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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 September 30, 2004

Commission File Number 000-26881

E.PIPHANY, INC.
(Exact name of registrant as specified in its charter)

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      

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES   X    NO      

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of October 31, 2004, was 76,615,468.

E.PIPHANY, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

PART I:    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

E.PIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

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

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E.PIPHANY, INC.

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

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

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E.PIPHANY, INC.

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

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

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E.PIPHANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.   Basis of Presentation

     The condensed consolidated financial statements included herein have been prepared by 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 September 30, 2004, the results of its operations for the three and nine months ended September 30, 2004 and 2003, and its cash flows for the nine months ended September 30, 2004 and 2003. The results for the three and nine months ended September 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 September 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.

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

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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 nine month periods ended September 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 September 30, 2004, we had $6.9 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 collectibility of our accounts receivable based on a combination of factors. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe to be collectible. 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 nine months ended September 30, 2004 and 2003. As of September 30, 2004, one individual customer account receivable balance accounted for 10% 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.

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     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 nine months ended September 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.

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     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 September 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 September 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 nine months ended September 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 nine months ended September 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):

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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 both the three and nine months ended September 30, 2004, respectively, and $0.1 million for both the three and nine months ended September 30, 2003, respectively. The Company had no accounts receivable balances from these customers as of September 30, 2004 and December 31, 2003.

     In addition, three 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 $1.4 million and $2.0 million for the three and nine months ended September 30, 2004 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2003, respectively. The Company had accounts receivable balances from these customers totaling $1.3 million as of September 30, 2004 and less than $0.1 million as of December 31, 2003.

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):

     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):

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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 paragraph 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 stipulation of settlement for the claims against the issuer defendants, including the Company, has been submitted to the court. The settlement is subject to a number of conditions, including approval of the court. 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 September 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

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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 United States 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 September 30, 2004 (in thousands):

     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.”

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     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.

Nine months ended September 30, 2004

     For the nine months ended September 30, 2004, the Company recorded adjustments to previously-recorded restructuring estimates totaling $0.9 million primarily associated with facilities in Illinois, California, and the United Kingdom.

     The accrued liability of $22.9 million at September 30, 2004 is net of $27.8 million of estimated sublease income. Of this estimated sublease income, $13.6 million represents future sublease income due under non-cancelable subleases and $14.2 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 collectibility of sublease income. If the Company determines that sublease income is not collectible 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):

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 an annual impairment test during the fourth quarter of 2003 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 nine months ended September 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.

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

__________

(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 September 30, 2003 was $0.8 million. As of March 31, 2004 these intangible assets were fully amortized.

9. 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):

10.   Subsequent Event - Common Stock Repurchase Program

     The Company’s Board of Directors has authorized a stock repurchase program of up to $30 million of common stock. Stock repurchases under this program may be made in the open market and through privately negotiated transactions at such times and in such amounts as management deems appropriate and will be funded from available working capital. The number of shares to be purchased and the timing of the purchases will depend on several factors, including the price of the Company’s stock, corporate and regulatory requirements and general business and market conditions. The stock repurchase program may be limited or terminated at any time without prior notice.

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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 our ability to meet our liquidity needs; 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 2002. The combination of increased revenue and decreased costs resulted in declining net losses in the first three quarters of 2003 and net income of $0.4 million in the fourth quarter.

     During the first nine months of 2004, we experienced a decline in revenues 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.

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     During the nine months ended September 30, 2003 and 2004, we experienced an increase in the percentage of license transactions for which integrator partners took primary responsibility for software implementation. The growth of our business depends on license revenue growth over time. During the first nine months of 2004, we experienced a decline in license revenue, primarily attributable to longer than expected sales cycles, lower average selling prices of our license transactions and continuing weakness in spending in the information technology market. 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 $16.8 million as of September 30, 2004. This decrease in deferred revenue was primarily a result of a decrease in deferred license 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 certain revenue recognition criteria are not met on significant license transactions that would require us to defer the recognition of revenues into future periods.

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 September 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, the cost of maintenance 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.

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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 collectibility is in doubt at the time of sale. Rather, revenue is recognized from these transactions as cash is collected. The determination of collectibility 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 year ended December 31, 2003 and the nine months ended September 30, 2004, third-party consulting organizations have been primarily responsible for implementation services for the majority of our license arrangements. Approximately 11% of license revenue was recognized under SOP 81-1 during the nine months ended September 30, 2004, compared to 31% for the nine months ended September 30, 2003.

     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 collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe is collectible. 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.

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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 $81.5 million 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. 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 quarter ended September 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 $22.9 million at September 30, 2004 is net of $27.8 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, $13.6 million represents future sublease income due under non-cancelable subleases and $14.2 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,

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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 nine months ended September 30, 2004 and 2003 (in thousands, except percentages):

     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 nine months ended September 30, 2004 and 2003 (in thousands, except percentages):

     Product license revenue for the three months ended September 30, 2004 decreased by $4.5 million, or 44%, as compared to product license revenue for the same period in the prior year. Product license revenue for the nine months ended September 30, 2004 decreased by $9.7 million, or 32%, as compared to 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. This decrease is attributable to longer than expected sales cycles, lower average selling prices for our licenses, and continued weakness in spending in the IT market. 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 nine month periods ending September 30, 2004.

