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, 2005

Commission File Number 000-27183

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 ¨

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 July 31, 2005, was 77,581,754

EPIPHANY, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2005

TABLE OF CONTENTS


		Page No.
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets - As of June 30, 2005 and December 31, 2004	3

	Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2005 and 2004	4

	Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 6.	Exhibits	36

SIGNATURES		37

Exhibit Index		38

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPIPHANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	June 30, 2005			December 31, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	18,856		$	18,080
Investments in marketable securities		147,382			131,090
Accounts receivable, net		7,019			11,677
Prepaid expenses and other assets		3,913			4,849
Short-term restricted cash and investments		542			266

Total current assets		177,712			165,962
Long-term investments		72,930			96,404
Long-term restricted cash and investments		4,054			5,432
Property and equipment, net		3,043			4,621
Goodwill		81,499			81,499
Other assets		243			301

Total assets	$	339,481		$	354,219

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,860		$	1,194
Accrued compensation		5,208			5,850
Accrued other		7,252			7,186
Current portion of restructuring costs		4,107			5,532
Deferred revenue		13,976			14,011

Total current liabilities		32,403			33,773
Restructuring costs, net of current portion		15,660			15,904
Other long-term liabilities		207			232

Total liabilities		48,270			49,909

Commitments and contingencies
Stockholders’ equity:
Common stock		7			7
Additional paid-in capital		3,833,250			3,831,571
Accumulated other comprehensive loss		(2,441	)		(2,230	)
Deferred Compensation		(1,013	)		(1,166	)
Accumulated deficit		(3,538,592	)		(3,523,872	)

Total stockholders’ equity		291,211			304,310

Total liabilities and stockholders’ equity	$	339,481		$	354,219

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

EPIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenues:
Product license	$	3,857		$	7,638		$	8,149		$	14,744
Services		5,059			5,059			9,258			10,594
Maintenance		7,777			7,729			15,513			15,317

		16,693			20,426			32,920			40,655

Cost of revenues:
Product license		168			387			534			802
Services		4,344			4,352			8,295			8,850
Maintenance		1,401			1,370			2,837			2,646
Amortization of purchased technology		—			—			—			679

		5,913			6,109			11,666			12,977

Gross profit		10,780			14,317			21,254			27,678

Operating expenses:
Research and development		6,021			6,368			12,651			13,041
Sales and marketing		6,900			8,953			14,237			17,384
General and administrative		5,405			3,136			9,483			5,841
Restructuring charges		2,163			375			2,400			1,011
Stock-based compensation		77			—			154			—

Total operating expenses		20,566			18,832			38,925			37,277

Loss from operations		(9,786	)		(4,515	)		(17,671	)		(9,599	)

Other income, net		1,588			903			3,061			1,831

Net loss before provision for taxes	$	(8,198	)	$	(3,612	)	$	(14,610	)	$	(7,768	)

Provision for taxes		101			35			110			81

Net Loss	$	(8,299	)	$	(3,647	)	$	(14,720	)	$	(7,849	)

Basic and diluted net loss per share	$	(0.11	)	$	(0.05	)	$	(0.19	)	$	(0.10	)

Shares used in computing basic and diluted net loss per share		77,076			75,765			76,863			75,377

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

EPIPHANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(14,720	)	$	(7,849	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,646			2,163
Stock-based compensation		154			—
Non-cash restructuring costs		335			—
Amortization of purchased technology		—			679
Accounts receivable		4,658			2,243
Prepaid expenses and other assets		994			1,500
Accounts payable		666			(291	)
Accrued liabilities and compensation		(601	)		(4,149	)
Restructuring costs		(1,633	)		(3,062	)
Deferred revenue		(35	)		(1,175	)

Net cash used in operating activities		(8,536	)		(9,941	)

Cash flows from investing activities:
Purchases of property and equipment		(573	)		(668	)
Proceeds from maturities of investments		130,690			178,944
Loss on disposal of property and equipment		133			68
Restricted cash and investment		1,102			932
Purchases of investments		(123,624	)		(179,349	)

