KANA Software, Inc. and its subsidiaries ("the Company" or "KANA") develop, market and support customer communications software products and services for e-Businesses. The Company sells its products primarily in the United States and Europe, and to a lesser extent, in Asia, through its direct sales force and third party integrators.

(b) Reincorporation and Stock Splits

The Board of Directors recommended and the stockholders approved a one- for-ten reverse stock split of the common stock for stockholders of record on December 13, 2001. The Board of Directors approved a two-for-one stock split of the common stock for stockholders of record on January 28, 2000. The accompanying consolidated financial statements have been retroactively restated to reflect these stock splits.

The consolidated financial statements include the financial statements of KANA and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year's financial statements to conform with the current year's presentation. These reclassifications had no effect on prior year's stockholders' equity or results of operations.

Since its inception, the Company has incurred substantial losses and negative cash flows from operations in every fiscal year. As of December 31, 2002, the Company had an accumulated deficit of $4.2 billion. For the year ended December 31, 2002, the Company incurred a loss from operations of $100.4 million, and negative cash flows from operations of $42.2 million, which includes $22.3 million in payments related to restructuring.

As a result of our restructuring activities in 2001, as well as personnel and facility cost reductions throughout 2002, management expects cash and cash equivalents and short-term investments on hand will be sufficient to meet our working capital and capital expenditure needs through December 31, 2003. If the Company experiences a decrease in demand for its products from the level experienced in 2002, then the Company would need to reduce expenditures to a greater degree than anticipated. Alternatively, the Company may need to seek additional financing. In the event the Company needs additional financing, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company.

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

The functional currency for the Company's international subsidiaries 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 average exchange rates prevailing during the year. Any translation adjustments are included in other comprehensive loss.

The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. The Company has classified its 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, are reported as a separate component of accumulated other comprehensive losses in stockholders' equity. All short- term investments mature in less than one year. To date, realized gains or losses have not been material.

The carrying values of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable approximates their fair values due to their relatively short maturities.

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 four 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 and Europe. 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. As of December 31, 2002 and 2001 no customer represented more than 10% of total accounts receivable.

As of December 31, 2002, the Company maintained $0.4 million in restricted cash, primarily as collateral on the Company's leased facilities and other long- term deposits.

As of December 31, 2001, the Company maintained $11.0 million in restricted cash. Approximately $5.8 million of restricted cash supports a letter of credit and $2.0 million of cash is in escrow to fulfill certain contractual obligations. In addition, restricted cash as of December 31, 2001 included $3.2 million as collateral on the Company's leased facilities and other long-term deposits.

Software costs for internal use, including costs incurred to purchase third party software, are capitalized beginning when the Company has determined certain factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisions have been made and the Company's management has authorized the funding of the project. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use and is amortized over its estimated useful life using the straight-line method.

When events or circumstances indicate the carrying value of internal use software might not be recoverable, the Company will assess the recoverability of these assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is recognized to the extent that the carrying value exceeds the projected discounted future operating cash flows and is recognized as a write-down of the asset. In addition, when it is no longer probable that the software being developed will be placed in service, the asset will be recorded at the lower of its carrying value or fair value, if any, less direct selling costs.

Investments are included in other assets and consist of a minority investment in preferred stock of a privately held company in which the Company holds less than a 20% interest. The private investment is carried at original cost, less reductions related to other-than-temporary declines in value. The Company assesses the recoverability of investments on a regular basis. Factors that the Company considers which could trigger an other-than-temporary decline include, but are not limited to, the likelihood that the related company would have insufficient cash flows to operate for the next twelve months, proposed financing, significant changes in the operating performance or business model, and changes in market conditions. The Company recorded a charge related to an other-than-temporary decline in the value of its investment of $1.0 million in 2001.

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. Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was $9.1 million, $10.1 million and $9.0 million, respectively.

The Company evaluates property and equipment 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.

Goodwill and identifiable intangibles are carried at cost less accumulated amortization and impairments. Identifiable intangibles are amortized on a straight-line basis over their estimated useful lives, which is three years. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). The impact of adoption of SFAS 142 is discussed in Note 4.

License revenue is recognized when there is persuasive evidence of an arrangement, delivery to the customer has occurred, provided the arrangement does not require significant customization of the software, the fee is fixed or determinable and collectibility is probable.

In software arrangements that include rights to multiple software products and/or services, the fees from the total arrangement are allocated among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements with the residual amounts of revenue being allocated to the delivered elements. Elements included in multiple element arrangements primarily consist of software products, maintenance (which includes customer support services and unspecified upgrades), or consulting services. Vendor-specific objective evidence for software products and consulting services is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change before market introduction. Vendor-specific objective evidence for maintenance is based on the residual method generally using stated contractual renewal rates.

Probability of collection is based upon assessment of the customer's financial condition through review of their current financial statements or credit reports. For sales to existing customers, prior payment history is also considered in assessing probability of collection. The Company is required to exercise significant judgment in deciding whether collectibility is reasonably assured, and such judgments may materially affect the timing of our revenues and our results of operations.

Revenues from customer support services are recognized ratably over the term of the contract, typically one year. Consulting revenues are primarily related to implementation services performed on a time-and-materials basis or, in certain situations, on a fixed-fee basis, under separate service arrangements. Implementation services performed under fixed-fee arrangements are generally recognized on a percentage-of-completion basis. When acceptance is not assured or an ability to reliably estimate costs is not possible, the Company uses the completed contract method, whereby revenues are deferred until all contractual obligations are met, and acceptance, if required in the contract, is received. Revenues from consulting and training services are recognized as services are performed.

For contracts requiring significant services, in order to assess whether a loss reserve is necessary, the Company estimates the total expected costs of providing services necessary to complete the contract and compares these costs to the fees expected to be received under the contract. If the costs are expected to exceed the fees to be received, an accrual is made to record the loss at the time of assessment.

In November 2001, the Emerging Issues Task Force ("EITF") concluded that reimbursements for out-of-pocket-expenses incurred should be included in revenue in the income statement and subsequently issued EITF 01-14, Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred in January 2002. The Company adopted EITF 01-14 effective January 1, 2002 and has reclassified comparative financial statements for prior periods to comply with the guidance in this EITF issue. The adoption of this issue resulted in approximately $362,000, $3.7 million, and $4.9 million of reimbursable expenses reflected in both service revenue and cost of service revenue for the years ended December 31, 2002, 2001, and 2000, respectively.

