E PIPHANY INC - 10-Q Quarterly Report

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

FORM 10 - Q

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

For the quarterly period ended June 30, 2004

Commission File Number 000-26881

E.PIPHANY, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0443392

(State of incorporation)		(I.R.S. Employer Identification Number)

475 Concar Drive San Mateo, California 94402

(Address of principal executive offices)

(650) 356-3800

(Registrant’s telephone number, including area code)

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

YES x

NO o

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

YES x

NO o

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of July 30, 2004, was 76,070,197.

E.PIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS

		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets - As of June 30, 2004 and December 31, 2003	3

	Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2004 and 2003	4

	Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2004 and 2003	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	34

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

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

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

SIGNATURES		37

Exhibit Index		38

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

	June 30, 2004			December 31, 2003

	(unaudited)
ASSETS
Current assets:
Cash, cash equivalents and short-term investments	$	26,042		$	30,468
Short-term investments		124,659			127,112
Accounts receivable, net		8,445			10,688
Prepaid expenses and other assets		4,636			5,825
Short-term restricted cash and investments		1,178			726

Total current assets		164,960			174,819
Long-term investments		106,590			105,171
Long-term restricted cash and investments		5,890			7,274
Property and equipment, net		5,147			6,710
Goodwill, net		81,499			81,499
Purchased intangibles, net		—			679
Other assets		536			847

Total assets	$	364,622		$	376,999

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,076		$	1,367
Accrued compensation		5,745			8,536
Accrued liabilities		6,685			8,081
Current portion of restructuring costs		6,524			7,215
Deferred revenue		17,982			19,157

Total current liabilities		38,012			44,356
Restructuring costs, net of current portion		18,118			20,489
Other long-term liabilities		223			185

Total liabilities		56,353			65,030

Stockholders’ equity:
Common stock		7			7
Additional paid-in capital		3,828,193			3,822,361
Accumulated other comprehensive loss		(2,366	)		(683	)
Accumulated deficit		(3,517,565	)		(3,509,716	)

Total stockholders’ equity		308,269			311,969

Total liabilities and stockholders’ equity	$	364,622		$	376,999

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

E.PIPHANY, INC.

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

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003

Revenues:
Product license	$	7,638		$	9,539		$	14,744		$	19,930
Services		5,059			5,434			10,594			10,549
Maintenance		7,729			7,185			15,317			14,190

		20,426			22,158			40,655			44,669

Cost of revenues:
Product license		387			412			802			664
Services		4,352			5,880			8,850			11,900
Maintenance		1,370			1,574			2,646			3,114
Amortization of purchased technology		—			1,470			679			3,298

		6,109			9,336			12,977			18,976

Gross profit		14,317			12,822			27,678			25,693

Operating expenses:
Research and development		6,368			8,193			13,041			16,742
Sales and marketing		8,953			11,074			17,384			23,387
General and administrative		3,136			2,915			5,841			5,487
Restructuring charges		375			1,079			1,011			3,322
Amortization of purchased intangibles		—			101			—			253
Stock-based compensation		—			12			—			39

Total operating expenses		18,832			23,374			37,277			49,230

Loss from operations		(4,515	)		(10,552	)		(9,599	)		(23,537	)
Other income, net		903			1,224			1,831			3,336

Loss before provision for taxes		(3,612	)		(9,328	)		(7,768	)		(20,201	)
Provision for taxes		35			80			81			108

Net loss	$	(3,647	)	$	(9,408	)	$	(7,849	)	$	(20,309	)

Basic and diluted net loss per share	$	(0.05	)	$	(0.13	)	$	(0.10	)	$	(0.28	)

Shares used in computing basic and diluted net loss per share		75,765			73,400			75,377			73,115

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

E.PIPHANY, INC.

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

	Six Months Ended June 30,

	2004			2003

Cash flows used in operating activities:
Net loss	$	(7,849	)	$	(20,309	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,163			3,731
Stock-based compensation		—			39
Non-cash restructuring costs		—			185
Amortization of purchased technology and purchased intangibles		679			3,551
Accounts receivable		2,243			(1,034	)
Prepaid expenses and other assets		1,500			2,991
Accounts payable		(291	)		(1,157	)
Accrued liabilities and compensation		(4,149	)		(2,205	)
Restructuring costs		(3,062	)		(1,589	)
Deferred revenue		(1,175	)		(4,288	)

Net cash used in operating activities		(9,941	)		(20,085	)

Cash flows from investing activities:
Purchases of property and equipment		(668	)		(867	)
Loss on disposal of property and equipment		68			—
Restricted cash and investments		932			(9	)
Proceeds from maturities of investments		178,944			152,730
Purchases of investments		(179,349	)		(169,833	)

Net cash used in investing activities		(73	)		(17,979	)

Cash flows from financing activities:
Principal payments on capital lease obligations		—			(101	)
Repayments on notes receivable		—			159
Proceeds from sale of common stock, net of repurchases		5,832			2,786

Net cash provided by financing activities		5,832			2,844

Effect of foreign exchange rates on cash and cash equivalents		(244	)		(192	)

Net increase (decrease) in cash and cash equivalents		(4,426	)		(35,412	)
Cash and cash equivalents at beginning of period		30,468			48,235

Cash and cash equivalents at end of period	$	26,042		$	12,823

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

E.PIPHANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

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

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include normal recurring adjustments and restructuring charges in each of the periods presented) which are, in the opinion of management, necessary to state fairly the financial position of E.piphany as of June 30, 2004, the results of its operations for the three and six months ended June 30, 2004 and 2003, and its cash flows for the six months ended June 30, 2004 and 2003. The results for the three and six months ended June 30, 2004 are not necessarily indicative of the results expected for the full fiscal year.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of E.piphany and its subsidiaries. As of June 30, 2004, the Company owns 100% of the outstanding stock of all its subsidiaries. Intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements

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

Reclassification

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

Foreign Currency Translation

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

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

Cash equivalents consist of highly liquid investments that are readily convertible into cash. Short-term investments consist of highly liquid securities that the Company intends to hold for less than one year. Long-term investments consist of securities that the Company intends to hold for more than one year with maturity dates of less than two years from the date of purchase. The Company has classified its short-term and long-term investments as available-for-sale. Short-term and long-term investments are carried at fair value with unrealized gains and losses reported, net of tax, as accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value which are determined to be other than temporary on available-for-sale securities are included in other income, net and are derived using the specific identification method for determining the cost of securities and were not significant for the three or six month periods ended June 30, 2004 and 2003.