     Services revenue consists of revenue from professional and training services. Services revenue for the third quarter of 2004 decreased by $2.3 million, or 32%, compared to the third quarter of 2003. Services revenue for the nine months ended September 30, 2004 decreased by $2.3 million, or 13%, over services revenue for the same period in the prior year. The decrease in both periods was primarily due to third-party consulting organizations being responsible for implementation services for the majority of our license arrangements, which led to a decrease in the number of our professional services employees.

     Maintenance revenue for the third quarter of 2004 increased by $0.6 million, or 9%, over maintenance revenue for the third quarter of 2003. Maintenance revenue for the nine months ended September 30, 2004 increased by $1.7 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.

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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 nine months ended September 30, 2004 and 2003 (in thousands, except percentages):

     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. The majority of these fees are fixed and thus have not decreased in accordance with the decrease in license revenue for the three and nine months ended September 30, 2004.

     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 nine months ended September 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 87 at September 30, 2003 to 73 at September 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 increase in the cost of maintenance for the three months ended September 30, 2004 compared to the same period in the prior year is due primarily to transition costs associated with the move of one of our support centers from Boston, Massachusetts to the United Kingdom. The decrease in cost of maintenance revenue for the nine months ended September 30, 2004 compared to the same period in the prior year was due primarily to lower overhead and facilities cost allocations.

     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 nine months ended September 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 September 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 nine months ended September 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

     Research and development expenses consist primarily of personnel and related costs associated with our product development efforts. The decrease for the three and nine months ended September 30, 2004 as compared to

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the same periods in the prior year was due primarily to a reduction in the number of research and development employees, as well as lower overhead and facilities cost allocations. The number of research and development employees decreased from 153 as of September 30, 2003 to 139 September 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 nine months ended September 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

     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 nine months ended September 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 nine months ended September 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, and lower travel expenses. The number of sales and marketing employees decreased from 112 as of September 30, 2003 to 102 as of September 30, 2004 as a result of voluntary and other terminations not related to restructuring plans.

General and Administrative

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

     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 nine months ended September 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 property rights. Audit and accounting costs increased primarily as a result of activities associated with our 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 66 as of September 30, 2003 to 57 as of September 30, 2004 as a result of voluntary and other terminations not related to restructuring plans.

Restructuring Charges

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

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     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 September 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 United States 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 (credits) recorded in the three and nine months ended September 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 nine months ended September 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

     Other income, net consists primarily of interest income on investments. For the nine months ended September 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 increase in interest income for the three months ended September 30, 2004 as compared to the same period last year is primarily due to higher rates of return on our investments during that period. The decrease in interest income for the nine months ended September 30, 2004 as compared to the same period last year is primarily due to the inclusion of the $0.8 million payment for the termination of a partner agreement discussed above, and also 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 nine months ended September 30, 2004 and 2003, expressed both in absolute dollars and as a percentage of total revenues (in thousands, except percentages):

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

Liquidity and Capital Resources

Cash Flow

     As of September 30, 2004, our primary sources of liquidity consisted of $147.3 million in cash, cash equivalents and short-term investments and $107.5 million in long-term investments for a total of $254.8 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.

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     Net cash used in operating activities totaled $12.9 million and $24.5 million for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2004 and September 30, 2003 totaled $1.9 million and $18.2 million, respectively, 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 $6.0 million and $3.5 million for the nine months ended September 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 nine months ended September 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.

Common Stock Repurchase Program

     Our Board of Directors has authorized a stock repurchase program of up to $30 million of common stock. Stock repurchases under this program may be made in the open market and through privately negotiated transactions at such times and in such amounts as management deems appropriate and will be funded from available working capital. The number of shares to be purchased and the timing of the purchases will depend on several factors, including the price of E.piphany’s stock, corporate and regulatory requirements and general business and market conditions. The stock repurchase program may be limited or terminated at any time without prior notice.

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 September 30, 2004, we had $6.9 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 $5.7 million of which are classified as long-term and relate to facility lease agreements that have expiration dates greater than twelve months from September 30, 2004.

Contractual Obligations

     Our contractual obligations as of September 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 September 30, 2004 were as follows (in thousands):

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     Net operating lease commitments shown above include $29.0 million of operating lease commitments under leases for abandoned facilities which are recorded as restructuring costs in the accompanying balance sheet as of September 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 the next 12 months and the foreseeable future. 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 September 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 September 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 September 30, 2004.

Related Party and Other Transactions

     Roger Siboni, Chairman of the Board, is currently a member of the board of directors of two of our customers. Total revenues to E.piphany from these customers were less than $0.1 million for both the three and nine months ended September 30, 2004, respectively, and $0.1 million for both the three and nine months ended September 30, 2003, respectively. We had no accounts receivable balances from these customers as of September 30, 2004 and December 31, 2003, respectively.

     In addition, three of our customers have board members that were also on our board of directors at the time revenues from contracts with these customers were recognized. Total revenues to us from these customers were $1.4 million and $2.0 million for the three and nine months ended September 30, 2004 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2003, respectively. We had accounts receivable balances from

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these customers totaling $1.3 million as of September 30, 2004 and less than $0.1 million as of December 31, 2003, respectively.

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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 $4.3 million for the quarter ended September 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 September 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 profitability on a quarterly basis or ever achieve profitability on an 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 economic conditions in the United States or in other territories or markets in which we do a substantial portion of 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, have more established relationships with key system integrators 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.

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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 September 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.

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: