82587) (the "Indemnification Agreements"). The Indemnification
Agreements provide Kana's executive officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of Kana against certain liabilities, and Section 1.10 of the Third Amended and
Restated Investors' Rights Agreement contained in Exhibit 4.2 hereto,
indemnifying certain of Kana's stockholders, including controlling
stockholders, against certain liabilities.

II-1
<PAGE>

Item 15. Recent Sales of Unregistered Securities

During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:

(a) In July 1996, the Registrant issued and sold 3,333,333 shares of
its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
purchase price of $500 pursuant to Common Stock Purchase Agreements. In
April 1997, the Registrant repurchased those shares of Common Stock for
$43,812.

(b) In April 1997, the Registrant issued and sold 2,916,666 shares of
its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
purchase price of $43,750 pursuant to Restricted Stock Purchase
Agreements.

(c) In April 1997, the Registrant issued and sold 3,949,138 shares of
its Series A Preferred Stock to entities affiliated with Draper Fisher
Jurvetson, Draper Richards L.P., High Street Partners, L.P., Beni M.
Horvath Trust 1991 and Ragnhild Horvath for an aggregate purchase price of
$770,000, which included $170,000 of cancellation of indebtedness.

(d) In April 1997, the Registrant issued a warrant to Beni M. Horvath
Trust 1991 to purchase up to 25,641 shares of its Series A Preferred Stock
at an exercise price of $0.20 per share.

(e) In April 1997, the Registrant issued a warrant to Ragnhild Horvath
to purchase up to 64,102 shares of its Series A Preferred Stock at an
excise price of $0.20 per share.

(f) In March 1998, the Registrant issued 19,468 shares of its Series A
Preferred Stock pursuant to the net exercise of a warrant issued to Beni
M. Horvath Trust 1991.

(g) in March 1998, the Registrant issued 48,670 shares of its Series A
Preferred Stock pursuant to the net exercise of a warrant issued to
Ragnhild Horvath.

(h) In June 1997, the Registrant issued 666 shares of its Common Stock
to Howell Hsiao as consideration for services rendered to the Registrant
pursuant to a Stock Issuance Agreement.

(i) In September 1997, the Registrant issued and sold 4,969,136 shares
of its Series B Preferred Stock to entities affiliated with Benchmark
Capital Partners L.P., entities affiliated with Draper Fisher Jurvetson,
Draper Richards L.P., High Street Partners, L.P. and Stanford University
for an aggregate purchase price of $4,025,000.

(j) In July 1998, the Registrant issued and sold 112,549 shares of its
Series B Preferred Stock to Eric A. Hahn for an aggregate purchase price
of $91,165.

(k) In August and September 1998, the Registrant issued and sold
3,414,098 shares of its Series C Preferred Stock to entities affiliated
with Benchmark Capital Partners L.P., entities affiliated with Draper
Fisher Jurvetson, Draper Richards L.P., Eric A. Hahn, Stanford University,
J.H. Whitney III, L.P., Whitney Strategic Partners III, L.P., entities
affiliated with Amerindo Investment Advisors, Inc. and Aspect
Telecommunications for an aggregate purchase price of $11,625,006.

(l) In July 1999, the Registrant issued and sold 838,472 shares of its
Series D Preferred Stock to Convergys Corporation, entities affiliated
with Benchmark Capital Partners L.P., entities affiliated with Draper
Fisher Jurvetson, Draper Richards L.P., entities affiliated with Amerindo
Investment Advisors, Inc. and New Millenium Venture Partners, LLC for an
aggregate purchase price of $10,200,004.

(m) Since inception, the Registrant has issued and sold an aggregate
of 53,333 shares of its Common Stock to Dr. Charles Holloway for an
aggregate consideration of $800.

(n) Since inception, the Registrant has issued and sold an aggregate
of 166,666 shares of its Common Stock to Ariel Poler for an aggregate
consideration of $2,500.

II-2
<PAGE>

(o) In August 1999, in connection with the acquisition of Connectify,
Inc. the Registrant issued 3,491,282 shares of common stock in exchange
for all outstanding shares of Connectify's capital stock and reserved
208,345 shares of common stock for issuance upon the exercise of assumed
Connectify options and warrants.

(p) Since inception, the Registrant has granted stock options to its
employees, directors and consultants under its 1997 Stock Option/Stock
Issuance Plan exercisable for up to an aggregate of 4,543,272 shares of
its Common Stock, with exercise prices ranging from $0.02 to $2.25. The
Registrant has issued and sold an aggregate of 4,240,072 shares of its
Common Stock to its employees, directors and consultants under this plan
for an aggregate consideration of $34,477 in cash and $1.3 million in
promissory notes with a five-year term and interest rate of 5.7% per
annum, compounding annually.

None of the foregoing transactions involved any underwriters, any
underwriting discounts or commissions, or any public offering, and the
Registrant believes that the transactions set forth in (a) through (o) were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof and the transactions set forth in (p) were exempt from
the registration requirements of the Securities Act by virtue of Rule 701
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under Rule 701 promulgated thereunder. The recipients in these
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.

II-3
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement among the Registrant, Goldman, Sachs
& Co., Hambrecht & Quist LLC and Wit Capital Corporation.

2.1** Agreement and Plan of Reorganization by and among the Registrant,
KCI Acquisition, Inc. and Connectify, Inc. dated August 13, 1999.

3.1 Second Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.

3.2** Amended and Restated Bylaws, to be effective upon consummation of
this offering.

4.1* Form of Registrant's Specimen Common Stock Certificate.

4.2** Fourth Amended and Restated Investors' Rights Agreement dated August
13, 1999 by and among the Registrant and parties listed on Schedule
A therein.

4.3* Form of Warrant for Connectify Investors.

5.1** Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.

10.1** Registrant's 1997 Stock Option/Stock Issuance Plan.

10.2 Registrant's 1999 Stock Incentive Plan.

10.3 Registrant's 1999 Employee Stock Purchase Plan.

10.4** Form of Registrant's Directors' and Officers' Indemnification
Agreement.

10.5** Form of Registrant's License Agreement.