Net cash provided (used) by investing activities		7,728			(73	)

Cash flows from financing activities:
Proceeds from sale of common stock		1,676			5,832

Net cash provided by financing activities		1,676			5,832

Effect of foreign exchange translation		(92	)		(244	)

Net increase (decrease) in cash and cash equivalents		776			(4,426	)
Cash and cash equivalents at beginning of period		18,080			30,468

Cash and cash equivalents at end of period	$	18,856		$	26,042

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

EPIPHANY, 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 “Epiphany” 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, 2004 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 Epiphany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the SEC on March 16, 2005.

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 Epiphany as of June 30, 2005, the results of its operations for the three and six months ended June 30, 2005 and 2004, and its cash flows for the six months ended June 30, 2005 and 2004. The results for the three and six months ended June 30, 2005 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 Epiphany and its subsidiaries. As of June 30, 2005, 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, Investments in Marketable Securities, Long-Term Investments and Restricted Cash and Investments

The Company considers all highly liquid investments with a maturity of 90 days or less from the date of purchase to be cash equivalents. The Company has classified its investments as “available for sale.” Investments in marketable securities generally consist of highly liquid securities that the Company intends to hold for more than 90 days but less than 1 year. Long-term investments generally consist of securities that the Company intends to hold for more than one year. Such investments are carried at fair value with unrealized gains and losses reported, net of tax, as other comprehensive income (loss) in stockholders’ equity. The Company periodically reviews these investments

for other-than-temporary impairments. 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.

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, 2005, we had $4.6 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.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives. The estimated useful lives for computer software and equipment is three years, furniture and fixtures is five years and leasehold improvements range from the shorter of five years or applicable lease term. Depreciation expense is included in operating expenses and cost of revenues based on how the assets are utilized.

Fair Value of Financial Instruments, Concentration of Credit Risk and Significant Customers

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.

The Company’s customer base consists of businesses in Asia, Australia, Europe, Latin America and North America. 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 and six months ended June 30, 2005. As of June 30, 2005, one customer accounted for 16% of our total accounts receivable balance. Two individual customer account receivable balances accounted for 17% and 12%, respectively, of our total accounts receivable as of December 31, 2004.

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 2004 and 2003, which did not result in an impairment charge. The Company intends to perform annual impairment testing in the fourth quarter of 2005. The Company did not identify events or circumstances during the three and six months ended June 30, 2005 which would more likely than not reduce the fair value of previously recorded intangible assets.

Revenue Recognition

Epiphany 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 under the input method. 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. Epiphany 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, 2005 or December 31, 2004. 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, 2005 or December 31, 2004 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, Epiphany Software, K.K. (“Epiphany 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. No claims have been made under this indemnification as of June 30, 2005. 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, 2005.

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, 2005.

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,
	2005			2004			2005			2004
Net loss, as reported	$	(8,299	)	$	(3,647	)	$	(14,720	)	$	(7,849	)
Add: Stock-based employee compensation expense included in reported net loss, net of tax effects		77			—			154			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects		(1,953	)		(4,755	)		(4,346	)		(11,274	)

Pro forma net loss	$	(10,175	)	$	(8,402	)	$	(18,912	)	$	(19,123	)

Loss per share:
Basic and diluted—as reported	$	(0.11	)	$	(0.05	)	$	(0.19	)	$	(0.10	)
Basic and diluted—pro forma	$	(0.13	)	$	(0.11	)	$	(0.25	)	$	(0.25	)

During the fourth quarter of 2004, the Company recorded an aggregate of $1.2 million of deferred compensation in connection with restricted stock granted to certain officers of the Company, which the Company is amortizing on a straight-line basis over the respective vesting periods. The Company has reflected $77,000 and $154,000 in compensation expense associated with these restricted shares in the accompanying condensed consolidated statements of operations during the three and six months ended June 30, 2005.