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, technological feasibility and general availability of such software have occurred simultaneously and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

The Company expenses advertising costs as incurred. Advertising expense was $0.7 million, $2.4 million, and $7.4 million, for the years ended December 31, 2002, 2001 and 2000, respectively.

The Company accounts for its stock-based compensation arrangements with employees using the intrinsic-value method in accordance with Accounting Principles Board 25, Accounting for Stock Issued to Employees. Deferred stock-based compensation is recorded on the date of grant when the deemed fair value of the underlying common stock exceeds the exercise price for stock options or the purchase price for the shares of common stock.

Deferred stock-based compensation resulting from option grants to employees, and warrants issued to non-employees, is amortized on an accelerated basis over the vesting period of the individual options, generally four years, in accordance with Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other VariableStock Option or Award Plans.

The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure". The following table presents what the net loss and net loss per share would have been adjusted to the following pro forma amounts had the Company adopted FAS 123 (in thousands, except per share amounts):

                                                           Year Ended December 31,
                                                      ---------------------------------
                                                        2002       2001        2000
                                                      ---------  ---------  -----------
As Reported:
  Net loss.......................................... $ (96,110) $(942,895) $(3,070,873)
  Basic and diluted net loss per share.............. $   (4.29) $  (68.61) $   (395.68)

Compensation expense included in net loss........... $   6,687  $  11,885  $    11,413

Compensation expense if FAS 123 had been adopted.... $  39,345  $ (34,038) $   119,162

Pro Forma:
  Net loss.......................................... $(128,768) $(896,972) $(3,178,622)
  Basic and diluted net loss per share.............. $   (5.75) $  (65.27) $   (409.56)

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. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not.

Other comprehensive income (loss) recorded by the Company for the years ended December 31, 2002, 2001 and 2000 was primarily attributable to foreign currency translation adjustments.

Basic net loss per share from continuing operations is computed using the weighted-average number of outstanding shares of common stock, excluding common stock subject to repurchase. Diluted net loss per share from continuing operations is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares from options and warrants using the treasury stock method.

The following table presents the calculation of basic and diluted net loss per share from continuing operations:

                                                                   Year Ended December 31,
                                                            ------------------------------------
                                                               2002        2001         2000
                                                            ----------  -----------  -----------
                                                               (in thousands, except per
                                                                     share amounts)
Numerator:
 Net loss from continuing operations before
  cumulative effect of accounting change.................. $ (100,392) $  (939,103) $(3,072,046)
                                                            ----------  -----------  -----------
Denominator:
 Weighted-average shares of common
  stock outstanding.......................................     22,420       13,880        8,306
 Less weighted-average shares subject
  to repurchase...........................................        (17)        (137)        (545)
                                                            ----------  -----------  -----------
 Denominator for basic and diluted calculation............     22,403       13,743        7,761
                                                            ==========  ===========  ===========
Basic and diluted net loss per
 common share from continuing operations
 before cumulative effect of accounting change............ $    (4.48) $    (68.33) $   (395.83)
                                                            ==========  ===========  ===========

All warrants, outstanding stock options and shares subject to repurchase by KANA have been excluded from the calculation of diluted net loss per share because all such securities were anti-dilutive for all periods presented. The total number of shares excluded from the calculation of diluted net loss per share are as follows (in thousands):

                                                                   Year Ended December 31,
                                                            ------------------------------------
                                                               2002        2001         2000
                                                            ----------  -----------  -----------
Stock options and warrants................................      7,917        6,753        2,554
Common stock subject to repurchase........................         18           28          389
                                                            ----------  -----------  -----------
                                                                7,935        6,781        2,943
                                                            ==========  ===========  ===========

The weighted average exercise price of stock options and warrants outstanding was $26.38, $50.05 and $386.72 as of December 31, 2002, 2001 and 2000, respectively.

KANA's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, KANA considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications. Geographic information on revenue for the years ended December 31, 2002, 2001, and 2000 are as follows (in thousands):

                                                      Year Ended December 31,
                                               -------------------------------------
                                                  2002         2001         2000
                                               -----------  -----------  -----------
United States................................ $    53,589  $    76,794  $    98,461
International................................      25,501       13,801       19,494
                                               -----------  -----------  -----------
                                              $    79,090  $    90,595  $   117,955
                                               ===========  ===========  ===========

During the year ended December 31, 2002, one customer represented 11% of total revenues. During the years ended December 31, 2001 and 2000, no customer represented more than 10% of total revenues. Revenue from the United Kingdom accounted for approximately 16.9% and 11% of total revenues in the years ended December 31, 2002 and 2000, respectively. Revenue to any one foreign country did not exceed 10% of total revenue in 2001.

Geographic information on KANA's long-lived assets is as follows (in thousands):

                       Year Ended December 31,
                       ----------------------
                          2002        2001
                       ----------  ----------
United States........ $   32,416  $   85,039
International........      1,735       2,100
                       ----------  ----------
                      $   34,151  $   87,139
                       ==========  ==========

(w) Recent Accounting Pronouncements

In June 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") 146, Accounting for Exit or Disposal Activities. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged.

In November 2002, the EITF reached a consensus on issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables ("EITF 00-21") on a model to be used to determine when a revenue arrangement with multiple deliverables should be divided into separate units of accounting and, if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. The EITF also reached a consensus that this guidance should be effective all

revenue arrangements entered into in fiscal periods beginning after June 15, 2003, which for the company would be the quarter ending September 30, 2003. The Company believes that the adoption of this issue is not expected to have a material impact on its financial statements.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods beginning after December 15, 2002. The adoption of FIN 45 has not had a material impact on the Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of this standard will not have a material impact on its financial statements.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") Consolidation of Variable Interest Entities. Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. FIN 46 applies immediately to variable interest entities created after January 31, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company believes that the adoption of this standard will not have a material impact on its financial statements. However, changes in the Company's business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46.

In June 2001, the Company finalized the acquisition of Broadbase. In connection with the merger, each share of Broadbase common stock outstanding immediately prior to the consummation of the merger was converted into the right to receive .105 shares of KANA common stock (the "Exchange Ratio") and KANA assumed Broadbase's outstanding stock options and warrants based on the Exchange Ratio, issuing approximately 8.7 million shares of KANA common stock and assuming options and warrants to acquire approximately 2.7 million shares of KANA common stock. The transaction was accounted for using the purchase method of accounting.