From time to time, we are required to obtain letters of credit that serve as collateral for our obligations to third parties under facility lease agreements. These letters of credit are secured by cash and investments. As of June 30, 2004, we had $7.1 million securing letters of credit, which are classified as restricted cash and investments in the accompanying Condensed Consolidated Balance Sheets. The classification of restricted cash and investments as short-term or long-term is determined based on the termination date of the underlying lease agreement irrespective of the expiration date of the letter of credit, as the Company is contractually required to maintain letters of credit during the lease term.

Accounts Receivable and Deferred Revenue

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

Allowances for Doubtful Accounts

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

Fair Value of Financial Instruments

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

Concentration of Credit Risk and Significant Customers

The Company’s customer base consists primarily of businesses in North America and Europe. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains reserves for potential credit losses. Historically, such reserves have been adequate to cover the actual losses incurred. No individual customer accounted for more than 10% of our total revenues for the three or six months ended June 30, 2004 and 2003. As of June 30, 2004, one individual customer account receivable balance accounted for 11% of our total accounts receivable balance. One individual customer account receivable balance accounted for 13% of our total accounts receivable balance as of December 31, 2003.

Impairment of Long-Lived Assets and Definite Lived Intangible Assets

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

Acquired goodwill and other intangible assets with indefinite useful lives are not amortized over time, but are subject to impairment tests on an annual basis, and on an interim basis in certain circumstances. The Company performs annual impairment tests in the fourth quarter of each year. The Company completed annual impairment tests on its Goodwill and Purchased Intangibles assets during the fourth quarter of 2003 and 2002, which did not result in an impairment charge. The Company intends to perform annual impairment testing in the fourth quarter of 2004. The Company did not identify events or circumstances during the three or six months ended June 30, 2004 which would more likely than not reduce the fair value of previously recorded intangible assets.

Revenue Recognition

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

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

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

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

customer acceptance or expiration of the acceptance period, provided that all of the criteria described above have been met.

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

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

Warranties and Indemnification

The Company generally provides a warranty for its software products and services to its customers and accounts for its warranties under the Financial Accounting Standards Board’s (“FASB’s”) Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”). The Company’s products are generally warranted to perform substantially as described in the associated product documentation for a period of one year. The Company’s services are generally warranted to be performed consistent with industry standards for a period of ninety days from delivery. In the event there is a failure of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty accrual as of June 30, 2004 or December 31, 2003. To date, the Company’s product warranty expense has not been significant.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations under SFAS No. 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software, as pro-rated over a five-year period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against our customers. As such, the Company has not provided for an infringement indemnification accrual as of June 30, 2004 or December 31, 2003 and has not deferred revenue recognition on license agreements which provide for a pro-rated refund over a five-year period.

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

The Company indemnifies its directors and officers in their capacity as such. To date, the Company has not been required to make any payment resulting from these indemnification obligations. Additionally, the fair value of these indemnification provisions was not material to the Company’s financial position, results of operations or cash flows for the three and six months ended June 30, 2004.

Stock-Based Compensation

The Company accounts for stock issued to employees in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and SFAS No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under APB 25, compensation expense

for fixed stock options is based on the difference between the fair market value of the Company’s stock and the exercise price of the option on the date of grant, if any.

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

	Three months ended June 30,						Six months ended June 30,

	2004			2003			2004			2003

Net loss, as reported	$	(3,647	)	$	(9,408	)	$	(7,849	)	$	(20,309	)
Add: Stock-based employee compensation expense included in reported net loss, net of tax effects		—			12			—			39
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects		(4,036	)		(9,013	)		(9,452	)		(19,740	)

Pro forma net loss	$	(7,683	)	$	(18,409	)	$	(17,301	)	$	(40,010	)

Loss per share:
Basic and diluted—as reported	$	(0.05	)	$	(0.13	)	$	(0.10	)	$	(0.28	)
Basic and diluted—pro forma	$	(0.10	)	$	(0.25	)	$	(0.23	)	$	(0.55	)

3. Related Party Transactions

Roger Siboni, Chairman of the Board, is currently a member of the board of directors of two of the Company’s customers. Total revenues to E.piphany from these customers were less than $0.1 million for each the three and six months ended June 30, 2004, respectively, and $0.1 million for each the three and six months ended June 30, 2003, respectively. The Company had accounts receivable balances from these customers totaling less than $0.1 million as of June 30, 2004 and zero as of December 31, 2003.

In addition, five of the Company’s customers have board members that were also on the Company’s board of directors at the time revenues from contracts with these customers were recognized. Total revenues to the Company from these customers were $0.3 million and $0.6 million for the three and six months ended June 30, 2004 and $0.1 million and $0.2 million for the three and six months ended June 30, 2003, respectively. The Company had accounts receivable balances from these customers totaling less than $0.1 million as of June 30, 2004 and December 31, 2003, respectively.

4. Computation of Basic and Diluted Net Loss Per Share

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

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003

Net loss	$	(3,647	)	$	(9,408	)	$	(7,849	)	$	(20,309	)
Basic and diluted:
Weighted average shares of common stock outstanding		75,765			73,417			75,378			73,144
Less: Weighted average shares subject to repurchase		—			(17	)		(1	)		(29	)

		75,765			73,400			75,377			73,115

Basic and diluted net loss per common share	$	(0.05	)	$	(0.13	)	$	(0.10	)	$	(0.28	)

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

	Three Months Ended June 30,				Six Months Ended June 30,

	2004		2003		2004		2003

Options excluded due to the exercise price exceeding the average fair market value of the Company’s common stock during the period		7,317		8,961		7,133		9,243
Options for which the exercise price was less than the average fair market value of the Company’s common stock during the period that were excluded as inclusion would decrease the Company’s net loss per share		4,588		3,304		5,059		3,299
Common shares excluded resulting from common stock subject to repurchase		—		17		1		29

Total common stock equivalents excluded from diluted net loss per common share		11,905		12,282		12,193		12,571

5. Commitments and Contingencies

Legal Proceedings

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

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

6. Restructuring

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

The following table summarizes the Company’s restructuring accrual as of June 30, 2004 (in thousands):