During the Company’s application of the fair value recognition provisions of SFAS No. 123 for the year ended December 31, 2004, the Company made certain corrections to its pro forma charges for the three and six months ended June 30, 2004. These amounts were previously reported as $4.0 million and $9.5 million for the three and six months ended June 30, 2004.

3. 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,
	2005			2004			2005			2004
Net loss	$	(8,299	)	$	(3,647	)	$	(14,720	)	$	(7,849	)
Basic and diluted:
Weighted average shares of common stock outstanding		77,361			75,765			77,148			75,378
Less: Weighted average shares subject to repurchase		(285	)		—			(285	)		(1	)

		77,076			75,765			76,863			75,377

Basic and diluted net loss per common share	$	(0.11	)	$	(0.05	)	$	(0.19	)	$	(0.10	)

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,
	2005	2004	2005	2004
Options excluded due to the exercise price exceeding the average fair market value of the Company’s common stock during the period	10,323	7,317	9,944	7,133
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	1,410	4,588	1,565	5,059
Common shares excluded resulting from common stock subject to repurchase	285	—	285	1

Total common stock equivalents excluded from diluted net loss per common share	12,018	11,905	11,794	12,193

4. Legal Proceedings

As of the date hereof, there is no material litigation pending against us. 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 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. In June 2004, a stipulation for the settlement and release of claims against the issuer defendants, including the Company, was submitted to the court. On February 15, 2005, the court granted preliminary approval of the settlement, subject to the parties’ modification of a proposed bar order relating to potential contribution claims. The settlement is subject to a number of conditions, including the final 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.

On February 8, 2005, New York University (“NYU”) filed a complaint against the Company in the United States District Court for the Southern District of New York, alleging patent infringement. The Company has answered the complaint. The Company believes it has meritorious defenses and intends to vigorously defend itself.

5. 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”), SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), and SFAS No. 112, “Employers’ Accounting for Post-employment Benefits”, as applicable. In accordance with these standards, 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”). A third plan was initiated during the quarter ended June 30, 2003 (“Plan 3”) and a fourth plan was initiated during the quarter ended March 31, 2005 (“Plan 4”). 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, 2005 (in thousands):


	Severance and Related Charges			Impairment of property and equipment			Lease Costs			Other Restructuring Activities			Total
Accrued balance at December 31, 2003	$	—		$	—		$	27,704		$	—		27,704
Charges accrued during 2004 – Plan2		—			—			—			—		—
Adjustments to previous estimates – Plan 1		—			—			828			—		828
Adjustments to previous estimates – Plan 2		—			—			(164	)		—		(164	)
Adjustments to previous estimates – Plan 3		—			—			6			6		12
Cash payments – Plan 1		—			—			(6,264	)		—		(6,264	)
Cash payments – Plan 2		—			—			(642	)		—		(642	)
Cash payments – Plan 3		—			—			(32	)		(6	)	(38	)

Accrued balance at December 31, 2004								21,436			—		21,436

Charges accrued during 2005 – Plan 4		253			373			1,703			—		2,329
Accretion Charge – Plan 4		—			—			16			—		16
Adjustments to previous estimates – Plan 1		—			—			55			—		55
Cash payments – Plan 1		—			—			(2,464	)		—		(2,464	)
Cash payments – Plan 2		—			—			(594	)		—		(594	)
Cash payments – Plan 3		—			—			(6	)		—		(6	)
Cash payments – Plan 4		(253	)		—			(44	)		—		(297	)
Non-cash activity – Plan 2		—			—			(298	)		—		(298	)
Non-cash activity – Plan 4		—			(373	)		(37	)		—		(410	)

Accrued balance at June 30, 2005		—			—			19,767			—		19,767
Less: current portion		—			—			4,107			—		4,107

Restructuring costs, net of current portion	$	—		$	—			15,660		$	—		15,660

Severance and related charges consist primarily of involuntary termination benefits and related payroll taxes resulting from a reduction in workforce. 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 a reduction in workforce. 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. The accretion charge represents the amortization of the difference between the net present value (NPV) of obligations and the absolute value of obligations.