The allocation of the purchase price to assets acquired and liabilities assumed is as follows (in thousands):

Tangible assets acquired.................................. $   125,144
Deferred compensation ....................................      15,485
Liabilities assumed ......................................     (34,975)
Deferred credit - negative goodwill ......................      (4,282)
                                                            -----------
 Net assets acquired...................................... $   101,372
                                                            ===========

Deferred compensation recorded in connection with the merger will be amortized over a four-year period. Negative goodwill was to be amortized over its estimated useful life of three years. However, due to the Company's adoption of SFAS 142 on January 1, 2002, negative goodwill was eliminated in the first quarter of 2002 resulting in a gain of $3.9 million.

The estimated purchase price was approximately $101.4 million, measured as the average fair market value of KANA's outstanding common stock from April 7 to April 11, 2001, two trading days before and after the merger agreement was announced plus the Black-Scholes calculated value of the options and warrants of Broadbase assumed by KANA in the merger, and other costs directly related to the merger is as follows (in thousands):

Fair market value of common stock..........................$    81,478
Fair market value of options and warrants assumed...........    12,586
Acquisition-related costs...................................     7,308
                                                            -----------
Total......................................................$   101,372
                                                            ===========

In connection with the Broadbase merger, KANA recorded $13.4 million of merger-related integration expenses and transition costs during the year ended December 31, 2001. These amounts consisted primarily of personnel costs of $5.6 million and duplicate facility and insurance costs, redundant assets, and professional fees associated with the merger of $7.8 million. As of December 31, 2001, the Company had approximately $10.3 million remaining in accrued merger-related costs on the consolidated balance sheet in accrued restructuring and merger costs, which were paid in 2002.

The following unaudited pro forma net revenues, net loss and net loss per share data for the year ended December 31, 2001 and 2000 are based on the respective historical financial statements of the Company and Broadbase. The pro forma data reflects the consolidated results of operations as if the merger with Broadbase occurred at the beginning of each of the periods indicated and includes the amortization of the resulting negative goodwill and deferred compensation. The pro forma results include the results of pre-acquisition periods for companies acquired by Broadbase prior to its acquisition by KANA. The pro forma financial data presented are not necessarily indicative of the Company's results of operations that might have occurred had the transaction been completed at the beginning of the periods specified, and do not purport to represent what the Company's consolidated results of operations might be for any future period.

                                                              (Unaudited Pro Forma)
                                                               For the Year Ended
                                                                  December 31,
                                                            ------------------------
                                                               2001         2000
                                                            -----------  -----------
                                                             (In thousands, except
                                                               per share amounts)
                                                            ------------------------
Net revenues ............................................. $   113,347  $   196,174
Net loss ................................................. $(1,965,075) $(3,247,880)
Basic and diluted net loss per share ..................... $   (108.92) $   (188.29)
Shares used in basic and diluted net loss
  per share calculation ..................................      18,042       17,249

In April 2000, the Company acquired Silknet Software, Inc. ("Silknet"). In connection with the merger, each share of Silknet common stock was converted into the right to receive .166 shares of the Company's common stock (the "Exchange Ratio") and the Company assumed Silknet's outstanding stock options and warrants based on the Exchange Ratio, issuing approximately 2.9 million shares of common stock and assuming options and warrants to acquire approximately 400,000 shares of the Company's common stock. The transaction was accounted for using the purchase method of accounting.

As of the acquisition date, the Company recorded the fair market value of Silknet's assets and liabilities. The resulting goodwill and intangible assets acquired in connection with the merger are being amortized over a three-year period. The allocation of the purchase price to assets acquired and liabilities assumed is as follows (in thousands):

Tangible assets acquired.................................. $    60,074
Identifiable intangibles acquired:
 In process research and development......................       6,900
 Existing technology......................................      14,400
 In-place workforce.......................................       6,600
 Goodwill.................................................   3,736,835
Liabilities assumed.......................................     (13,562)
                                                            -----------
 Net assets acquired...................................... $ 3,811,247
                                                            ===========

The purchase price was determined using the average fair market value of the Company's common stock from January 31, 2000 to February 14, 2000, five trading days before and after the merger agreement was announced. The purchase price is summarized as follows (in thousands):

Fair market value of common stock..........................$ 3,373,425
Fair market value of options and warrants assumed..........    404,922
Acquisition-related costs..................................     32,900
                                                            -----------
Total......................................................$ 3,811,247
                                                            ===========

In connection with the merger of Silknet, net intangibles of $6.9 million were allocated to in process research and development. The fair value allocation to in-process research and development was determined by identifying the research projects for which technological feasibility has not been achieved and which have no alternative future use at the merger date, assessing the stage and expected date of completion of the research and development effort at the merger date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort.

The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in- process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and obstacles necessary to attain technological feasibility. As of the date of the acquisition, Silknet had two projects in process that were 90% complete. These projects were completed as of December 31, 2001.

The estimated net present value of cash flows was based on incremental future cash flows from revenues expected to be generated by the technologies in the process of development, taking into account the characteristics and applications of the technologies, the size and growth rate of existing and future markets and an evaluation of past and anticipated technology and product life cycles. Estimated net future cash flows included allocations of operating expenses and income taxes but excluded the expected completion costs of the in-process projects, and were discounted at a rate of 20% to arrive at a net present value. The discount rate included a factor that took into account the uncertainty surrounding the successful deployment of in-process technology projects. This net present value was allocated to in-process research and development based on the percentage of completion at the merger date.

In connection with the Silknet merger, the Company recorded $6.6 million of transaction costs and merger-related integration expenses. These amounts consisted primarily of merger-related advertising and announcements of $4.5 million and duplicate facility costs of $1.0 million.

As discussed in Note 1, the Company recorded a $2.1 billion impairment charge to reduce the value of goodwill resulting from the Silknet acquisition. This impairment charge is not reflected in the above unaudited pro forma information.