	Severance and Related Charges			Impairment of property and equipment			Lease Costs			Other Restructuring Activities			Total

Accrued balance at December 31, 2002	$	26		$	—		$	32,920		$	—		$	32,946
Charges accrued during 2003 – Plan 3		620			301			122			311			1,354
Adjustments to previous estimates – Plan 1		—			—			1,846			—			1,846
Adjustments to previous estimates – Plan 2		(13	)		—			689			—			676
Adjustments to previous estimates – Plan 3		—			—			52			—			52
Cash payments – Plan 1		—			—			(6,580	)		—			(6,580	)
Cash payments – Plan 2		—			—			(1,228	)		—			(1,228	)
Cash payments – Plan 3		(633	)		—			(117	)		(311	)		(1,061	)
Non-cash activity – Plan 3		—			(301	)		—			—			(301	)

Accrued balance at December 31, 2003	$	—		$	—		$	27,704		$	—		$	27,704
Adjustments to previous estimates – Plan 1		—			—			742			—			742
Adjustments to previous estimates – Plan 2		—			—			262			—			262
Adjustments to previous estimates – Plan 3		—			—			7			—			7
Cash payments – Plan 1		—			—			(3,539	)		—			(3,539	)
Cash payments – Plan 2		—			—			(496	)		—			(496	)
Cash payments – Plan 3		—			—			(38	)		—			(38	)

Accrued balance at June 30, 2004		—			—			24,642			—			24,642
Less: current portion		—			—			6,524			—			6,524

Restructuring costs, net of current portion	$	—		$	—		$	18,118		$	—		$	18,118

Severance and related charges primarily result from involuntary termination benefits and related payroll taxes. The impairment of property and equipment primarily relates to leasehold improvements and other property and

equipment impaired as a result of the abandonment of leased facilities and the reduction of headcount. Lease costs reflect remaining operating lease obligations and brokerage fees stated at actual costs reduced by estimated sublease income. The Company calculates the estimated costs of abandoning these leased facilities, including estimated sublease costs and income, with the assistance of market information trend analyses provided by commercial real estate brokerage firms retained by the Company. Charges shown as other restructuring activities consist of the net loss on the sale of the Company’s subsidiary located in Japan and related costs.

Year ended December 31, 2003

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

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

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

Six months ended June 30, 2004

For the six months ended June 30, 2004, the Company recorded adjustments to previously-recorded restructuring estimates totaling $1.0 million primarily associated with facilities in Illinois, California, and the United Kingdom.

The accrued liability of $24.6 million at June 30, 2004 is net of $28.9 million of estimated sublease income. Of this estimated sublease income, $14.3 million represents future sublease income due under non-cancelable subleases and $14.6 million represents our estimates of future sublease income on excess facilities we expect to sublease in the future. In estimating future sublease income under non-cancelable subleases, the Company evaluates the collectability of sublease income. If the Company determines that sublease income is not collectable with respect to a particular subtenant, the Company estimates the amount of sublease income that it is likely to generate from a new subtenant. The Company then increases the restructuring accrual by an amount equal to the difference between the initially contracted amount and the estimated sublease income from the new subtenant. Our ability to generate this amount of sublease income, as well as our ability to terminate certain lease obligations at the amounts we have estimated, is highly dependent upon the existing economic conditions, particularly lease market conditions in certain geographies, at the time we negotiate the lease termination and sublease arrangements with third parties. While the amount we have accrued is our best estimate, these estimates are subject to change and may require periodic adjustment as conditions change through the implementation period. If macroeconomic conditions, particularly as they pertain to the commercial real estate market, continue to worsen, we may be required to increase our estimated cost to exit certain facilities. The current estimates accrued for abandoned leases, net of anticipated sublease proceeds, are projected to be paid over their respective lease terms through 2017.

7. Segment Information

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

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

	Three Months Ended June 30,				Six Months Ended June 30,

	2004		2003		2004		2003

Revenues:
United States	$	14,359	$	16,155	$	28,835	$	31,490
United Kingdom		2,669		1,165		5,888		3,883
Rest of World		3,398		4,838		5,932		9,296

Total	$	20,426	$	22,158	$	40,655	$	44,669

8. Goodwill and Purchased Intangible Assets

In the first quarter of 2002, the Company adopted SFAS 142 which states that goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually or more frequently if impairment indicators arise. The Company completed a transitional test and an annual impairment test during the first and fourth quarters of 2003, respectively, which did not result in an impairment charge. The Company plans to complete an annual impairment test during the fourth quarter of 2004. The Company has not identified events or circumstances during the three or six months ended June 30, 2004 which would more likely than not reduce the fair value of previously recorded intangible assets. Definite lived intangible assets will continue to be amortized over their estimated useful lives.

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

	June 30, 2004							December 31, 2003

	Gross Carrying Amount (1)		Accumulated Amortization			Net Balance		Gross Carrying Amount (1)		Accumulated Amortization			Net Balance

Purchased technology	$	17,652	$	(17,652	)	$	—	$	17,652	$	(16,973	)	$	679
Customer list		1,332		(1,332	)		—		1,332		(1,332	)		—

Total	$	18,984	$	(18,984	)	$	—	$	18,984	$	(18,305	)	$	679

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

Amortization of other intangible assets for the three months ended June 30, 2003 was $1.6 million. As of March 31, 2004 these intangible assets were fully amortized.

9. Other Income, Net

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

10. Income Taxes

For the three or six months ended June 30, 2004 and 2003, the Company recorded a provision for income taxes of $35,000 and $81,000, and $80,000 and 108,000, respectively, as a result of withholding taxes on payments from certain foreign customers.