10.6** Letter of Credit, dated July 9, 1999, with Silicon Valley Bank and
the Registrant.

10.7** Lease, dated May 1998, by and between Encina Properties and the
Registrant.

10.8** Office/R&D Lease, dated June 18, 1999, by and between Chestnut Bay
LLC and the Registrant.

10.9** Form of Registrant's Kana Online Service Agreement.

10.10** Form of Registrant's Restricted Stock Purchase Agreement.

10.11** QuickStart Loan and Security Agreement, dated November 6, 1998, with
Silicon Valley Bank and Connectify, Inc.

16.1** Letter from PricewaterhouseCoopers LLP, dated July 8, 1999 regarding
change in accountant.

21.1** Subsidiaries of the Registrant.

23.1 Consent of KPMG LLP, Independent Auditors.

23.2** Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).

23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.

24.1** Power of Attorney.

27.1** Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed.

(b) Financial Statement Schedules

None.

II-4
<PAGE>

Item 17. Undertakings

Kana hereby undertakes to provide to the underwriters, at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Kana
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Kana, Indemnification Agreements entered into
between Kana and its officers and directors, the Underwriting Agreement, or
otherwise, Kana has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Kana of
expenses incurred or paid by a director, officer or controlling person of Kana
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, Kana will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by Kana pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California, on this 2nd day of September, 1999.

KANA COMMUNICATIONS, INC.

/s/ Michael J. McCloskey
By: _________________________________
Michael J. McCloskey
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed by the following
persons in the capacities and on the date indicated:

<TABLE>
<CAPTION>
Signature Title Date

<S> <C> <C>
* Chief Executive Officer September 2, 1999
______________________________________ and Director (Principal
Michael J. McCloskey Executive Officer)

/s/ Joseph D. McCarthy Vice President, Finance September 2, 1999
______________________________________ and Operations (Principal
Joseph D. McCarthy Financial and Accounting
Officer)

* Director September 2, 1999
______________________________________
David M. Beirne

Director September 2, 1999
______________________________________
Robert W. Frick

/s/ Mark S. Gainey President and Chairman of September 2, 1999
______________________________________ the Board of Directors
Mark S. Gainey

* Director September 2, 1999
______________________________________
Eric A. Hahn

* Director September 2, 1999
______________________________________
Dr. Charles A. Holloway

* Director September 2, 1999
______________________________________
Steven T. Jurvetson

* Director September 2, 1999
______________________________________
Ariel Poler
</TABLE>

/s/ Mark S. Gainey
*By: ____________________________
Mark S. Gainey (attorney-in-fact)

II-6
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title Page
------- ------------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Registrant, Goldman,
Sachs & Co., Hambrecht & Quist LLC and Wit Capital
Corporation.
2.1** Agreement and Plan of Reorganization by and among the
Registrant, KCI Acquisition, Inc. and Connectify, Inc. dated
August 13, 1999.

3.1 Second Amended and Restated Certificate of Incorporation, to
be effective upon consummation of this offering.

3.2** Amended and Restated Bylaws, to be effective upon consummation
of this offering.
</TABLE>

<TABLE>
<S> <C>
4.1* Form of Registrant's Specimen Common Stock Certificate.

4.2** Fourth Amended and Restated Investors' Rights Agreement dated August 13, 1999 by
and among the Registrant and parties listed on Schedule A therein.

4.3* Form of Warrant for Connectify Investors.

5.1** Opinion of Brobeck, Phleger & Harrison LLP, counsel for the Registrant, with respect
to the common stock being registered.

10.1** Registrant's 1997 Stock Option/Stock Issuance Plan.

10.2 Registrant's 1999 Stock Incentive Plan.

10.3 Registrant's 1999 Employee Stock Purchase Plan.

10.4** Form of Registrant's Directors' and Officers' Indemnification Agreement.

10.5** Form of Registrant's License Agreement.

10.6** Letter of Credit, dated July 9, 1999, with Silicon Valley Bank and the Registrant.

10.7** Lease, dated May 1998, by and between Encina Properties and the Registrant.

10.8** Office/R&D Lease, dated June 18, 1999, by and between Chestnut Bay LLC and the
Registrant.

10.9** Form of Registrant's Kana Online Service Agreement.

10.10** Form of Registrant's Restricted Stock Purchase Agreement.

10.11** QuickStart Loan and Security Agreement, dated November 6, 1998, with Silicon Valley
Bank and Connectify, Inc.

16.1** Letter from PricewaterhouseCoopers LLP, dated July 8, 1999 regarding change in
accountant.

21.1** Subsidiaries of the Registrant.

23.1 Consent of KPMG LLP, Independent Auditors.

23.2** Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1).

23.3 Consent of PricewaterhouseCoopers LLP, Independant Accountants.

24.1** Power of Attorney.

27.1** Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed

<PAGE>

EXHIBIT 1.1

Kana Communications, Inc.

Common Stock, par value $0.001 per share

_____________

Underwriting Agreement
----------------------

____________, 1999

Goldman, Sachs & Co.
Hambrecht & Quist LLC
Wit Capital Corporation
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
2765 Sand Hill Road
Menlo Park, CA 94025

Ladies and Gentlemen:

Kana Communications, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 3,300,000 shares (the "Firm Shares") and, at the election of the
Underwriters, up to 495,000 additional shares (the "Optional Shares") of the
Common Stock, $0.001 par value per share ("Stock") of the Company (the Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof being collectively called the "Shares").