Cash equivalents consisted of the following (in thousands):

                                                     December 31,
                                               ------------------------
                                                  2002         2001
                                               -----------  -----------
Money market funds........................... $     8,514  $    21,992
Municipal securities.........................       1,853           --
Certificate of Deposit.........................       114           --
                                               -----------  -----------
                                              $    10,481  $    21,992
                                               ===========  ===========

Short-term investments consisted of the following (in thousands):

                                                     December 31,
                                               ------------------------
                                                  2002         2001
                                               -----------  -----------
Municipal securities......................... $     3,784  $    13,636
Corporate notes / bonds......................       6,752        1,018
                                               -----------  -----------
                                              $    10,536  $    14,654
                                               ===========  ===========

Property and equipment, net consisted of the following (in thousands):

                                                     December 31,
                                               ------------------------
                                                  2002         2001
                                               -----------  -----------
Computer equipment........................... $    22,692  $    28,024
Furniture and fixtures.......................       2,898        2,784
Leasehold improvements.......................       4,058        3,762
Internal use software........................      15,116           --
                                               -----------  -----------
                                                   44,764       34,570
Less accumulated depreciation and amortizatio     (22,471)     (15,188)
                                               -----------  -----------
                                              $    22,293  $    19,382
                                               ===========  ===========

Accrued liabilities consisted of the following (in thousands):

                                                     December 31,
                                               ------------------------
                                                  2002         2001
                                               -----------  -----------
Accrued payroll and related expenses......... $     3,851  $     5,197
Accrued commissions..........................       2,067        3,238
Other accrued liabilities....................       7,963       16,857
                                               -----------  -----------
                                              $    13,881  $    25,292
                                               ===========  ===========

Other income (expense), net consisted of the following (in thousands):

                                                      Year Ended December 31,
                                               -------------------------------------
                                                  2002         2001         2000
                                               -----------  -----------  -----------
Interest income.............................. $       965  $     2,266  $     5,991
Interest expense.............................         107         (152)        (242)
Other........................................        (159)        (593)        (915)
                                               -----------  -----------  -----------
                                              $       913  $     1,521  $     4,834
                                               ===========  ===========  ===========

Consideration paid in connection with acquisitions is required to be allocated to the acquired assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on the Company's estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, the Company is required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. The Company uses the straight-line method to expense long-lived assets, which results in an equal amount of expense in each period. Amortization of goodwill ceased as of January 1, 2002 upon the Company's adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Instead, the Company is now required to test goodwill for impairment under certain circumstances, write down goodwill when it is impaired.

The Company regularly evaluates acquired businesses for potential indicators of impairment of goodwill and intangible assets. The Company's judgments regarding the existence of impairment indicators are based on market conditions, operational performance of our acquired businesses and identification of reporting units. Future events could cause the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associated with the Company's acquired businesses are impaired.

Under the transition provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002 based upon the Company's analysis at that time. However, during the quarter ended June 30, 2002, circumstances developed that indicated the goodwill was likely impaired and the Company performed an impairment analysis as of June 30, 2002. This analysis resulted in a $55.0 million impairment expense. Circumstances that led to the impairment included the lower-than-previously-expected revenues and net loss for the second quarter of 2002 and the revision of estimates of the Company's revenues and net loss for subsequent quarters, based upon financial results for the second quarter of 2002 and the reduction of estimated revenue and cash flows in future quarters. The Company used relevant market data, including KANA's market capitalization during the period following the revision of estimates, to calculate an estimated fair value and the resulting goodwill impairment. The estimated fair value was compared to the corresponding carrying value of goodwill at June 30, 2002, which resulted in a revaluation of goodwill as of June 30, 2002. The remaining amount of goodwill as of December 31, 2002 was $7.4 million. Any further impairment loss could have a material adverse impact on the Company's financial condition and results of operations.

In 2001, the Company also performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Silknet, under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The assessment was performed primarily due to the significant and sustained decline in the Company's stock price since the valuation date of the shares issued in the Silknet acquisition which resulted in the net book value of the Company's assets prior to the impairment charge significantly exceeding its market capitalization, the overall decline in the industry growth rates, and the Company's lower-than-projected operating results. As a result, the Company recorded an impairment charge of approximately $603.4 million to reduce goodwill in the quarter ended March 31, 2001. The charge was based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%. The assumptions supporting the cash flows, including the discount rate, were determined using the Company's best estimates as of such date.

The Company ceased amortizing goodwill as of the beginning of fiscal 2002. The following table presents comparative information showing the effects that the non-amortization of goodwill provisions of SFAS 142 would have had on the net loss and basic and diluted net loss per share for the periods shown (in thousands, except per share amounts):

                                                Year Ended December 31,
                                         -------------------------------------
                                            2002         2001         2000
                                         -----------  -----------  -----------
Reported net loss...................... $   (96,110) $  (942,895) $(3,070,873)
Goodwill amortization..................          --      118,060      866,328
                                         -----------  -----------  -----------
Adjusted net loss...................... $   (96,110) $  (824,835) $(2,204,545)
                                         ===========  ===========  ===========

Basic and diluted net loss per share... $     (4.29) $    (68.61) $   (395.68)
Goodwill amortization..................          --         8.59       111.63
                                         -----------  -----------  -----------
Adjusted basic and diluted
  net loss per share................... $     (4.29) $    (60.02) $   (284.05)
                                         ===========  ===========  ===========
Shares used in computing adjusted basic
  and diluted net loss per share.......      22,403       13,743        7,761
                                         ===========  ===========  ===========

The components of goodwill and other intangibles are as follows (in thousands):

                                               December 31,
                                         ------------------------
                                            2002         2001
                                         -----------  -----------
Goodwill............................... $ 3,085,207  $ 3,135,925
Less: impairment charges...............  (1,536,395)  (1,481,395)
Less: accumulated amortization.........  (1,541,364)  (1,595,983)
                                         -----------  -----------
Goodwill, net..........................       7,448       58,547
                                         -----------  -----------

Purchased technology...................      14,400       14,400
Less: accumulated amortization.........     (12,947)      (8,147)
                                         -----------  -----------
Intangibles, net.......................       1,453        6,253
                                         -----------  -----------
Goodwill and intangibles, net.......... $     8,901  $    64,800
                                         ===========  ===========

The changes in the carrying amount of goodwill are as follows (in thousands):

Goodwill, net, as of December 31, 2001... $    58,547
Write-off of negative goodwill...........       3,901
Impairment...............................     (55,000)
                                           -----------
Goodwill, net, as of December 31, 2002... $     7,448
                                           ===========

At December 31, 2002, the Company maintained a line of credit totaling $5.0 million, which is collateralized by all of its assets and bears interest at the bank's prime rate plus .25% (4.5% as of December 31, 2002 and 5.25% as of December 31, 2001). The line of credit expires in November 2003, at which time the entire balance of the line of credit will be due. Total borrowings as of December 31, 2002 and 2001 were $3.4 and $1.2 million under this line of credit. The line of credit contains a financial covenant that requires the Company to maintain at least a $8.0 million dollar balance in cash or cash equivalents with the bank at all times. In lieu of this minimum balance covenant the Company may also cash-secure the facility with funds equivalent to 115% of the outstanding debt obligation. The line of credit also requires that the Company maintains at all times a minimum of $20.0 million as short-term unrestricted cash and cash equivalents. As of December 31, 2002, the Company was in compliance with all financial covenants.