11. Comprehensive Loss

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

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003

Net loss	$	(3,647	)	$	(9,408	)	$	(7,849	)	$	(20,309	)
Change in unrealized gain on investments		(1,673	)		87			(1,439	)		205
Change in foreign currency translation adjustment		(61	)		(138	)		(244	)		(192	)

Comprehensive losses	$	(5,381	)	$	(9,459	)	$	(9,532	)	$	(20,296	)

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

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

Overview

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

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

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

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

During the second half of 2003 and the first half of 2004, we experienced an increase in the percentage of license revenue attributable to customer implementations for which integrator partners took primary responsibility. When a

third-party integration partner takes primary responsibility for the implementation of our software, we generally recognize license revenue at the time of the sale, provided that all other revenue recognition criteria have been met as set forth in Note 2 of Notes to the Condensed Consolidated Financial Statements. As a result, our deferred revenue decreased from $19.2 million as of December 31, 2003 to $18.0 million as of June 30, 2004. This decrease in deferred revenue was a result of a decrease in deferred license revenue offset, in part, by an increase in deferred maintenance revenue. Therefore, quarterly revenues have been more dependent on revenues from new software license agreements entered into during those quarters. Although we anticipate this trend to continue into future quarters, this trend may vary in any given quarter to the extent that we defer recognition of revenues for significant license transactions.

Sources of Revenue

We generate revenues principally from licensing our software products directly to customers and providing related services including implementation, professional, maintenance and training services. Through June 30, 2004, substantially all of our revenues were generated by our direct sales force. Our license agreements generally provide that customers pay a software license fee to perpetually use one or more software products within specified limits. The amount of the license fee varies depending on which software products are purchased, the number of software products purchased and the scope of usage rights. Customers can subsequently pay additional license fees to expand the right to use previously licensed software products, or to purchase additional software products. Our software products are made available to our customers electronically via Internet download or on compact disk.

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

Cost of Revenues and Operating Expenses

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

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

Critical Accounting Policies and Estimates

Accounting policies, methods and estimates are an integral part of the condensed consolidated financial statements prepared by management and are based upon management’s current judgments. Those judgments are based on knowledge and experience with regard to past and current events and assumptions about future events.

Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant and subject to the exercise of judgment include revenue recognition policies, allowances for doubtful accounts, the measurement and recoverability of goodwill and purchased intangible assets, restructuring accruals for the abandonment of certain leased facilities, and stock-based compensation. These policies and our practices related to these policies are described below and in Note 2 of Notes to Condensed Consolidated Financial Statements.

Revenue Recognition

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

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

To date, when we have been primarily responsible for the implementation of the software under a customer contract, both product license revenues and service revenues are recognized under the percentage of completion contract method in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction Type and Certain Production-Type Contracts” (“SOP 81-1”). This is based on our assessment that the implementation services for these arrangements are essential to the functionality of our software. Throughout most of the three years ended December 31, 2003 and the six months ended June 30, 2004, third-party consulting organizations have been primarily responsible for implementation services for the majority of our license arrangements. This trend reversed temporarily during the second half of 2002 and during this time we were responsible for the implementation on the majority of contracts. This temporary change resulted in a greater percentage of revenue being recognized under SOP 81-1 in the second half of 2002 and the first half of 2003. Approximately 13% of license revenue was recognized under SOP 81-1 during the six months ended June 30, 2004, compared to 28% and 24% for the six months ended June 30, 2003 and for the fiscal year 2003, respectively.

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

Allowances for Doubtful Accounts

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

Acquisitions, Goodwill and Purchased Intangible Assets

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

As a result of the adoption of SFAS 142 as of January 1, 2002, we ceased amortization of approximately $81.8 million of goodwill. In lieu of amortization, we were required to perform a transitional impairment test of goodwill. We perform impairment tests annually. We also perform impairment tests when events occur or circumstances change that would more likely than not reduce the fair value of previously recorded intangible assets. If the fair value of such assets is considered to be reduced, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Fair market value is determined by independent valuation experts using, among other things, discounted future cash flow techniques. Estimating discounted future cash flows requires significant management judgment concerning revenue, profitability and discount rates. Differences between forecasted and actual results as well as changes in the general economic environment could result in material write-downs of goodwill and purchased intangible assets. We performed the transitional impairment test on January 1, 2002 and annual impairment tests on December 31, 2002 and 2003. We determined that no impairment existed at those times. In addition, we have not identified events or circumstances that would more likely than not reduce the fair value of previously recorded intangible assets during the period ended June 30, 2004.

Restructuring Charges

As discussed in Note 6 of Notes to Condensed Consolidated Financial Statements, we have recorded significant restructuring charges, primarily in connection with our abandonment of certain leased facilities. The lease abandonment costs were estimated to include remaining lease liabilities and brokerage fees offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to sublease the facilities and the likely sublease rates. These estimates are based on market trend information analyses provided by commercial real estate brokerage firms retained by us. We review these estimates each reporting period and, to the extent that market conditions and our assumptions change, adjustments to the restructuring accrual are recorded. If the real estate market continues to worsen and we are not able to sublease the properties as early as, or at the rates estimated, the accrual will be increased, which would result in additional restructuring costs in the period in which such determination is made. If the real estate market strengthens and we are able to sublease the properties earlier or at more favorable rates than projected, the accrual may be decreased, which would increase net income in the period in which such determination is made. The accrued liability of $24.6 million at June 30, 2004 is net of $28.9 million of estimated sublease income. Sublease income is comprised of future minimum sublease payments as well as the reimbursement of future expected operating expenses. Of this total sublease income, $14.3 million represents future sublease income due under non-cancelable subleases and $14.6 million represents our estimates of future sublease income on excess facilities we expect to sublease in the future.

Stock-Based Compensation

We elect to account for compensation expense related to stock options issued to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, compensation expense for fixed stock options is based on the difference between the market value of our stock and the exercise price of the option on the date of grant, if any. This election is available to companies under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Had we elected to apply the fair value method for valuing stock options under SFAS 123, our net loss and net loss per share would have been substantially higher as discussed in Note 2 of Notes to Condensed Consolidated Financial Statements. The fair value method of option valuation was applied for disclosure purposes by utilizing the Black-Scholes option-pricing model. This option-pricing model is commonly used by companies to calculate the fair value of options under SFAS 123 and

utilizes certain variables including the exercise price of the option, expected life of the option, the market value of the underlying stock as of the grant date, the expected volatility of the underlying stock during the life of the option, and a risk-free interest rate of return. Although some of these variables are known at the date of grant, other variables are based on estimates of future events. Changes in these estimates may have a material impact on the compensation expense calculated under the fair value method. For example, an increase in the estimated expected life of the option or the stock volatility would increase the fair market value of the option and result in an increase to compensation expense calculated under the fair value method.