1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:

(a) A registration statement on Form S-1 (File No. 33-82587) (the "Initial
Registration Statement") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
<PAGE>

regulations of the Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement and the
Rule 462(b) Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed with
the Commission pursuant to Rule 424(b) under the Act in accordance with Section
5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared effective, each as
amended at the time such part of the Initial Registration Statement became
effective or such part of the Rule 462(b) Registration Statement, if any, became
or hereafter becomes effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus");

(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;

(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;

(d) Neither the Company nor any of its subsidiaries (as defined in Rule
405 of the of the rules and regulations under the Act), taken as a whole, has
sustained since the date of the latest audited financial statements included in
the Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term debt
of the Company or any of its subsidiaries, there have been no transactions
entered into by the Company or any of its subsidiaries, other than those entered
into in the ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and there has not
been any material adverse change, or any development which could reasonably be
expected to result in a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, taken as a whole, otherwise
than as set forth or contemplated in the Prospectus;

2
<PAGE>

(e) Neither the Company nor its subsidiaries own any real property, and
the Company and its subsidiaries have good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;

(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, except where the
failure to so qualify would not in the aggregate have a material adverse effect
on the general affairs, management, current or future consolidated financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Effect"); and each
subsidiary of the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation;

(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equitable interests
or claims;

(h) The Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and, when issued and delivered
against payment therefor as provided herein, will be duly and validly issued and
fully paid and non-assessable and will conform to the description of the Stock
contained in the Prospectus;

(i) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; and no filing, consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares, the approval by

3
<PAGE>

the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters;

(j) Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or By-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may be
bound, except where any such default would not have a Material Adverse Effect;

(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, under the caption "Benefit Plans", insofar as they
purport to describe the provisions of the documents referred to therein, and
under the caption "Underwriting", insofar as they purport to describe the
provisions of the documents referred to therein, are accurate and complete;

(l) Other than as described in the Prospectus or which have been waived,
there are no persons with rights to have any securities of the Company
registered pursuant to the Registration Statement;

(m) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse
Effect; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;

(n) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act");

(o) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;

(p) KPMG LLP, who have certified certain financial statements of the
Company and its subsidiaries, are independent public accountants as required by
the Act and the rules and regulations of the Commission thereunder;

(q) The financial statements included in the Registration Statement and
the Prospectus, together with the related schedule and notes, present fairly the
financial position of the Company and its consolidated subsidiaries at the dates
indicated and the statement of operations, stockholders' equity and cash flows
of the Company and its consolidated subsidiaries for the periods specified; such
financial statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis through the periods
involved. The supporting schedules included in the Registration Statement
present fairly in accordance with GAAP the information required to be stated
therein. The selected financial data and the summary financial information
included in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements and the related notes

4
<PAGE>

thereto included in the Registration Statement. The pro forma financial
statements and the related notes thereto included in the Registration Statement
and the Prospectus present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with respect
to pro forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein;

(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit timely preparation of financial
statements in conformity in all material respects with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences;

(s) Except as otherwise disclosed in the Prospectus, the Company and its
subsidiaries have sufficient interests in all patents, patent applications,
trademarks, service marks, trade names, licenses, know-how, copyrights, trade
secrets and other intellectual property (collectively, "Intellectual Property")
necessary to operate the business now operated by them as described in the
Prospectus, and neither the Company nor any of its subsidiaries has received any
notice or is otherwise aware of any infringement of or conflict with asserted
rights of others with respect to any Intellectual Property which would, singly
or in the aggregate, have a Material Adverse Effect;

(t) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year 2000
Issue. As a result of such review, the Company represents and warrants that the
disclosure in the Registration Statement relating to the Year 2000 Issue is
accurate and complies in all material respects with the rules and regulations of
the Act. The "Year 2000 Issue" as used herein means Year 2000 issues described
in or contemplated by the Commission's Interpretation: "Statement of the
Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public
Companies, Investment Advisers, Investment Companies, and Municipal Securities
Issuers (Release No. 33-7558)"; and

(u) Substantially all outstanding Stock, and all securities convertible
into or exercisable or exchangeable for Stock, are subject to valid, binding and
enforceable agreements (collectively, the "Lock-up Agreements") that restrict
the holders thereof from selling, making any short sale of, granting any option
for the purchase of, or otherwise transferring or disposing of, any of such
shares of Stock, or any such securities convertible into or exercisable or
exchangeable for Stock, for a period of 180 days after the date of the
Prospectus without the prior written consent of the Company or Goldman, Sachs &
Co.

2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $________________, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the

5
<PAGE>

Underwriters agrees, severally and not jointly, to purchase from the Company, at
the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.

The Company hereby grants to the Underwriters the right to purchase at
their election up to 495,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.

3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.

4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on _____________, 1999 or
such other time and date as Goldman, Sachs & Co. and the Company may agree upon
in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time,
on the date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".

(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo
Alto, CA 94303-0913 (the "Closing Location"), and the Shares will be delivered
at the Designated

6
<PAGE>

Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at 9:00 a.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.

5. The Company agrees with each of the Underwriters:

(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;

(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;

(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect

7
<PAGE>

such compliance, and in case any Underwriter is required to deliver a prospectus
in connection with sales of any of the Shares at any time nine months or more
after the time of issue of the Prospectus, upon your request but at the expense
of such Underwriter, to prepare and deliver to such Underwriter as many copies
as you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;

(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);

(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell, register with the Commission (other than on Form
S-8 or any successor form), or otherwise dispose of, directly or indirectly,
except as provided hereunder, any securities of the Company that are
substantially similar to the Shares, including but not limited to any securities
that are convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than pursuant
to employee stock option plans or employee stock purchase plans existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement, and the issuance of securities as
consideration in connection with mergers, acquisitions of assets,
reclassifications and other transactions not primarily for equity financing
purposes, provided that the number of shares or other securities issued in
connection with such mergers, acquisitions of assets, reclassifications and
other transactions shall not exceed fifteen percent (15%) of the number of
shares of Stock of the Company outstanding on the date of issuance (after giving
effect to such issuance) and, provided further, that all persons that are issued
such shares or other securities shall enter into a lock-up agreement in the form
delivered by Goldman, Sachs & Co. to the Company for execution by the Company's
securityholders in connection with the purchase of the Shares contemplated by
this Agreement), without the prior written consent of Goldman, Sachs & Co.;

(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;

(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);

8
<PAGE>

(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";

(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");

(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act;

(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act;