In June 2002, the Company entered into a non-recourse receivables purchase agreement with a bank which provides for the sale of up to $5.0 million in certain qualified receivables subject to an administrative fee and a discount schedule ranging from the bank's prime rate of interest plus 0.50% to the bank's prime rate of interest plus 1.50%. The Company had not sold any receivables under this agreement as of December 31, 2002.

Included in notes payable are the Company's capital lease obligations at December 31, 2002, totaling $15,100. All capital leases will be fully repaid during 2003 and are therefore classified as current liabilities. As of December 31, 2001, the Company's capital lease obligation was $284,000.

6. Commitments and Contingencies

The Company leases its facilities under noncancelable operating leases with various expiration dates through December 2010. In connection with its existing leases, the Company entered into letters of credit totaling $868,000 expiring in 2003 through 2010. The letters of credit are supported by either restricted cash or the Company's line of credit.

Future minimum lease payments under noncancelable operating leases are as follows (in thousands):

   Year Ending December 31,
  --------------------------
     2003...................................... $    5,539
     2004......................................      4,917
     2005......................................      5,087
     2006......................................      3,830
     2007......................................      3,096
     Thereafter................................      6,782
                                                 ----------
     Total minimum lease payments.............. $   29,251
                                                 ==========

Rent expense for properties in use, net of sublease payments, was approximately $4.2 million, $8.7 million and $8.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Restructuring expense related to restructured properties was a gain of $5.1 million and $38.2 million for the years ended December 31, 2002 and 2001, respectively. Sublease payments were approximately $814,000, $637,000 and $324,000 in the years ended December 31, 2002, 2001 and 2000, respectively.

In April 2001, Office Depot, Inc. filed a complaint against KANA in the Circuit Court for the 15th District of the State of Florida claiming that KANA breached its license agreement with Office Depot. Office Depot is seeking relief in the form of a refund of license fees and maintenance fees paid to KANA, attorneys' fees and costs. Management believes we have meritorious defenses to these claims and intends to defend the action vigorously.

The underwriters for KANA's initial public offering, Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC, Wit Capital Corp as well as KANA and certain current and former officers of KANA were named as defendants in federal securities class action lawsuits filed in the United States District Court for the Southern District of New York. The parties have agreed that the claims against the current and former officers of KANA shall be dismissed without prejudice. The cases allege violations by more than 300 issuers of stock, including KANA and the underwriters of various securities laws on behalf of a class of plaintiffs who purchased KANA's stock between September 21, 1999 and December 6, 2000 in connection with the Company's initial public offering. Specifically, the complaints allege that the underwriter defendants engaged in a scheme concerning sales of KANA's and other issuers' securities in the initial public offering and in the aftermarket. Management believes we have meritorious defenses to these claims and intends to defend the action vigorously.

On April 16, 2002, Davox Corporation (now Concerto Software) filed an action against the Company in the Superior Court, Middlesex, Commonwealth of Massachusetts, asserting breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, misrepresentation, and unfair trade practices, in relation to an OEM Agreement between the Company and Davox under which Davox has paid a total of approximately $1.6 million in fees. Davox seeks actual and punitive damages in an amount to be determined at trial, and award of attorneys' fees. This action is in its early stages and has been re-filed in the Circuit Court of Cook County, Illinois. Management believes the Company has meritorious defenses to these claims and intends to defend the action vigorously.

On February 20, 2003, Tumbleweed Communications Corp. filed suit against the Company's customer, Ameritrade, Inc., in the U.S. District Court for the Central District of California, alleging infringement of U.S. Patent No. 6,192,407, and seeking injunctive relief, damages and attorneys fees. The Company has agreed to assume defense of this case on behalf of Ameritrade. Management believes the Company has meritorious defenses to these claims and intends to defend the action vigorously.

Other third parties have from time to time claimed, and others may claim in the future that the Company has infringed their past, current or future intellectual property rights. The Company has in the past been forced to litigate such claims. These claims, whether meritorious or not, could be time- consuming, result in costly litigation, require expensive changes in our methods of doing business or could require the Company to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm the Company's business.

As of December 31, 2002, approximately $700,000 was accrued as the Company's estimate of costs related to the above legal proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on the results from operations, consolidated balance sheet and cash flows, due to defense costs, diversion of management resources and other factors.

On February 12, 2002, the Company completed the sale of an aggregate of approximately 2.9 million shares of its common stock to institutional investors in a private placement, for gross proceeds of approximately $34.5 million (before transaction-related costs of $3.1 million).

In November 2001, the Company sold 1,000,000 shares of its common stock for gross and net proceeds of $10.0 million in a private placement transaction, and an additional 10,000 shares for gross and net proceeds of $100,000 to the same investor in December 2001.

In June 2000, the Company sold 250,000 shares of common stock at $500.00 per share in a private placement transaction. KANA received approximately $120.0 million in net proceeds.

In September 1999, KANA consummated its initial public offering in which it sold 759,000 shares of common stock at $75.00 per share. KANA received approximately $51.0 million in cash, net of underwriting discounts, commissions and other offering costs.

Since inception, KANA issued 1,335,111 shares of convertible preferred stock. During 1999, 1,158,138 shares were converted to common stock at the time of the Connectify merger and 176,973 shares were converted to common stock at the initial public offering at a ratio of 1 share of preferred stock for 2 shares of common stock.

As an incentive for continued employment, the Company has issued to founders 1,099,440 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. As of December 31, 2000, all shares were vested.

Certain option holders have exercised options to purchase shares of restricted common stock in exchange for four-year full recourse promissory notes. The notes bear interest at 5.7% and expire on various dates through 2003. 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, 2002, there were approximately 10,900 shares subject to repurchase. These options were exercised at prices ranging from $01.45 to $33.75 with a weighted- average exercise price of $5.77 per share.

The KANA 1999 Employee Stock Purchase Plan ("KANA ESPP") allows eligible employees to purchase common stock through payroll deductions of up to 15% of an employee's compensation. Each offering period will have a maximum duration of 24 months and will consist of four six-month purchase periods. The purchase price of the common stock 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 fair market value per share on each semi-annual purchase date. The KANA ESPP qualifies as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. As of December 31, 2002, 93,950 shares were issued from the KANA ESPP.