Results of Operations

Revenues

The following table sets forth our revenues, expressed both in absolute dollars and as a percentage of total revenues, for the three and six months ended June 30, 2004 and 2003 (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Revenues:
Product license	$	7,638	37	%	$	9,539	43	%	$	14,744	36	%	$	19,930	44	%
Services		5,059	25	%		5,434	25	%		10,594	26	%		10,549	24	%
Maintenance		7,729	38	%		7,185	32	%		15,317	38	%		14,190	32	%

	$	20,426	100	%	$	22,158	100	%	$	40,655	100	%	$	44,669	100	%

The following table sets forth our revenues by geography, expressed both in absolute dollars and as a percentage of total revenues, for the three and six months ended June 30, 2004 and 2003 (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

North America	$	14,511	71	%	$	16,938	76	%	$	29,151	72	%	$	32,274	72	%
Europe		5,746	28	%		3,218	15	%		11,149	27	%		8,633	19	%
Rest of world		169	1	%		2,002	9	%		355	1	%		3,762	9	%

	$	20,426	100	%	$	22,158	100	%	$	40,655	100	%	$	44,669	100	%

Product license revenue for the three months ended June 30, 2004 decreased by $1.9 million, or 20%, over product license revenue for the same period in the prior year. Product license revenue for the six months ended June 30, 2004 decreased by $5.2 million, or 26%, over product license revenue for the same period in the prior year. The decrease in product license revenue for both periods is due primarily to fewer license sales in North America. In addition, product license revenue in markets outside of North America and Europe decreased as a result of our restructuring plan to reduce sales and marketing costs by transitioning these regions to an indirect sales model. These decreases were offset, in part, by increases in product license sales in Europe for the three and six month periods ending June 30, 2004.

Services revenue consists of revenue from professional and training services. Services revenue for the second quarter of 2004 decreased by $0.4 million, or 7%, compared to the second quarter of 2003. The decrease was primarily due to a decrease in the number of professional services employees. Services revenue for the six months ended June 30, 2004 was comparable to services revenue for the same period in the prior year.

Maintenance revenue for the second quarter of 2004 increased by $0.5 million, or 8%, over maintenance revenue for the second quarter of 2003. Maintenance revenue for the six months ended June 30, 2004 increased by $1.1 million, or 8%, over maintenance revenue for the same period in the prior year. The increase in maintenance revenue was primarily attributable to maintenance contracts sold with new licenses in addition to maintenance agreement renewals by our existing installed base.

The relative amount of license revenue as compared to services revenue has varied historically depending on the extent to which third-party consulting organizations have been engaged directly by customers to provide professional services, the nature of products licensed, the complexity of our customers’ information technology environment, the resources allocated by customers to implementation projects and the scope of licensed rights.

Services revenue has substantially lower margins than product license revenue. This is especially true when we are required to subcontract with consulting organizations to supplement our internal professional services organization. To the extent that services revenue becomes a greater percentage of our total revenues, our overall gross margins will decline.

Cost of Revenues

The following table sets forth our cost of revenues and gross profit, both in absolute dollars and expressed as a percentage of total revenues, for the three and six months ended June 30, 2004 and 2003 (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Cost of revenues:
Product license	$	387	2	%	$	412	2	%	$	802	2	%	$	664	1	%
Services		4,352	21	%		5,880	27	%		8,850	22	%		11,900	27	%
Maintenance		1,370	7	%		1,574	7	%		2,646	7	%		3,114	7	%
Amortization of purchased technology		—	—			1,470	6	%		679	1	%		3,298	7	%

Total cost of revenues	$	6,109	30	%	$	9,336	42	%	$	12,977	32	%	$	18,976	42	%

Gross profit	$	14,317	70	%	$	12,822	58	%	$	27,678	68	%	$	25,693	58	%

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

Cost of services revenues consists primarily of personnel and related costs of providing professional services and training services. The decrease in cost of services revenue for the three and six months ended June 30, 2004 compared to the same periods in the prior year was due primarily to a reduction in the number of internal professional services employees and their related travel expenses. The decrease was also a result of lower overhead and facilities cost allocations due primarily to a reduction in rent expense from office lease expirations. The number of services employees decreased from 131 at June 30, 2003 to 113 at June 30, 2004 as a result of voluntary and other terminations not related to restructuring plans.

Cost of maintenance revenues consists primarily of personnel and related costs of providing customer telephone support services under maintenance agreements. The decrease in cost of maintenance revenue for the three and six months ended June 30, 2004 compared to the same periods in the prior year was due primarily to lower overhead and facilities cost allocations as well as a reduction in the number of customer support employees.

The amortization of purchased technology consists of amortization from technology purchased in the acquisitions of RightPoint, Octane, iLeverage, eClass Direct, Moss and certain intellectual property assets of Radnet. The decrease in amortization of purchased technology for the three and six months ended June 30, 2004 compared to the same periods in the prior year was due to the full amortization of RightPoint, Octane and eClass Direct assets during 2003. No amortization expense was recognized for the quarter ended June 30, 2004 since all purchased technology assets were fully amortized as of March 31, 2004.

Operating Expenses

Research and Development

The following table sets forth our research and development expenses for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Research and development	$	6,368	31	%	$	8,193	37	%	$	13,041	32	%	$	16,742	37	%

Research and development expenses consist primarily of personnel and related costs associated with our product development efforts. The decrease for the three and six months ended June 30, 2004 as compared to the same periods in the prior year was due primarily to a reduction in the number of research and development employees and lower overhead and facilities cost allocation as discussed above. The number of research and development employees decreased from 162 as of June 30, 2003 to 131 June 30, 2004 as a result of voluntary and other terminations not related to restructuring plans.

Sales and Marketing

The following table sets forth our sales and marketing expenses for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Sales and marketing	$	8,953	44	%	$	11,074	50	%	$	17,384	43	%	$	23,387	52	%

Sales and marketing expenses consist primarily of employee salaries, benefits and commissions, and the costs of trade shows, seminars, promotional materials and other sales and marketing programs. The decrease in these expenses for the three and six months ended June 30, 2004 compared to the same periods in the prior year was primarily due to a reduction in the number of sales and marketing employees and lower sales commission expense. Sales commission expense was lower as a result of lower revenues for the three and six months ended June 30, 2004 as compared to the same periods in the prior year. The decrease was also due to lower overhead and facilities cost allocations as discussed above, lower spending on sales and marketing programs and lower travel expenses. The number of sales and marketing employees decreased from 132 as of June 30, 2003 to 108 as of June 30, 2004. Of the total reduction, 7 related to the restructuring of our operations and the remainder related to voluntary and other terminations.