(l) (i) To enforce the terms of each Lock-up Agreement and (ii) to
issue stop-transfer instructions to the transfer agent for the Stock with
respect to any transaction or contemplated transaction that would constitute a
breach of or default under the applicable Lock-up Agreement. In addition,
except with the prior written consent of Goldman, Sachs & Co., the Company
agrees (i) not to amend or terminate, or waive any right under, any Lock-up
Agreement, or take any other action that would directly or indirectly have the
same effect as an amendment or termination, or waiver of any right under, any
Lock-up Agreement, that would permit any holder of Stock, or securities
convertible into or exercisable or exchangeable for Stock, to sell, make any
short sale of, grant any option for the purchase of, or otherwise transfer or
dispose of, any of such Stock or other securities prior to the expiration of 180
days after the date of the Prospectus, and (ii) not to consent to any sale,
short sale, grant of an option for the purchase of, or other disposition or
transfer of Stock, or securities convertible into or exercisable or exchangeable
for Stock, subject to a Lock-up Agreement; and

(m) The Company will place a restrictive legend on any Stock acquired
pursuant to the exercise, after the date hereof and prior to the expiration of
the 180-day period after the date of the initial public offering of the Shares,
of any option granted under any employee benefit plan or other equity incentive
arrangement, which legend shall restrict the transfer of such shares prior to
the expiration of such 180 day period. In addition, the Company agrees that,
without the prior written consent of Goldman, Sachs & Co., it will not release
any stockholder or option holder from the market standoff provision imposed by
the Company pursuant to the terms of any stock purchase agreement or other
agreement relating to the acquisition of Stock or any employee benefit plan
earlier than 180 days after the date of the initial public offering of the
Shares.

6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)

9
<PAGE>

hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.

7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:

(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;

(b) Fenwick & West LLP, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such opinion
is attached as Annex II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (iii), (vi), (xi) (with respect to the
statements under the captions "Description of Capital Stock" and "Underwriting"
only), (xiii), and the final paragraph of subsection (c) below as well as such
other related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;

(c) Brobeck, Phleger & Harrison LLP, counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is attached
as Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that (apart from the opinion in paragraph
(xi) concerning statements under the caption "Underwriting", to which such
counsel need express no opinion):

(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties and conduct
its business as described in the Prospectus;

(ii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, except where

10
<PAGE>

the failure to so qualify would not have a Material Adverse Effect (such counsel
being entitled to rely in respect of the opinion in this clause upon opinions of
local counsel and in respect of matters of fact upon certificates of officers of
the Company, provided that such counsel shall state that they believe that both
you and they are justified in relying upon such opinions and certificates and
signed copies of such opinions and certificates are furnished to the
representatives of the Underwriters (the "Representatives"));

(iii) The authorized, issued and outstanding capital as of June
30, 1999 is as set forth under the heading "Capitalization" in the Prospectus,
and all of the issued shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable;

(iv) Each subsidiary of the Company (other than Kana
Communications Europe Ltd., to which such counsel need express no opinion) has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except for
directors' qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims (such counsel
being entitled to rely in respect of the opinion in this clause upon opinions of
local counsel and in respect to matters of fact upon certificates of officers of
the Company or its subsidiaries, provided that such counsel shall state that
they believe that both you and they are justified in relying upon such opinions
and certificates and signed copies of such opinions and certificates are
furnished to the Representatives);

(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property of
the Company or any of its subsidiaries is the subject which are required to be
described in the Registration Statement that are not so described. To such
counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;

(vi) This Agreement has been duly authorized, executed and
delivered by the Company;

(vii) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a material default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument that is filed as an exhibit to the Registration Statement, nor will
such action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any Delaware General Corporation Law,
California or federal statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties, and
the issuance of the Shares is not subject to preemptive rights arising under the
Delaware General Corporation Law, the Company's Certificate of Incorporation,
the Company's Bylaws or any agreement or instrument that is filed as an exhibit
to the Registration Statement, or to such counsel's knowledge similar rights
that entitle or would entitle any person or entity to acquire the Shares or any
other shares of capital stock or other securities of the Company in connection
with or upon the sale and issuance of the Shares by the Company;

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<PAGE>

(viii) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no persons with rights to have securities
of the Company registered pursuant to the Registration Statement;

(ix) No filing, consent, approval, authorization, order,
registration or qualification of or with any such court or governmental agency
or body is required for the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except the
registration under the Act and the Exchange Act of the Shares, the approval by
the NASD of the terms of the sale of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;

(x) To such counsel's knowledge, neither the Company nor any
of its subsidiaries is in violation of its Certificate of Incorporation or By-
laws or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument that is filed as
an exhibit to the Registration Statement;

(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, under the caption "Benefit Plans", insofar as
they purport to describe the provisions of the documents referred to therein,
under the caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, and under the caption
"Legal Proceedings", to the extent that such statements constitute matters of
law, summaries of legal matters, the Company's Certificate of Incorporation and
By-laws or legal proceedings, have been reviewed by such counsel and are correct
and complete in all material respects;

(xii) The Company is not an "investment company", as such term
is defined in the Investment Company Act;

(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the rules and
regulations thereunder; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus which are not filed or described as required; and

(xiv) To such counsel's knowledge, based on oral advice of the
staff of the Commission, the Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the Act; any required
filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and, to such counsel's
knowledge, based upon oral advice of the staff of the Commission, no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Act and no proceedings for that
purpose have been instituted or are pending or overtly threatened by the
Commission.

In addition, such counsel shall state that it has participated in
conferences with certain officers and other representatives of the Company, its
independent public accountants, the

12
<PAGE>

Underwriters and the Underwriters' counsel at which the contents of the
Registration Statement, the Prospectus and related matters were discussed. Such
counsel may further specify that it is not, however, passing upon, and does not
assume any responsibility for, and has not independently checked or verified,
the accuracy, completeness or fairness of the information contained in the
Registration Statement or the Prospectus (except for those legal matters
referred to in the opinion in subsection (xi) of this section 7(c)). Such
counsel shall state, however, that based upon its participation as described in
the foregoing, (i) it confirms that it has no reason to believe that, (other
than the consolidated financial statements, including the notes and schedule
thereto and the financial data included therein, as to which it need express no
belief) at the time the Registration Statement or any further amendment or
supplement thereto made by the Company, prior to such Time of Delivery, became
effective, the Registration Statement contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statement therein not misleading; and (ii) it shall
confirm that it has no reason to believe that (other than the consolidated
financial statements, including the notes and schedules thereto and the other
financial data included therein, as to which it need express no belief) the
Prospectus or any further amendment or supplement thereto made by the Company,
prior to such Time of Delivery, on the date hereof, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;