Year Ended December 31, 2004

For the year ended December 31, 2004, the Company recorded adjustments to previously-recorded restructuring estimates totaling $0.7 million primarily associated with facilities in Illinois, California, and the United Kingdom.

Plan 4 Activity Quarter and six months ended June 30, 2005

On February 15, 2005, the Company adopted a restructuring plan designed to reduce operating expenses and to further focus its resources on its core markets (“Plan 4”). The total restructuring charges incurred under Plan 4 during the six months ended June 30, 2005 were approximately $2.4 million, of which $2.1 million is comprised of lease termination costs related to the abandonment of leased facilities in the United Kingdom and Boston, Massachusetts including the write-off of certain property and equipment totaling $0.4 million. The remaining $0.3 million relates to employee related termination costs. Under SFAS No, 146 “Accounting for Costs associated with Exit or Disposal Activities” the restructuring charges are recorded at the net present value of the future obligations. Future restructuring charges against Plan 4 will be attributable to accretion charges and, potentially, severance charges.

Plans 1, 2 and 3 have been accounted for using the guidance of EITF 94-3 “Liability Recognition for Costs to Exit an Activity”, under which charges were recorded at the absolute value of the future obligations.

The accrued liability of $19.8 million at June 30, 2005 is net of $29 million of estimated sublease income. Of this total sublease income, $18.5 million represents future sublease income due under non-cancelable subleases and $10.5 million represents our estimates of future sublease income on excess facilities we expect to sublease in the future. 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.

6. 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,
	2005		2004		2005		2004
Revenues:
United States	$	11,696	$	14,359	$	22,811	$	28,835
United Kingdom		2,529		2,669		4,888		5,888
Rest of World		2,468		3,398		5,221		5,932

Total	$	16,693	$	20,426	$	32,920	$	40,655

7. Purchased Intangible Assets

Definite lived intangible assets were fully amortized as of June 30, 2004. There was $679,000 of amortization charges in the period ended March 31, 2004 and none thereafter.

8. 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,
	2005			2004			2005			2004
Net loss	$	(8,299	)	$	(3,647	)	$	(14,720	)	$	(7,849	)
Change in unrealized gain on investments		594			(1,673	)		(116	)		(1,439	)
Change in foreign currency translation adjustment		2			(61	)		(92	)		(244	)

Comprehensive losses	$	(7,703	)	$	(5,381	)	$	(14,928	)	$	(9,532	)

9. Subsequent Event

ProposedMmerger with SSA Global Technologies, Inc.

On August 3, 2005, the Company entered into an Agreement and Plan of Merger, or merger agreement, by and among SSA Global Technologies, Inc. (“SSA”), SSA-E Merger Subsidiary, Inc., a wholly-owned subsidiary of SSA (“Merger Sub”), SSA-E Acquisition Subsidiary, Inc., a wholly-owned subsidiary of SSA (“Acquisition Sub”), and Epiphany. Pursuant to the merger agreement, Acquisition Sub will purchase substantially all of the intellectual property assets of Epiphany and then Merger Sub will merge with and into Epiphany, with the result that Epiphany shall be the surviving corporation and shall become a wholly-owned subsidiary of SSA. As a result of the merger, each share of Epiphany common stock issued and outstanding immediately prior to the effective time of the merger shall be converted into the right to receive $4.20. In addition, all options or other rights to purchase capital stock of Epiphany outstanding under the Company’s existing stock option plans with exercise prices below $4.20 per share will be cashed out for the difference between $4.20 per share and the exercise price of such options. All options or other rights to purchase capital stock of Epiphany outstanding under Epiphany’s existing stock option plans with exercise prices above $4.20 will be cancelled. In addition, if the merger is terminated under specified circumstances, the Company may be required to pay SSA a termination fee under the merger agreement in the amount of $8.23 million, plus expenses of up to an additional $1.65 million.