General and Administrative

The following table sets forth our general and administrative expenses for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

General and administrative	$	3,136	15	%	$	2,915	13	%	$	5,841	14	%	$	5,487	12	%

General and administrative expenses consist primarily of employee salaries and related expenses for executive, finance, legal and administrative personnel. The increase in these expenses for the three and six months ended June 30, 2004 compared to the same periods in the prior year was primarily due to an increase in legal, audit and accounting costs offset, in part, by a decrease in compensation and benefits expenses. Legal expenses increased primarily as a result of increased litigation costs mainly associated with legal action filed by us against a private third party to protect our intellectual properly rights. Audit and accounting costs increased primarily as a result of activities associated with the Company’s compliance with the Sarbanes-Oxley Act of 2002. Compensation and benefits expenses decreased due primarily to a reduction in the average number of general and administrative employees. The number of general and administrative employees decreased from 62 as of June 30, 2003 to 60 as of June 30, 2004.

Restructuring Charges

The following table sets forth our restructuring charges for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Restructuring charges	$	375	2	%	$	1,079	5	%	$	1,011	2	%	$	3,322	7	%

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

Restructuring charges recorded in the three and six months ended June 30, 2004 relate to changes in estimated lease costs related primarily to facilities located in Illinois, California, and the United Kingdom. Restructuring charges recorded in the same periods in the prior year relate to severance and related charges under Plan 3 and adjustments to previously recorded restructuring estimates to reflect changes in estimated lease costs related to facilities located in Boston, Massachusetts.

Other Income, Net

The following table sets forth our other income, net for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,								Six months ended June 30,

	2004				2003				2004				2003

Other income, net	$	903	4	%	$	1,224	6	%	$	1,831	5	%	$	3,336	7	%

Other income, net consists primarily of interest income on investments. For the six months ended June 30, 2003, other income also includes $0.8 million reflecting the termination of a partner agreement executed in October 1999 by one of the companies that we acquired. The decrease in interest income for the three and six months ended June 30, 2004 as compared to the same periods last year is primarily due to a decrease in the average rate of return on our investments as well as lower average cash and investment balances.

Provision for Taxes

The following table sets forth our provision for taxes for the three and six months ended June 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

	Three months ended June 30,						Six months ended June 30,

	2004			2003			2004			2003

Provision for taxes	$	35	—	$	80	—	$	81	—	$	108	—

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

Liquidity and Capital Resources

Cash Flow

As of June 30, 2004, our primary sources of liquidity consisted of $150.7 million in cash, cash equivalents and short-term investments and $106.6 million in long-term investments for a total of $257.3 million in unrestricted cash and investments. Long-term investments generally consist of securities that we intend to hold for more than one year with maturity dates of less than two years from the date of purchase.

Net cash used in operating activities totaled $9.9 million and $20.1 million for the six months ended June 30, 2004 and 2003, respectively. The decrease in cash used in operations is primarily due to a reduction in our net loss during these periods. Our net loss decreased primarily due to a reduction of employees and lower overhead and facilities

costs. The decrease in cash used in operations was also attributable to higher collection activity of our accounts receivable during the six months ended June 30, 2004 as compared to the same period last year.

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

Net cash used in investing activities for the six months ended June 30, 2004 totaled $0.1 million due primarily to the net sale of investments. Net cash used in investing activities of $18.0 million for the six months ended June 30, 2003 was due primarily to the purchase of investments. Investments purchased are primarily comprised of government sponsored enterprises, auction rate municipal securities and corporate debt securities with maturities which do not exceed 24 months.

Net cash provided by financing activities totaled $5.8 million and $2.8 million for the six months ended June 30, 2004 and 2003, respectively. Cash provided by financing activities for each period resulted primarily from the receipt of proceeds from the issuance of common stock pursuant to the exercise of stock options and our employee stock purchase plan. The increase in cash proceeds during the six months ended June 30, 2004 compared to the same period in the prior year is due to an increase in stock option exercises during the first quarter of 2004.

Restricted Cash and Investments

From time to time, we are required to obtain letters of credit that serve as collateral for our obligations to third parties under facility lease agreements. These letters of credit are secured by cash and cash equivalents and are recorded as restricted cash in the balance sheet. As of June 30, 2004, we had $7.1 million of restricted cash and investments, $1.2 million of which are classified as short-term and relate to facility lease agreements that have expiration dates within 12 months, and $5.9 million of which are classified as long-term and relate to facility lease agreements that have expiration dates greater than twelve months from June 30, 2004.

Contractual Obligations

Our contractual obligations as of June 30, 2004 are comprised of operating leases, purchase obligations and long-term liabilities. Our purchase obligations and long-term liabilities have not changed materially since December 31, 2003.

Operating Leases. We lease certain facilities under operating lease agreements which expire at various dates through 2017. In addition, we receive sublease income from non-cancelable subleases of excess facilities. Future minimum lease payments due and receivable under these leases as of June 30, 2004 were as follows (in thousands):

Year Ending December 31,	Operating Leases Due		Sublease Income Receivable			Total, Net

2004	$	5,833	$	(1,335	)	$	4,498
2005		9,248		(2,374	)		6,874
2006		6,453		(1,587	)		4,866
2007		6,492		(1,414	)		5,078
2008		6,585		(1,244	)		5,341
2009 and thereafter		23,249		(4,313	)		18,936

	$	57,860	$	(12,267	)	$	45,593

Net operating lease commitments shown above include $30.5 million of operating lease commitments under leases for abandoned facilities which are recorded as restructuring costs in the accompanying balance sheet as of June 30, 2004. We do not have commercial commitments under lines of credit, standby lines of credit, guarantees, standby repurchase obligations or other such arrangements.

We believe that our cash, cash equivalents and investment balances will be sufficient to meet our anticipated liquidity needs for working capital and capital expenditures for at least 12 months. If we require additional capital

resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to liquidate our long-term investments, issue additional equity or debt securities or secure a bank line of credit. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. We cannot assure you that any financing arrangements will be available in amounts or on terms acceptable to us in the future.

Off-Balance Sheet Arrangements

We generally agree to indemnify our customers against legal claims that our software products infringe certain third-party intellectual property rights and account for our indemnification obligations under SFAS No. 5. In the event of such a claim, we are generally obligated to defend our customer against the claim and to either settle the claim at our expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, we agree to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software, as pro-rated over a five-year period. To date, we have not been required to make any payment resulting from infringement claims asserted against our customers. As such, we have not provided for an infringement accrual as of December 31, 2003 or June 30, 2004 and have not deferred revenue recognition on license agreements which provide for a pro-rated refund over a five-year period.

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

We indemnify our directors and officers in their capacity as such. To date, we have not been required to make any payment resulting from these indemnification obligations. Additionally, the fair value of these indemnification provisions was not material to our financial position, results of operations or cash flows for the quarter ended June 30, 2004.

Related Party and Other Transactions

RISK FACTORS

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

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

We incurred net losses of $3.6 million for the quarter ended June 30, 2004, $24.2 million for the year ended December 31, 2003, $71.7 million for the year ended December 31, 2002 and $2.6 billion for the year ended December 31, 2001. We had an accumulated deficit of $3.5 billion as of June 30, 2004. We may incur losses in the foreseeable future. These losses may be substantial and we may not be able to achieve or sustain profitability. Our operating results will be harmed if our revenues do not keep pace with our expenses or are not sufficient for us to achieve profitability. Although we achieved profitability in the quarter ended December 31, 2003, it cannot be certain that we will again achieve or increase profitability on a quarterly or annual basis.

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

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

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

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

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

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

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

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

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

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

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

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

	•	customers’ decisions to defer or cancel orders or implementations, particularly large orders or implementations, from one quarter to the next,

	•	changes in demand for our software or for enterprise software generally,

	•	reductions in the rate at which opportunities in our pipeline convert into binding license agreements,

	•	announcements or introductions of new products by us or our competitors,

	•	software defects and other product quality problems,

	•	our ability to release new, competitive products on a timely basis,

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

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

	•	changes in accounting, legal and regulatory requirements, and

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

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

Although no single customer accounted for more than 10% of total revenues for the quarter ended June 30, 2004 or for the year ended December 31, 2003, a few large license transactions may from time to time account for a substantial amount of our license revenues. For example, for the quarter ended March 31, 2002, revenues from one customer accounted for 12% of total revenues. For the quarter ended December 31, 2002, revenues from one customer accounted for 17% of total revenues. If a customer or potential customer cancels or does not enter into a large transaction that we may anticipate in a certain quarter, or delays the transaction beyond the end of the quarter, our financial results in that quarter may be materially adversely affected. Our business model has and continues to evolve to include each quarter more operational CRM transactions which are often more complex, larger in size and have less predictable sales cycles. As a result, our financial results for a particular quarter may be more susceptible to an adverse affect by the delay or cancellation of one or more large transactions.

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

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

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

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

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

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

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

Customers that license our products typically require consulting and implementation services and can obtain them from our internal professional services organization, or from outside consulting organizations. When we are primarily responsible for implementation services, we generally recognize software license revenue as the implementation services are performed. If our internal professional services organization does not effectively implement our products, or if we are unable to maintain our internal professional services organization as needed to meet our customers’ needs, the recognition of revenue from such transactions will be delayed. In addition, our ability to sell software, and accordingly our revenues, will be harmed. We may be required to increase our use of

subcontractors to help meet our implementation and service obligations, which would result in lower gross margins. In addition, we may be unable to negotiate agreements with subcontractors to provide a sufficient amount and quality of services. If we fail to retain sufficient qualified subcontractors, our ability to sell software for which these services are required will be harmed and our revenues will suffer.

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

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

	•	expend significant resources to locate, correct or work around the error,

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

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

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

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

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

	•	be expensive to defend, and

	•	result in large damages awards.

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

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

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

	•	the complex nature of our products,

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

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

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

	•	uncertainty regarding future economic conditions,

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

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

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

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

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

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

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

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

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

	•	not achieve favorable results using these products,

	•	experience technical difficulty in implementing or using these products,

	•	use alternative methods to solve the same or similar business problems, or

	•	attribute less priority to customer relationship management products relative to other enterprise software products and services.

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

We market and sell our products and services abroad. Our revenue from the sale of our products and services outside of the United States accounted for 30% percent of our total revenues for the quarter ended June 30, 2004. Doing business internationally involves greater expense and many additional risks and challenges, particularly:

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

	•	differing intellectual property rights,

	•	differing labor regulations,

	•	changes in a specific country’s or region’s political or economic conditions,

	•	limited experience and greater difficulty in managing certain foreign operations,

	•	the complexity and cost of developing and maintaining international versions of our products, and

•

fluctuating exchange rates.

Our international business operations require a significant amount of attention from our management and substantial financial resources. As of June 30, 2004, we had 73 employees located in Europe and Canada.

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

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

	•	introduce new and improved customer relationship management software products,

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

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

	•	enhance our software’s ease of use and administration,

	•	develop software for vertical markets,

	•	improve our software’s ability to extract data from existing software systems, and

	•	adapt to rapidly evolving computer operating system and database standards and Internet technology.

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

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

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

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

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

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

In order to grow our business, we need to increase market awareness of our company and products and enhance the effectiveness and productivity of our direct sales force and indirect sales channels. If we fail to do so, this failure could harm our revenues.

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

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

	•	properly evaluate the business, personnel and technology of the company to be acquired,

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

	•	integrate and retain appropriate personnel,

	•	geographic complexity,

	•	combine potentially different corporate cultures,

	•	effectively integrate products, research and development, sales, marketing and support operations, and

	•	maintain focus on our day-to-day operations.

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

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

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

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

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

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

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

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

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

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

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

Our Senior Vice President, World Wide Field Operations, recently resigned from employment. We have initiated a search for his replacement. If we are not able to employ a qualified individual to serve in this position within an appropriate period of time, our revenues may be harmed.

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency Exchange Rate Risk

The majority of our operations are based in the United States and, accordingly, the majority of our transactions are denominated in U.S. dollars. We do have foreign-based operations, however, where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. As of June 30, 2004, we had international operations in Asia, Australia, Europe, Canada and Latin America and conduct transactions in the local currency of each location. Historically, our exposure to fluctuations in the relative value of other currencies has been limited because substantially all of our assets are denominated in U.S. dollars, and those assets which are not denominated in U.S. dollars have generally been denominated in historically stable currencies. The impact to our cash and investment balances has therefore not been material. Currency transaction gains or losses, derived on monetary assets and liabilities stated in a currency other than the functional currency, are recognized in current operations and have not been significant to our operating results in any period. To date, we have not entered into any foreign exchange hedges or other derivative financial instruments. We will continue to evaluate our exposure to foreign currency exchange rate risk on a regular basis.

Interest Rate Risk

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

As of June 30, 2004, we held $26.0 million in cash and cash equivalents consisting of highly liquid short-term investments having original maturity dates of no more than 90 days. Declines of interest rates over time would reduce our interest income from our highly liquid short-term investments. Based upon our balance of cash and cash equivalents, a decrease in interest rates of 100 basis points would cause a corresponding decrease in our annual interest income by $0.3 million. Due to the nature of our highly liquid cash equivalents, a change in interest rates would not materially change the fair market value of our cash, cash equivalents and restricted cash.

As of June 30, 2004, we held $231.2 million in short-term and long-term investments, all of which consisted of taxable fixed income securities having original maturity dates between three months and two years. A decline in interest rates over time would reduce our interest income from our short-term investments and long-term investments. A decrease in interest rates of 100 basis points would cause a corresponding decrease in our annual interest income of approximately $2.4 million. An increase in interest rates over time would cause the fair market value of our portfolio to decline. An immediate and uniform increase in interest rates of 100 basis points would cause the fair market value of these items to decrease by approximately $2.4 million. Alternatively, a decrease in interest rates over time would cause the fair market value of our portfolio to increase. An immediate and uniform decrease in interest rates of 100 basis points would cause the fair market value of these items to increase by approximately $2.4 million.

As of June 30, 2004, we did not have any outstanding debt.

The following summarizes our investments, weighted average yields and expected maturity dates as of June 30, 2004 (in thousands, except interest rates):

	2004			2005			2006			Thereafter		Total

Commercial paper	$	—		$	—		$	—		$	—	$	—
Weighted average yield		—			—			—			—		—
Corporate bonds	$	11,524		$	31,253		$	14,878		$	—	$	57,655
Weighted average yield		2.07	%		1.80	%		2.20	%		—		1.95	%
Government notes/bonds (1)	$	22,527		$	43,507		$	44,485		$	—	$	110,519
Weighted average yield		1.97	%		2.02	%		2.25	%		—		2.10	%
Auction rate securities (2)	$	61,375		$	1,700		$	—		$	—	$	63,075
Weighted average yield		1.45	%		2.40	%		—			—		1.47	%

Total investment securities	$	95,426		$	76,460		$	59,363		$	—	$	231,249

	(1)	Government notes/bonds consists primarily of government sponsored enterprises and includes, to a lesser extent, investments in taxable municipal bonds.
	(2)	Auction rate securities consist primarily of taxable municipal bonds having reset dates of less than 45 days. A significant portion of our short term investments consist of these instruments as they typically provide a higher rate of return than money market funds while maintaining a low level of risk and a high degree of liquidity.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our

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

Changes in Internal Control Over Financial Reporting

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

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of stockholders was held on June 2, 2004 and the following matters were considered, voted upon and approved/ratified:

The re-election of Mohan Gyani to serve as a Class II member of E.piphany’s Board of Directors with a term expiring on the date of the 2007 annual meeting of stockholders.

	FOR:	AUTHORITY TO VOTE WITHHELD:

Common Stock:	65,512,520	1,121,261

The re-election of Douglas J. Mackenzie to serve as a Class II member of E.piphany’s Board of Directors with a term expiring on the date of the 2007 annual meeting of stockholders.

	FOR:	AUTHORITY TO VOTE WITHHELD:

Common Stock:	65,113,926	1,519,855

The re-election of Karen A. Richardson to serve as a Class II member of E.piphany’s Board of Directors with a term expiring on the date of the 2007 annual meeting of stockholders.

	FOR:	AUTHORITY TO VOTE WITHHELD:

Common Stock:	66,231,002	402,779

The ratification of the appointment of Ernst & Young LLP as our independent auditor for the year ending December 31, 2004.

	FOR:	AGAINST:	ABSTAIN:

Common Stock:	65,822,696	805,684	5,401

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

Number		Exhibit Title

3.1 (1)		Restated Certificate of Incorporation of the Registrant.
3.2 (2)		Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.
3.3 (3)		Amended and Restated Bylaws of the Registrant.
4.1 (1)		Form of Stock Certificate
10.1(4)		Employment and Non-Competition Agreement dated March 14, 2000 (as amended on May 31, 2000) between Andrew Sherman and the Registrant.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

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

(4) Incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004 (Registration No. 000-27183) filed with the Securities and Exchange Commission on May 10, 2004.

(b) Reports on Form 8-K.

A report on Form 8-K containing our preliminary earnings results for the quarter ended March 31, 2004 was furnished to the SEC on April 5, 2004.

A report on Form 8-K containing our earnings release for the quarter ended March 31, 2004 was furnished to the SEC on April 26, 2004.

A report on Form 8-K containing supplemental historical revenue and cost information with revenues generated from product licenses, services and maintenance was furnished to the SEC on May 28, 2004.

SIGNATURES

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

E.PIPHANY, INC.

DATE:	August 6, 2004	SIGNATURE:	/s/ KAREN A. RICHARDSON

			Karen A. Richardson Chief Executive Officer


DATE:	August 6, 2004	SIGNATURE:	/s/ KEVIN J. YEAMAN

			Kevin J. Yeaman Chief Financial Officer

EXHIBIT INDEX

Number		Exhibit Title

3.1(1)		Restated Certificate of Incorporation of the Registrant.

3.2(2)		Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant dated December 18, 2000.

3.3(3)		Amended and Restated Bylaws of the Registrant.

4.1(1)		Form of Stock Certificate.

10.1(4)		Employment and Non-Competition Agreement dated March 14, 2000 (as amended on May 31, 2000) between Andrew Sherman and the Registrant.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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

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

(4)	Incorporated by reference to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2004 (Registration No. 000-27183) filed with the Securities and Exchange Commission on May 10, 2004.