(d) Brobeck, Hale & Dorr International, foreign counsel for the
Company shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(c) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that Kana Communications Europe
Ltd. has been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except for
directors' qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims (such counsel
being entitled to rely in respect to matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in relying upon
such opinions and certificates and signed copies of such opinions and
certificates are furnished to the Representatives);

(e) Blakely, Sokoloff, Taylor & Zafman, patent counsel for the
Company, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(d) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:

(i) Such counsel are familiar with the technology used by the
Company in its business and the manner of its use thereof and have read the
Registration Statement and the Prospectus, including particularly the portions
of the Registration Statement and the Prospectus referring to patents, trade
secrets, trademarks, service marks or other proprietary information or
materials;

(ii) The Company is listed in the records of the United States
Patent and Trademark Office (the "PTO") as the holder of record of each of the
pending applications listed on a schedule to such opinion (the "Applications").
The Company is not listed in the records of the PTO as the holder of record of
any patents. To the knowledge of such counsel, there are no claims of third
parties to any ownership interest or lien with respect to any of the
Applications. Such counsel is not

13
<PAGE>

aware of any material defect in form in the preparation or filing of the
Applications on behalf of the Company. To the knowledge of such counsel, the
Applications are being pursued by the Company. To the knowledge of such counsel,
the Company owns as its sole property the Applications;

(iii) The Company is not listed as a holder of any foreign
patents or patent applications;

(iv) Such counsel has no knowledge of any reason why any patent
to be issued as a result of any Application would not be valid or would not
afford the Company useful patent protection with respect thereto;

(v) As to the statements under the captions "Risk Factors -
`Our pending patents may never be issued and, even if issued, may provide us
with little protection', `We rely upon trademarks, copyrights and trade secrets
to protect our proprietary rights, which may not be sufficient to protect our
intellectual property', and `We may become involved in litigation over
proprietary rights, which could be costly and time consuming'", and "Business --
Intellectual Property", such counsel shall state that nothing has come to the
attention of such counsel which caused it to believe that, (i) at the time the
Registration Statement or any further amendment or supplement thereto made by
the Company, prior to such Time of Delivery, became effective, the above-
mentioned sections of the Registration Statement contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statement therein not misleading; and (ii) the
above-mentioned sections of the Prospectus or any further amendment or
supplement thereto made by the Company, prior to such Time of Delivery, on the
date hereof, contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and

(vi) Such counsel knows of no material action, suit, claim or
proceeding relating to patents, patent rights or licenses, trademarks or
trademark rights, copyrights, collaborative research, licenses or royalty
arrangements or agreements or trade secrets, know-how or proprietary techniques,
including processes and substances, owned by or affecting the business or
operations of the Company which are pending or threatened against the Company or
any of its officers or directors.

(f) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, KPMG LLP shall have
furnished to you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the execution
of this Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective amendment to
the Registration Statement and as of each Time of Delivery is attached as Annex
I(b) hereto);

(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the

14
<PAGE>

Company or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity, or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;

(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by Federal, New
York or California State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if the effect of any such event specified in
this clause (iv) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;

(i) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;

(j) The Lock-up Agreements between the Underwriters and the
stockholders, officers and directors of the Company relating to sales and
certain other dispositions of Stock or certain other securities, delivered to
you on or before the date hereof, shall be in full force and effect on such Time
of Delivery;

(k) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and

(l) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (g) of this Section
and as to such other matters as you may reasonably request.

8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in

15
<PAGE>

any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein.

(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.

(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.

(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the

16
<PAGE>

other from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission and the extent any
such party is prejudiced by the failure of an indemnified party to provide
notice as specified in Section 8(c). The Company and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this subsection
(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.

9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of thirty-
six hours within which to

17
<PAGE>

procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.

(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.

(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.

10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.

11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the

18
<PAGE>

Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company shall then be under no further
liability to any Underwriter except as provided in Sections 6 and 8 hereof.

12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.

All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.

13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.

14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.

15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.

16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.

19
<PAGE>

If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.

Very truly yours,

Kana Communications, Inc.

By: ________________________________________

Name: ______________________________________

Title: _____________________________________

Accepted as of the date hereof:
Goldman, Sachs & Co.
Hambrecht & Quist LLC
Wit Capital Corporation

By: _______________________________
(Goldman, Sachs & Co.)

On behalf of each of the Underwriters

20
<PAGE>

SCHEDULE I

<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co...................
Hambrecht & Quist LLC.................
Wit Capital Corporation
[Names of other Underwriters].........
--------------- ------------------
Total......................
=============== ==================
</TABLE>

21
<PAGE>

ANNEX I

Pursuant to Section 7(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:

(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;

(ii) In their opinion, the financial statements, the supplemental
financial statements and any supplementary financial information and
schedules of the Company examined by them and included in the Prospectus or
the Registration Statement and the financial statements of Connectify, Inc.
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements and unaudited
interim supplemental financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been separately furnished to the representatives of the
Underwriters (the "Representatives");

(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the (a)
unaudited supplemental consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows for the six three-
month periods ended June 30, 1999 included in the Prospectus, and (b) the
unaudited supplemental consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows for each of the
six quarters in the period ended June 30, 1999 from which the quarterly
results of operations presented in the Prospectus were derived, as
indicated in their reports thereon and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited
consolidated financial statements referred to in paragraphs (vi)(A)(i) and
(vi)(B)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that cause them to
believe that such financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;

(iv) The unaudited selected financial information with respect to the
supplemental consolidated results of operations and financial position of
the Company for the two most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where applicable)
in the audited supplemental consolidated financial statements for such two
fiscal years;

(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE>

(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:

(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited consolidated statements
of income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus for them to be in conformity
with generally accepted accounting principles;

(B) (i) the unaudited supplemental consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations, or (ii) any
material modifications should be made to the unaudited supplemental
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus for
them to be in conformity with generally accepted accounting
principles;

(C) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements or in the
supplemental consolidated financial statements from which such data
and items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated financial
statements or supplemental consolidated financial statements included
in the Prospectus;

(D) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited financial
statements referred to in clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and
referred to in clause (C) were not determined on a basis
substantially consistent with the basis for the audited consolidated
financial statements included in the Prospectus;

(E) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
<PAGE>

(F) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon earn-
outs of performance shares and upon conversions of convertible
securities, in each case which were outstanding on the date of the
latest supplemental financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in consolidated
net current assets or stockholders' equity or other items specified
by the Representatives, or any increases in any items specified by
the Representatives, in each case as compared with amounts shown in
the latest supplemental balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are
described in such letter; and

(G) for the period from the date of the latest supplemental
financial statements included in the Prospectus to the specified
date referred to in clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified by
the Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and

(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.

<PAGE>

EXHIBIT 3.1

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

KANA COMMUNICATIONS, INC.

The undersigned, Mark S. Gainey and Warren T. Lazarow, hereby certify
that:

ONE: They are the duly elected, qualified and acting President and
---
Secretary, respectively, of Kana Communications, Inc., a Delaware corporation.

TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on June 17, 1999 and the Amended and Restated Certificate of
Incorporation of said corporation was originally filed in such office on July
__, 1999.

THREE: The Amended and Restated Certificate of Incorporation of said
-----
corporation is amended and restated to read in its entirety as follows:

ARTICLE I

The name of this corporation is Kana Communications, Inc. (the
"Corporation").

ARTICLE II

The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address is the
Corporation Service Company.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").

ARTICLE IV

The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is One Hundred
Five Million (105,000,000). One Hundred Million (100,000,000) shares shall be
Common Stock, par value $0.001 per share, and Five Million (5,000,000) shares
shall be Preferred Stock, par value $0.001 per share.

The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby
<PAGE>

authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon each series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or of any of
them. The rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
----------
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote), or senior to any of
those of any present or future class or series of Preferred Stock or Common
Stock. The Board of Directors is also authorized to increase or decrease the
number of shares of any series prior or subsequent to the issue of that series,
but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.

ARTICLE V

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.

ARTICLE VI

The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.

Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.

At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.

The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common

2
<PAGE>

Stock, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three (3) years. At the third
annual meeting of stockholders following the initial public offering of the
Corporation's Common Stock, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three (3)
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three (3) years to succeed the directors of the class
whose terms expire at such annual meeting. If the number of directors is
hereafter changed, each director then serving as such shall nevertheless
continue as a director of the Class of which he is a member until the expiration
of his current term and any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as is practicable.

Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.

ARTICLE VII

Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.

ARTICLE VIII

To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.

No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty of loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving

3
<PAGE>

intentional misconduct or a knowing violation of law, or (3) shall have derived
an improper personal benefit. If the GCL is hereafter amended to authorize the
further elimination or limitation of the liability of a director, the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL, as so amended.

Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.

If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.

If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.

4
<PAGE>

ARTICLE IX

The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.

FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.

FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, the undersigned have executed this certificate on
July ___, 1999.

__________________________________________
Mark S. Gainey
President

__________________________________________
Warren T. Lazarow
Secretary

<PAGE>

EXHIBIT 10.2

KANA COMMUNICATIONS, INC.
1999 STOCK INCENTIVE PLAN
-------------------------

ARTICLE ONE

GENERAL PROVISIONS
------------------

I. PURPOSE OF THE PLAN

This 1999 Stock Incentive Plan is intended to promote the interests of
Kana Communications, Inc., a Delaware corporation, by providing eligible persons
in the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.

Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into five separate equity incentives
programs:

- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,

- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,

- the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),

- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and

- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.

B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>

III. ADMINISTRATION OF THE PLAN

A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.

B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.

D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.

2.
<PAGE>

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

(i) Employees,

(ii) non-employee members of the Board or the board of directors
of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).

B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.

C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.

D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.

F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.

3.
<PAGE>

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed Four Million
Seven Hundred Thousand (4,700,000) shares. Such reserve shall consist of (i)
the number of shares estimated to remain available for issuance, as of the
Plan Effective Date, under the Predecessor Plan as last approved by the
Corporation's stockholders, including the shares subject to outstanding options
under that Predecessor Plan, (ii) plus an additional increase of approximately
Three Million Five Hundred Sixty-Five Thousand (3,565,000) shares to be
approved by the Corporation's stockholders prior to the Underwriting Date.

B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to four and one-fourth percent (4.25%) of the total number of
shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed Two Million (2,000,000) shares.

C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.

D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.

4.
<PAGE>

E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and exercise
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plan and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year pursuant to the provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.

5.
<PAGE>

ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. Exercise Price.
--------------

1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:

(i) cash or check made payable to the Corporation,

(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or

(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. Exercise and Term of Options. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.

6.
<PAGE>

C. Effect of Termination of Service.
--------------------------------

1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.

(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.

(iii) Should the Optionee's Service be terminated for
Misconduct or should the Optionee otherwise engage in Misconduct while
holding one or more outstanding options under this Article Two, then all
those options shall terminate immediately and cease to be outstanding.

(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.

2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or

(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.

7.
<PAGE>

D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's family or to a trust established exclusively for one or more such
family members or to Optionee's former spouse, to the extent such assignment is
in connection with the Optionee's estate plan or pursuant to a domestic
relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---

A. Eligibility. Incentive Options may only be granted to Employees.
-----------

B. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).

8.
<PAGE>

To the extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become exercisable for all
the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
However, an outstanding option shall not become exercisable on such an
accelerated basis if and to the extent: (i) such option is, in connection with
the Corporate Transaction, to be assumed by the successor corporation (or parent
thereof) or (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.

B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and

9.
<PAGE>

(iii) the maximum number and/or class of securities for which any one person may
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year and (iv) the maximum
number and/or class of securities by which the share reserve is to increase
automatically each calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.

F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
and do not otherwise accelerate. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to any shares held by the
Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
that time.