The consummation of the merger is subject to the approval of the Company’s stockholders, expiration or termination of certain waiting periods under United States and applicable foreign antitrust laws and other customary closing conditions. There can be no assurance that the closing conditions to the merger will be met or that the transaction will be consummated. The Company’s business and stock price could be negatively impacted if the pending transaction is not completed due to any of the factors set forth in the Risk Factor section of this quarterly report. Please see the section entitled “Risk Factors – Our proposed merger with SSA Global involves a high degree of risk, including the following risks” for a discussion of the risks in connection with the pending transaction.

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 the financial statement impact of FAS 123R; statements regarding our ability to meet our liquidity needs; statements regarding receipt of future sublease income; 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 on Form 10-Q and the risks discussed from time to time in our other public filings. We assume no obligation to update any forward-looking statements.

Overview

Background

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 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 using stock consideration, including the acquisition of RightPoint Software, Inc., Octane Software, Inc. and Moss Software, Inc.

We grew our revenues from $3 million in 1998 to $19 million in 1999 and $131 million in 2000. However, in 2001 a general economic slowdown resulted in a reduction in technology spending worldwide. As a result, we began restructuring our worldwide operations to reduce costs and improve efficiencies during 2001 and recorded our first restructuring charge. Also during 2001, we reviewed the fair value of our purchased intangible assets recorded through the acquisitions discussed above and recorded a $1.7 billion impairment charge to write these assets down to their fair values. Our revenues declined to $129 million in 2001 and $84 million in 2002. We increased revenue to $96 million in 2003 on the strength of the release of our E6 suite of products.

The general economic slowdown has continued to apply substantial pressure on the CRM industry. Small competitors are facing weakening financial conditions which has resulted in competitive pricing pressures. In addition, the consolidation of software vendors and the resulting volatility in the marketplace has further delayed technology spending decisions for some of our potential customers. These factors have combined to result in longer than expected sales cycles and lower average selling prices for license transactions. In addition, we experienced poor sales productivity in North America during 2004, in part, because of the general IT spending environment and attrition within our sales personnel, including the departure of our Senior Vice President of Worldwide Field Operations in July 2004.

As a result of these factors, we experienced a decline in revenues to $79 million in 2004. During the first half of 2005, we have experienced a continued decline in revenues with revenues of $33 million for the six months ended June 30, 2005 as compared to $41 million for the same period in 2004. Our product license revenue was $8.1 million for the six months ended June 30, 2005 as compared to $14.7 million for the same period in 2004. The decrease in our product license revenue is primarily due to continued weakness in the Customer Relationship Management (CRM) enterprise software environment, changes in sales personnel, fewer large transactions and the impact of our transition from a broad sales and marketing focus to our core markets. We have experienced a decline in licenses sold and a decline in the average selling price per license sold.

Our Proposed Merger with SSA Global Technologies, Inc.

On August 3, 2005, the Company entered into an Agreement and Plan of Merger, or merger agreement, by and among SSA Global Technologies, Inc. (“SSA”), SSA-E Merger Subsidiary, Inc., a wholly-owned subsidiary of SSA (“Merger Sub”), Acquisition Subsidiary, Inc., a wholly-owned subsidiary of SSA (“Acquisition Sub”), and Epiphany. Pursuant to the merger agreement, SSA-E Acquisition Sub will purchase substantially all of the intellectual property assets of Epiphany and then Merger Sub will merge with and into Epiphany, with the result that Epiphany shall be the surviving corporation and shall become a wholly-owned subsidiary of SSA. As a result of the merger, each share of Epiphany common stock issued and outstanding immediately prior to the effective time of the merger shall be converted into the right to receive $4.20. In addition, all options or other rights to purchase capital stock of Epiphany outstanding under the Company’s existing stock option plans with exercise prices below $4.20 per share will be cashed out for the difference between $4.20 per share and the exercise price of such options. All options or other rights to purchase capital stock of Epiphany outstanding under Epiphany’s existing stock option plans with exercise prices above $4.20 will be cancelled. In addition, if the merger is terminated under specified circumstances, the Company may be required to pay SSA a termination fee under the merger agreement in the amount of $8.23 million, plus expenses of up to an additional $1.65 million.