Upon the merger with Broadbase in June 2001, the Company assumed Broadbase's 1999 Employee Stock Purchase Plan (the "Broadbase ESPP"). The Broadbase ESPP has terms similar to the KANA ESPP. As of December 31, 2002, 155,691 shares were issued under the Broadbase ESPP. This plan expires with the purchase June 30, 2003.

The Company's 1999 Stock Incentive Plan (the "1999 Plan"), as successor to the 1997 Stock Option/Stock Issuance Plan (the "1997 Plan"), provides for a total of 5,804,120 shares of the Company's common stock to be granted to employees, independent contractors, officers, and directors. Options are granted at an exercise price equivalent to the closing fair market value on the date of grant. 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 monthly over four years, after a 6 month cliff. Plans of acquired companies have similar terms as those of the 1999 Plan. Outstanding options under all these plans were assumed in the respective merger or acquisition.

Upon the merger with Broadbase in June 2001, the Company assumed Broadbase's existing 1999 and 2000 Stock Incentive Plans (Broadbase Incentive Plans). These Broadbase Incentive Plans have similar terms as the 1999 Plan. Upon the date of the merger, 2,515,984 and 5,251,061 options were outstanding and available for grant, respectively, under the Broadbase Incentive Plans.

In December 1999, the board of directors approved the 1999 Special Stock Option Plan and 100,000 shares of common stock were reserved for issuance under this plan. The Special Stock Option Plan has similar terms as those of the 1999 Plan, except that options may be granted with an exercise price less than, equal to, or greater than the fair market value of the option shares on the grant date. This plan expired upon the merger with Broadbase in June 2001.

A summary of stock option activity for all plans follows:

                                              Options Outstanding
                                            -----------------------
                                                                Weighted
                                        Shares                  Average
                                       Available   Number of    Exercise
                                       for Grant    Shares       Price
                                      ----------- -----------  ----------
Balances, December 31, 1999..........    786,787     377,112  $   127.10
  Additional shares authorized.......  1,258,310          --          --
  Options assumed....................         --     342,199      168.70
  Options granted.................... (2,151,300)  2,151,300      521.30
  Options exercised..................         --    (103,637)      41.20
  Options canceled and retired.......    279,235    (284,800)     788.80
                                      ----------- -----------  ----------
Balances, December 31, 2000..........    173,032   2,482,174      397.80
  Additional shares authorized.......  1,500,000          --          --
  Option plan assumed................  5,251,061   2,515,984      131.97
  Options granted.................... (4,636,083)  4,636,083       13.81
  Options exercised..................         --    (537,314)       4.81
  Options canceled and retired.......  1,399,025  (2,802,287)     208.82
                                      ----------- -----------  ----------
Balances, December 31, 2001..........  3,687,035   6,294,640       48.63
  Additional shares authorized.......  2,133,745          --
  Options granted.................... (3,563,236)  3,563,236        5.05
  Options exercised..................         --    (426,422)       4.06
  Options canceled and retired.......  2,186,628  (2,226,601)      62.84
                                      ----------- -----------  ----------
Balances, December 31, 2002..........  4,444,172   7,204,853  $    25.42
                                      =========== ===========  ==========

The following table summarizes information about fixed stock options outstanding at December 31, 2002:

                          Options Outstanding          Options Exercisable
                    --------------------------------- ----------------------
                                 Weighted
                                 Average    Weighted               Weighted
                                Remaining    Average                Average
                      Number    Contractual Exercise    Number     Exercise
                     of shares     Life       Price    of shares     Price
                    ----------- ----------  --------- -----------  ---------
$0.10--$1.15.......    548,591        9.5  $    0.82     191,258  $    0.30
$1.19--$1.63.......  1,223,960        9.5       1.62     211,232       1.61
$2.05--$8.76.......  1,592,480        8.7       5.97     560,760       6.80
$9.48--$12.40......  1,097,358        9.0      10.44     692,531      10.08
$13.80--$14.41.....  2,021,057        9.0      14.41     518,679      14.41
$14.57--$75.00.....    421,628        8.5      22.21     167,334      26.26
$90.40--$1,395.00..    299,779        7.3     404.41     192,983     425.59
                    ----------- ----------  --------- -----------  ---------
                     7,204,853        8.9  $   25.42   2,534,777  $   41.50
                    =========== ==========  ========= ===========  =========

The weighted average exercise price of stock options outstanding was $48.63 and $397.80 as of December 31, 2001 and December 31, 2000, respectively. With the exception of grants for which the charges are referred to below, the fair value of stock options granted equaled the exercise price on the date of grant.

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. Options granted with an exercise price below the fair market value resulted in a charge of $1.5 million in 2002 and $2.6 million in 2001. Cancellations of grants with previous associated charges resulted in a reversal of compensation expense of $1.2 million in 2002 and $3.0 million in 2001. In connection with the merger with Broadbase, the Company recorded unearned stock-based compensation totaling approximately $15.5 million during the year ended December 31, 2001. These amounts are included as a component of stockholders' equity and are being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in FASB Interpretation No. 28.

Had compensation cost for the Company's plans been determined consistent with the fair value approach in SFAS No. 123, the Company's net loss and net loss per share would have been as indicated below (in thousands, except per share amounts):

                                                  Year Ended December 31,
                                           ------------------------------------
                                              2002        2001         2000
                                           ----------  -----------  -----------
Net loss:
  As reported............................ $  (96,110) $  (942,895) $(3,070,873)
  Pro forma.............................. $ (128,768) $  (896,972) $(3,178,622)
Basic and diluted net loss per share:
  As reported............................ $    (4.29) $    (68.61) $   (395.68)
  Pro forma.............................. $    (5.75) $    (65.27) $   (409.56)

The fair value of the Company's stock-based awards was estimated assuming no expected dividends and the following weighted average assumptions:

                               Options                         ESPP
                    ------------------------------ ------------------------------
                    Interest                       Interest
                      Rate      Term    Volatility   Rate      Term    Volatility
                    --------- --------- ---------- --------- --------- ----------
2002................    3.02%   3 yrs         127%     1.27%   6 mths        127%
2001...............     3.62%   3 yrs         100%     1.82%   6 mths        100%
2000...............     6.16%   3 yrs         100%     5.30%   9 mths        100%

The weighted average fair value of the employee stock purchase rights granted under the 1999 ESPP during 2002, 2001 and 2000 was $5.71, $18.31, and $4.99 respectively.

The weighted average fair value and exercise price of the options granted are as follows:

                                                           Weighted Average Exercise Pri  Weighted Average Fair Value
                                                           ----------------------------  ----------------------------
                                                             2002      2001      2000      2002      2001      2000
                                                           --------  --------  --------  --------  --------  --------
Exercise price does not exceed fair value on grant date.. $   5.05  $  14.01  $ 512.20  $   3.64  $  11.30  $ 334.90
Exercise price exceeds fair value on grant date.......... $     --  $  12.51  $ 811.20  $     --  $   7.56  $ 526.90
Total options............................................ $   5.05  $  13.81  $ 521.30  $   3.64  $  10.79  $ 342.00

In September 2000, the Company issued to Accenture 40,000 shares of common stock and a warrant to purchase up to 72,500 shares of common stock pursuant to a stock and warrant purchase agreement in connection with its global strategic alliance. The shares of the common stock issued were fully vested, and the Company recorded a charge of approximately $14.8 million to be amortized over the four-year term of the agreement. As of December 31, 2002, warrants to purchase 33,997 shares of common stock are fully vested and 28,503 have been forfeited, with the remainder becoming vested upon the achievement of certain performance goals. The vested warrants were valued using the Black-Scholes model resulting in charges totaling $2.0 million of which $1.0 million is being amortized over the remaining term of the agreement and $1.0 million was immediately expensed in the fourth quarter of 2000. The Company will incur a charge to stock-based compensation for the unvested portion of the warrant when performance goals are achieved. As of December 31, 2002, shares of common stock under the warrant which were unvested had a fair value of approximately $20,000 based upon the fair market value of the Company's common stock at such date.

In June 2001, the Company entered into an agreement to issue to a customer a fully vested and exercisable warrant to purchase up to 25,000 shares of common stock pursuant to a warrant purchase agreement. The Company has recorded deferred stock-based compensation of $330,000 for the warrant using the Black- Scholes model. This amount was amortized as a reduction of revenue in 2001.

In September 2001, the Company issued to a customer a warrant to purchase up to 5,000 shares of common stock pursuant to a warrant purchase agreement. The warrant fully vests in September 2006 and has a provision for acceleration of vesting 1,250 shares annually over four years if certain marketing criteria are met by the customer. The warrants were valued using the Black-Scholes model resulting in a charge to stock-based compensation of approximately $29,000 which is being amortized over the five-year term of the agreement.

In September 2001, the Company issued to Accenture an additional warrant to purchase up to 150,000 shares of common stock pursuant to a warrant purchase agreement in connection with its global strategic alliance. The warrant is fully vested and exercisable as of September 2001. The warrants were valued using the Black-Scholes model resulting in a charge of approximately $946,000 which is being amortized over the four-year term of the agreement.

In November 2001, the Company issued to two investment funds warrants to purchase up to 386,118 shares of common stock at $10.00 per share in connection with a proposed financing which was to have been completed in February 2002 upon attaining stockholder approval. These warrants were initially exercisable into 193,059 shares. The exercisable warrants were valued using the Black-Scholes model resulting in a charge of approximately $1.0 million to deferred stock- based compensation. On February 1, 2002, the stockholders voted against the proposed financing, which resulted in the Company terminating the share purchase agreement and caused the warrants to become exercisable with respect to all 386,118 shares. The warrants are exercisable for two years from the date the share purchase agreement was terminated. Using the Black-Scholes model, the warrants issued in November 2001 that were initially exercisable were re-valued as of February 1, 2002, and the warrants that became exercisable on February 1, 2002 were valued as of such date, resulting in a charge totaling approximately $4.7 million which was reflected as amortization of stock-based compensation in the statement of operations in the first quarter of 2002.

As of December 31, 2002, there was approximately $8.6 million of total unearned deferred stock-based compensation remaining to be amortized, of which $6.3 million is associated with warrants issued.

In November of 2002, the Company entered into an amendment to a facility lease. In connection with this lease amendment, our evaluation of real estate market conditions relating to this and other excess leased facilities, and discussions with its other landlords, the Company reduced its associated restructuring reserve by approximately $9.1 million. This reduction in restructuring reserve was primarily comprised of a $4.0 million payment made in connection with the lease amendment, as well as approximately $5.1 million in cost savings resulting from this amendment that were reflected in the Company's operating results for the quarter ended December 31, 2002.

In the past, the Company has experienced substantial increases in expenditures consistent with growth in its operations and personnel. To reduce its expenditures, the Company restructured in several areas, including reduced staffing, expense management and capital spending. In 2001, the Company incurred restructuring charges of approximately $89.0 million related to the reductions in its workforce and costs associated with certain excess leased facilities and asset impairments. Included in the $89.0 million are non-cash charges totaling $28.3 million primarily related to disposals of fixed assets. The restructuring costs in 2001 include $26.4 million for assets disposed of or removed from operations. Assets disposed of or removed from operations consisted primarily of computer equipment and related software, office equipment, furniture and fixtures, and leasehold improvements.

The restructuring costs in 2001 also include $24.4 million, for severance, benefits and related costs due to the reduction in workforce. As of December 31, 2001, the Company had 409 full-time employees. The Company restructured the organization throughout 2001 with net workforce reductions of approximately 772 employees, or 65% from December 31, 2000, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, and reduce costs and bring staffing and structure in line with industry standards and current economic conditions. These reductions have been significant, particularly in light of the increase of approximately 896 employees upon the acquisition of Broadbase Software in June of 2001.

The restructuring costs in 2001 also include $38.2 million due to the Company's decision to exit and reduce certain facilities. The estimated facility costs are based on the Company's contractual obligations, net of assumed sublease income based on current comparable rates for leases in the respective markets. Should facilities operating lease rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. Future cash outlays are anticipated through December 2010 unless the Company negotiates to exit the leases at an earlier date.

A summary of restructuring expenses, payments, and liabilities for the years ended and as at December 31, 2001 and 2002 is as follows (in thousands):

                                                                    Fixed Asset
                                          Severance    Facilities    Disposals     Totals
                                          ----------  ------------  ------------  --------
Restructuring reserve at 12/31/2000..... $       --  $         --  $         --  $     --
                                          ----------  ------------  ------------  --------
Restructuring charge....................     24,426        38,168        26,453    89,047
Non-cash charges........................     (1,858)           --       (26,453)  (28,311)
Payments made...........................    (21,655)      (10,750)           --   (32,405)
                                          ----------  ------------  ------------  --------
Restructuring reserve at 12/31/2001.....        913        27,418            --    28,331
                                          ----------  ------------  ------------  --------
Non-cash reduction of restructuring.....         --        (5,086)           --    (5,086)
Payments made...........................       (695)      (12,415)           --   (13,110)
Sublease payments received..............         --           814            --       814
                                          ----------  ------------  ------------  --------
Restructuring reserve at 12/31/2002..... $      218  $     10,731  $         --  $ 10,949
                                          ==========  ============  ============  ========

The Company has a 401(k) retirement plan, which covers substantially all employees. Eligible employees may make salary deferral (before tax) contributions up to a specified amount. The Company, at its discretion, may make additional matching contributions on behalf of the participants of the retirement plan. No contributions were made by the Company for the years ended December 31, 2002, 2001 and 2000.

The 2002, 2001 and 2000 income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following (in thousands):

                                                      Year Ended December 31,
                                                 ------------------------------------
                                                    2002        2001         2000
                                                 ----------  -----------  -----------
Federal tax benefit at statutory rate.......... $  (31,659) $  (320,272) $(1,040,940)
Stock-based compensation ......................         --          379        3,861
Merger-based costs.............................         --        2,584        7,564
Net operating losses and temporary
   differences, no tax benefit recognized......     12,160       68,302       26,517
Goodwill amortization and impairment...........     19,006      248,447    1,005,673
Other permanent differences....................        493          560       (2,675)
                                                 ----------  -----------  -----------
Total tax expense.............................. $       --  $        --  $        --
                                                 ==========  ===========  ===========

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

                                                      December 31,
                                                 -----------------------
                                                    2002        2001
                                                 ----------  -----------
 Deferred tax assets:
   Accruals and reserves....................... $    2,010  $     4,604
   Property and equipment......................      4,170        8,379
   Stock option deduction......................     42,009       35,183
   Other.......................................      4,940          967
   Net operating loss..........................    139,576      149,041
                                                 ----------  -----------
 Gross deferred tax assets.....................    192,705      198,174
 Valuation allowance...........................   (192,705)    (198,174)
                                                 ----------  -----------
   Net deferred tax assets..................... $       --  $        --
                                                 ==========  ===========

The net change in the valuation allowance for the year ended December 31, 2002 was a decrease of approximately $5.5 million. Management believes that sufficient uncertainty exists as to whether the deferred tax assets will be realized, and accordingly, a valuation allowance is required.

As of December 31, 2002, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $388.9 million and $118.2 million, respectively. The federal net operating loss carryforwards, if not offset against future taxable income, will expire from 2011 through 2022.

Pursuant to the Internal Revenue Code, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. A portion of the net operating loss and tax credit carryforwards subject to potential expiration has not been included in deferred tax assets.

A portion of deferred tax assets relating to net operating losses pertain to net operating loss carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these loss and credit carryforwards are accounted for as a credit to additional paid-in-capital rather than a reduction of income tax provision.

As of the quarter ended June 30, 2001, the Company adopted a plan to discontinue the KANA Online business. The Company no longer seeks new business for KANA Online, but continued to service all ongoing contractual obligations it has to its existing customers through April 2002. Accordingly, KANA Online is reported as a discontinued operation for the years ended December 31, 2002, 2001 and 2000. The estimated loss on the disposal of KANA Online was $3.7 million as of June 30, 2001, consisting of an estimated loss on disposal of the assets of $2.6 million and a provision of $1.1 million for the anticipated operating losses during the phase-out period. The loss on disposal was recorded in the second quarter of 2001 and adjusted in the second quarter of 2002, resulting in a gain of $0.4 million.

This operation has been presented as a discontinued operation for all periods presented. The KANA Online operating results are as follows (in thousands):

                                                               Year Ended December 31,
                                                            ----------------------------
                                                              2002      2001      2000
                                                            --------  --------  --------
Revenues ................................................. $     --  $  3,161  $  6,230

Income (loss) from operations of discontinued operation ..       --      (125)    1,173
Gain/(loss) on disposal ..................................      381    (3,667)       --
                                                            --------  --------  --------
Total income (loss) on discontinued operations ........... $    381  $ (3,792) $  1,173
                                                            ========  ========  ========

During 2002, the Company provided support services to a company that is affiliated with a director of KANA. The Company recognized approximately $59,400 in revenue related to the company in the year ended December 31, 2002.

In addition, the Company purchased software and support services from this company in 2002 totaling $239,100. The purchase cost of the software and support was included in fixed assets and prepaid maintenance. Management believes that this contract has rates and terms that are comparable with those entered into with independent third parties.

                                       Balance    Additions
                                         at      Charged to                Balance
                                      Beginning  Revenues and              at End
                                       of Year    Expenses     Deductions  of Year
                                      ---------  -----------   ---------  ---------
Allowance for Doubtful Accounts:
 Year ended December 31, 2002....... $   6,844  $        57   $  (2,086) $   4,815

 Year ended December 31, 2001.......     1,966       13,970      (9,092)     6,844

 Year ended December 31, 2000.......       366        1,962        (362)     1,966



                                                  Additions
                                       Balance   Charged to
                                         at       Deferred                 Balance
                                      Beginning   Tax Asset                at End
                                       of Year    Valuation    Deductions  of Year
                                      ---------  -----------   ---------  ---------
Deferred Tax Asset Valuation Allowance:
 Year ended December 31, 2002....... $ 198,174  $        --   $   1,092  $ 197,082

 Year ended December 31, 2001.......    50,143      148,031          --    198,174

 Year ended December 31, 2000.......    20,469       29,674          --     50,143

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Menlo Park, state of California, on the 28^th day of March, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:     March 28, 2003          By     /s/ CHUCK BAY                     
			Chuck Bay
			Chief Executive Officer and
			Director (Principal Executive Officer)


Date:     March 28, 2003          By     /s/ JOHN HUYETT                   
			John Huyett
			Chief Financial Officer
			(Principal Financial and Accounting Officer)
 
Date:     March 28, 2003          By     /s/ JAMES C. WOOD                 
			James C. Wood
			Chairman of the Board of Directors
 
Date:     March 28, 2003          By     /s/ TOM GALVIN                    
			Tom Galvin
			Director 
 
Date:     March 28, 2003          By     /s/ KEVIN HARVEY                  
			Kevin Harvey
			Director 
 
Date:     March 28, 2003          By     /s/ MASSOOD ZARRABIAN             
			Massood Zarrabian
			Director 

Date:     March 28, 2003          By     /s/ CHUCK BAY                     
			Chuck Bay
			Chief Executive Officer

Date:     March 28, 2003          By     /s/ JOHN HUYETT                   
			John Huyett
			Chief Financial Officer