G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become exercisable for all the shares of Common Stock at the
time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the

10.
<PAGE>

Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.

H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.

I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.

(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.

11.
<PAGE>

(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.

C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:

(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.

(ii) Upon the occurrence of a Hostile Take-Over, each individual
holding one or more options with such a limited stock appreciation right
shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each such option to
the Corporation. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to the
excess of (A) the Take-Over Price of the shares of Common Stock at the time
subject to such option (whether or not the Optionee is otherwise vested in
those shares) over (B) the aggregate exercise price payable for those
shares. Such cash distribution shall be paid within five (5) days following
the option surrender date.

(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.

12.
<PAGE>

ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.

II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.

A. Exercise Price.
--------------

1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.

2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

X is the number of option shares,

13.
<PAGE>

A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and

B is the Fair Market Value per share of Common Stock on the
option grant date.

C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of the option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.

III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER

A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become exercisable for all the shares of Common Stock
at the time subject to such option and may be

14.
<PAGE>

exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earliest to occur of (i) the
--------
expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Service,
(iii) the termination of the option in connection with a Corporate Transaction
or (iv) the surrender of the option in connection with a Hostile Take-Over.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.

E. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

15.
<PAGE>

ARTICLE FOUR

STOCK ISSUANCE PROGRAM
----------------------

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.

A. Purchase Price.
--------------

1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).

B. Vesting Provisions.
------------------

1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or

16.
<PAGE>

other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.

3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

17.
<PAGE>

B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

18.
<PAGE>

ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM
------------------------------

I. OPTION TERMS

A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:

1. Each individual who is first elected or appointed as a non-
employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.

B. Exercise Price.
--------------

1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.

D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
20,000-share grant shall vest, and the Corporation's repurchase right shall

19.
<PAGE>

lapse, in a series of eight (8) successive equal semi-annual installments upon
the Optionee's completion of each six (6)-month period of service as a Board
member over the forty eight (48)-month period measured from the option grant
date. The shares subject to each annual 5,000-share option grant shall be fully
vested as of the grant date.

E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with the Optionee's estate plan
or pursuant to domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.

F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:

(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or the designated beneficiary or beneficiaries of such
option) shall have a twelve (12)-month period following the date of such
cessation of Board service in which to exercise each such option.

(ii) During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares
of Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.

(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.

20.
<PAGE>

(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service for any reason
other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.

II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER

A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become exercisable for
all the option shares as fully-vested shares of Common Stock and may be
exercised for any or all of those vested shares. Immediately following the
consummation of the Corporate Transaction, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).

B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become exercisable for all
the option shares as fully-vested shares of Common Stock and may be exercised
for any or all of those vested shares. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.

21.
<PAGE>

C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.

D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.

E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.

F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

22.
<PAGE>

ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.

II. OPTION TERMS

Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.

A. Exercise Price.
--------------

1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.

X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and

23.
<PAGE>

B is the Fair Market Value per share of Common Stock on the
option grant date.

C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.

D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Six, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.

E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

F. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.

24.
<PAGE>

Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Board
service.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. The option shall remain so exercisable
until the earliest to occur of (i) the expiration of the ten (10)-year option
--------
term, (ii) the expiration of the three (3)-year period measured from the date of
the Optionee's cessation of Board service, (iii) the termination of the option
in connection with a Corporate Transaction or (iv) the surrender of the option
in connection with a Hostile Take-Over.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.

25.
<PAGE>

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.

E. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

26.
<PAGE>

ARTICLE SEVEN

MISCELLANEOUS
-------------

I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:

Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.

Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.

27.
<PAGE>

III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.

B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.

C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.

D. The Plan shall terminate upon the earliest to occur of (i) June
--------
30, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on June 30, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.

IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

28.
<PAGE>

B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

29.
<PAGE>

APPENDIX
--------

The following definitions shall be in effect under the Plan:

A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.

B. Board shall mean the Corporation's Board of Directors.
-----

C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or

(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.

D. Code shall mean the Internal Revenue Code of 1986, as amended.
----

E. Common Stock shall mean the Corporation's common stock.
------------

F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>

G. Corporation shall mean Kana Communications, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.

H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.

I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.

J. Eligible Director shall mean a non-employee Board member eligible
-----------------
to participate in the Automatic Option Grant Program or the Director Fee Option
Grant Program in accordance with the eligibility provisions of Articles One,
Five and Six.

K. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.

M. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.

(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.

A-2.
<PAGE>

N. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

O. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.

P. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and percentage target bonus under
any corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.

Q. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

R. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.

S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.

T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.

A-3.
<PAGE>

U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.

W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.

X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.

Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

Z. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.

AA. Predecessor Plan shall mean the Corporation's 1998 Stock
----------------
Incentive Plan in effect immediately prior to the Plan Effective Date hereunder.

BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.

CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.

DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

A-4.
<PAGE>

EE. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

FF. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.

GG. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.

HH. Stock Issuance Agreement shall mean the agreement entered into
------------------------
by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.

II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.

JJ. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

KK. Take-Over Price shall mean the greater of (i) the Fair Market
--------------- -------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

LL. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

NN. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.

A-5.

<PAGE>

EXHIBIT 10.3
KANA COMMUNICATIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------

I. PURPOSE OF THE PLAN

This Employee Stock Purchase Plan is intended to promote the interests
of Kana Communications, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.

Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

II. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.

III. STOCK SUBJECT TO PLAN

A. The stock purchasable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares of Common Stock purchased
on the open market. The number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall be limited to Five Hundred Thousand
(500,000) shares.

B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to three-fourths of one percent (0.75%) of the total number of
shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three
(333,333) shares.

C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and class of securities issuable under the Plan,
(ii) the maximum number and class of securities purchasable per Participant on
any one Purchase Date, (iii) the maximum number and class of securities
purchasable in total by all Participants on any one Purchase Date, (iv) the
maximum
<PAGE>

number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of'
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.

IV. OFFERING PERIODS

A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.

B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in October
2001. The next offering period shall commence on the first business day in
November 2001, and subsequent offering periods shall commence as designated by
the Plan Administrator.

C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in April 2000.

D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.

V. ELIGIBILITY

A. Each individual who is an Eligible Employee on the start date of any
offering period under the Plan may enter that offering period on such start date
or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.

B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.

2.
<PAGE>

C. The date an individual enters an offering period shall be designated
his or her Entry Date for purposes of that offering period.

D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.

VI. PAYROLL DEDUCTIONS

A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:

(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.

(ii) The Participant may, prior to the commencement of any
new Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.

B. Payroll deductions shall begin on the first pay day administratively
feasible following the Participant's Entry Date into the offering period and
shall (unless sooner terminated by the Participant) continue through the pay day
ending with or immediately prior to the last day of that offering period. The
amounts so collected shall be credited to the Participant's book account under
the Plan, but no interest shall be paid on the balance from time to time
outstanding in such account. The amounts collected from the Participant shall
not be required to be held in any segregated account or trust fund and may be
commingled with the general assets of the Corporation and used for general
corporate purposes.

C. Payroll deductions shall automatically cease upon the termination of
the Participant's purchase right in accordance with the provisions of the Plan.

D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.

3.
<PAGE>

VII. PURCHASE RIGHTS

A. Grant of Purchase Rights. A Participant shall be granted a separate
------------------------
purchase right for each offering period in which he or she participates. The
purchase right shall be granted on the Participant's Entry Date into the
offering period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.

Under no circumstances shall purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant, own
(within the meaning of Code Section 424(d)) or hold outstanding options or other
rights to purchase, stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Corporation or any
Corporate Affiliate.

B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.

C. Purchase Price. The purchase price per share at which Common Stock
--------------
will be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.

D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 750 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date shall not exceed 125,000 shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. However,
the Plan Administrator shall have the discretionary authority, exercisable
prior to the start of any offering period under the Plan, to increase or
decrease the limitations to be in effect for the number of shares purchasable
per Participant and in total by all Participants on each Purchase Date during
that offering period.

4.
<PAGE>

E. Excess Payroll Deductions. Any payroll deductions not applied to the
-------------------------
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.

F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:

(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions shall be
collected from the Participant with respect to the terminated purchase
right. Any payroll deductions collected during the Purchase Interval in
which such termination occurs shall, at the Participant's election, be
immediately refunded or held for the purchase of shares on the next Purchase
Date. If no such election is made at the time such purchase right is
terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.

(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual must
re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.

(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until the
last business day of the Purchase Interval in which such leave commences, to
(a) withdraw all the payroll deductions collected to date on his or her
behalf for that Purchase Interval or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled Purchase Date.
In no event, however, shall any further payroll deductions be collected on
the Participant's behalf during such leave. Upon the Participant's return to
active service (x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan shall
automatically resume at the rate in

5.
<PAGE>

effect at the time the leave began, unless the Participant withdraws from
the Plan prior to his or her return. An individual who returns to active
employment following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new Employee for
purposes of subsequent participation in the Plan and must accordingly re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the offering
period.

G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date.

The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.

H. Proration of Purchase Rights. Should the total number of shares of
----------------------------
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.

I. Assignability. The purchase right shall be exercisable only by the
-------------
Participant and shall not be assignable or transferable by the Participant.

J. Stockholder Rights. A Participant shall have no stockholder rights
------------------
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.

VIII. ACCRUAL LIMITATIONS

A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans

6.
<PAGE>

(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.

B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:

(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on each
successive Purchase Date during the offering period on which such right
remains outstanding.

(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each calendar
year such rights were at any time outstanding.

C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.

D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

IX. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan was adopted by the Board on July 7, 1999 and shall become
effective at the Effective Time, provided no purchase rights granted under the
Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

7.
<PAGE>

B. Unless sooner terminated by the Board, the Plan shall terminate upon
the earliest of (i) the last business day in October 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.

X. AMENDMENT OF THE PLAN

A. The Board may alter, amend, suspend or terminate the Plan at any time
to become effective immediately following the close of any Purchase Interval.
However, the Plan may be amended or terminated immediately upon Board action, if
and to the extent necessary to assure that the Corporation will not recognize,
for financial reporting purposes, any compensation expense in connection with
the shares of Common Stock offered for purchase under the Plan, should the
financial accounting rules applicable to the Plan at the Effective Time be
subsequently revised so as to require the Corporation to recognize compensation
expense in the absence of such amendment or termination.

B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.

XI. GENERAL PROVISIONS

A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.

B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

C. The provisions of the Plan shall be governed by the laws of the State
of California without resort to that State's conflict-of-laws rules.

8.
<PAGE>

Schedule A

Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------

Kana Communications, Inc.
<PAGE>

APPENDIX
--------

The following definitions shall be in effect under the Plan:

A. Board shall mean the Corporation's Board of Directors.
-----

C. Cash Earnings shall mean the (i) regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall not include any contributions made on
the Participant's behalf by the Corporation or any Corporate Affiliate to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).

B. Change in Control shall mean a change in ownership of the Corporation
-----------------
pursuant to any of the following transactions:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or

(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common control
with the Corporation) of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.

C. Code shall mean the Internal Revenue Code of 1986, as amended.
----

D. Common Stock shall mean the Corporation's common stock.
------------

E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.

A-1
<PAGE>

F. Corporation shall mean Kana Communications, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.

H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.

I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).

J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.

K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.

(iii) For purposes of the initial offering period which begins at the
Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.

L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------

M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.

A-2.
<PAGE>

N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.

0. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.

P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.

Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be April 28, 2000.

R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.

S. Semi-Annual Entry Date shall mean the first business day in May
----------------------
and November each year on which an Eligible Employee may first enter an offering
period.

T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.

U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

A-3.

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Kana Communications, Inc.:

We consent to the use of our form of reports included herein and to the
references to our firm under the headings "Supplemental Selected Consolidated
Financial Data," "Change in Accountants," and "Experts" in the prospectus.

/s/ KPMG LLP

Mountain View, California

September 1, 1999

<PAGE>

Exhibit 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 19, 1999 except for Note 8 for which the date is August
13, 1999 relating to the financial statements of Connectify, Inc., which appear
in such Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

San Jose, California

September 1, 1999.