Performance Indicators, Opportunities and Risks

We believe the key indicators of our operating performance and financial condition are annual product license revenues and net income (loss). We believe our future profitability and success is more dependent upon growth in our product license revenues and total revenues than further cost containment initiatives. We are focusing our sales and marketing efforts on solutions that address organic growth, relationship marketing and the contact center. Although these solutions have broad applicability in the business-to-consumer market, our focus is on key verticals

which include financial services, telecommunications and insurance. We believe that focusing our marketing and sales efforts on these industries will allow us to enhance our sales effectiveness and leverage our technological advantages with customers who are more likely to understand the benefits that our products offer. The growth of our product license revenues and our total revenues will be dependent upon IT and CRM spending by large enterprises, our relationships with key partners including systems integrators, our ability to compete effectively against significant competitors, improved market awareness and enhanced sales effectiveness primarily within our key vertical industries.

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, 2005, the substantial majority 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, Cap Gemini, Deloitte Consulting, or IBM. Alternatively, customers can purchase these services directly from us through our internal professional services organization, Epiphany Consulting. We generate services revenues primarily by providing assistance to third party consulting organizations through the implementation lifecycle. Consulting and implementation services are generally sold to customers on a time and expense basis. We have also historically supplemented the capacity of our internal professional services organization by subcontracting some of these services to third party consulting organizations.

Maintenance services are generally sold under services agreements which are renewed annually with the customer. Under these agreements, we provide customers with technical support as well as software updates if and when they are made generally available during the term of the agreement.

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 and cost of maintenance revenues primarily consist of salaries and related expenses and an allocation of facilities, information technology, communications and depreciation expenses. Cost of services revenues also includes the cost of reimbursable expenses incurred by our professional services organization and the cost of subcontracting professional services from third party consulting organizations. Amortization of purchased technology represents the cost of technology acquired through our business acquisitions recognized as expense over the respective estimated useful lives of such assets. 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 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.

We use the residual method to recognize revenue from a license arrangement with multiple elements when vendor specific objective evidence (“VSOE”) of fair value exists for all the undelivered elements in the arrangement, but does not exist for one of the delivered elements in the arrangement. VSOE of the fair value of 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. Maintenance services are typically an undelivered element of our license arrangements. The determination as to whether VSOE of fair value exists for our maintenance services requires significant judgment. If we determined that VSOE of fair value did not exist for maintenance services, we would be required to defer revenue recognition and would, generally, recognize revenue ratably over the customer’s maintenance term which is typically one year.

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 the year ended December 31, 2004 and the three and six months ended June 30, 2005, third-party consulting organizations have been primarily responsible for implementation services for the majority of our license arrangements. As a result, approximately 13% and 11% of license revenue was recognized under SOP 81-1 during the three and six months ended June 30, 2005. This figure was 6% for the three months ended June 30, 2004.

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, or if the general economic environment or our experience with bad debts were to worsen, additional allowances may be required that would result in additional general and administrative expense in the period such determination is made. In addition, if we determined that fewer allowances were required due to improvements in these areas, we would be required to reduce the allowances for doubtful accounts which would result in a benefit to 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. Goodwill arising from purchase transactions is 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.

Our net goodwill asset was $81.5 million as of June 30, 2005 and December 31, 2004. We perform an annual impairment test on goodwill. We also perform an impairment test on goodwill and purchased intangible assets when events occur or circumstances change that would more likely than not reduce the fair value of these 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 an annual impairment test on December 31, 2004 and determined that no impairment existed at that time. In addition, the Company did not identify events or circumstances during the three and six months ended June 30, 2005 which would more likely than not reduce the fair value of previously recorded intangible assets. During the quarters ended March 31, 2005, the Company’s market capitalization declined. In addition, we reduced our projections of the Company’s near term revenues. Future declines in market capitalization or any further downward revisions to our projected revenues may result in an impairment charge in future periods.

Restructuring Charges

As discussed in Note 5 of Notes to Condensed Consolidated Financial Statements, we have recorded significant restructuring charges, primarily in connection with the 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 worsens 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 $19.8 million as of June 30, 2005 relates primarily to lease abandonment costs and is net of $29 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, $18.5 million represents future sublease income due under non-cancelable subleases and $10.5 million represents our estimate of future sublease income from excess facilities that we expect to sublease in the future.

Future expected payments of lease costs net of contractual and projected sublease receipts which have been included in our accrued restructuring costs are as follows (in thousands):


Year Ended December 31,	Lease Costs.
2005	$	4,113
2006		2,314
2007		2,029
2008		2,050
2009		2,038
2010 and thereafter		7,223

	$	19,767

During the quarter ended March 31, 2005, we adopted a restructuring plan designed to reduce operating expenses and further focus our resources on our core markets. See further discussion under Results of Operations, below.

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.

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to FASB Statement No. 123, Share-Based Payment (“FASB No. 123R”) which eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires that such transactions be accounted for using a fair value method. This statement is effective for companies’ first fiscal year beginning after June 15, 2005 and allows companies to choose between the following methods of adoption: (i) A “modified prospective” method in which compensation cost is recognized beginning with the effective date, or (ii) A “modified retrospective” method which permits entities to restate prior period financial statements based on the amounts previously disclosed in the footnotes to the financial statements under Statement 123.

Had we adopted FASB No. 123R in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 of Notes to Condensed Consolidated Financial Statements.

Results of Operations

Revenues

The following table sets forth our revenues, both in absolute dollars and expressed as a percentage of total revenues, for the three and six months ended June 30, 2005 and 2004 (in thousands, except percentages):


	Three months ended June 30,								Six months ended June 30,
	2005				2004				2005				2004
Revenues:
Product license	$	3,857	23	%	$	7,638	37	%	$	8,149	25	%	$	14,744	36	%
Services		5,059	30	%		5,059	25	%		9,258	28	%		10,594	26	%
Maintenance		7,777	47	%		7,729	38	%		15,513	47	%		15,317	38	%

	$	16,693	100	%	$	20,426	100	%	$	32,920	100	%	$	40,655	100	%

The following table sets forth our revenues by geography, both in absolute dollars and expressed as a percentage of total revenues, for the three and six months ended June 30, 2005 and 2004 (in thousands, except percentages):


	Three months ended June 30,								Six months ended June 30,
	2005				2004				2005				2004
North America	$	11,870	71	%	$	14,511	71	%	$	23,146	70	%	$	29,151	72	%
Europe		4,770	29	%		5,746	28	%		9,660	30	%		11,149	27	%
Rest of world		53	-	%		169	1	%		114	-	%		355	1	%

	$	16,693	100	%	$	20,426	100	%	$	32,920	100	%	$	40,655	100	%

Product license revenue for the three months ended June 30, 2005 decreased by $3.8 million, or 50%, over product license revenue for the same period in the prior year. Product license revenue for the six months ended June 30, 2005 decreased by $6.6 million, or 45%, over product license for the same period in the prior year. As a percentage of total revenues, product license revenue decreased to 23% and 25% for the quarter and six months ended June 30, 2005 from 37% and 36% for the same periods in 2004. The decrease in product license revenue is primarily due to continued weakness in the Customer Relationship Management (CRM) enterprise software environment, changes in sales personnel, fewer large transactions and the impact of our transition from a broad sales and marketing focus to a narrower focus on our core markets. We have experienced a decline in licenses sold and in the average selling price per license sold.

Services revenue consists of revenue from professional and training services. Services revenue for the three months ended June 30, 2005 remained unchanged from the second quarter of 2004. As a percentage of revenue, there is a slight increase for the second quarter of 2005. Service revenue for the six months ended June 30, 2005 decreased by $1.3 million, or 13%, over the same period of 2004. The decrease for the six months resulted from a decrease in both the number and size of engagements for which services were rendered due to a decrease in product sales. Maintenance revenue for the three and six months ended June 30, 2005 was comparable to maintenance revenue for the three and six months ended June 30, 2004.

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, 2005 and 2004 (in thousands, except percentages):


	Three months ended June 30,								Six months ended June 30,
	2005				2004				2005				2004
Cost of revenues:
Product license	$	168	1	%	$	387	2	%	$	534	2	%	$	802	2	%
Services		4,344	26	%		4,352	21	%		8,295	25	%		8,850	22	%
Maintenance		1,401	8	%		1,370	7	%		2,837	8	%		2,646	7	%
Amortization of purchased technology		—	—			—	—			—	—			679	1	%

	$	5,913	35	%	$	6,109	30	%	$	11,666	35	%	$	12,977	32	%

Gross profit	$	10,780	65	%	$	14,317	70	%	$	21,254	65	%	$	27,678	68	%

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 was due primarily to a reduction in the number of internal professional services employees.

Cost of maintenance revenues consists primarily of personnel and related costs of providing customer telephone support services under maintenance agreements. The increase in cost of maintenance revenue was due primarily to an increase in the number of customer support personnel.

The amortization of purchased technology consists of amortization from technology purchased in the acquisitions of iLeverage, eClass Direct, Moss Software and certain intellectual property assets of Radnet. Purchased technology assets were fully amortized as of June 30, 2004.

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.

Operating Expenses

Research and Development

The following table sets forth our research and development expenses for the three and six months ended June 30, 2005 and 2004, 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,
	2005				2004				2005				2004
Research and development	$	6,021	36	%	$	6,368	31	%	$	12,651	38	%	$	13,041	32	%

Research and development expenses consist primarily of personnel and related costs associated with our product development efforts. Research and development expenses for the three and six months ended June 30, 2005 are comparable to the same period in the prior year.

Sales and Marketing

The following table sets forth our sales and marketing expenses for the three and six months ended June 30, 2005 and 2004, 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,
	2005				2004				2005				2004
Sales and marketing	$	6,900	41	%	$	8,953	44	%	$	14,237	43	%	$	17,384	43	%

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 was primarily due to a reduction in the number of sales and marketing employees. The number of sales and marketing employees decreased from 108 as of June 30, 2004 to 86 as of June 30, 2005. Of the total reduction, 20 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, 2005 and 2004, 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,
	2005				2004				2005				2004
General and administrative	$	5,405	32	%	$	3,136	15	%	$	9,483	29	%	$	5,841	14	%

General and administrative expenses consist primarily of employee salaries and related expenses for executive, finance, legal and administrative personnel. The increase in these expenses was primarily due to an increase in legal costs associated with a legal action filed by us against a private third party to protect our intellectual property rights. Excluding these litigation costs, our general and administrative expenses for 2005 would have been lower than expenses in 2004. We expect these litigation costs to be significantly lower in the third quarter and to be eliminated in the fourth quarter.

Restructuring Charges

The following table sets forth our restructuring charges for the three and six months ended June 30, 2005 and 2004, 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,
	2005				2004				2005				2004
Restructuring charges	$	2,163	13	%	$	375	2	%	$	2,400	7	%	$	1,011	2	%

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 changed in certain geographies and facilities have been abandoned to align our cost structure with current market conditions.

Restructuring charges recorded in the six months ended June 30, 2005 relate primarily to the abandonment of leased facilities in the United Kingdom and Boston, Massachusetts under Plan 4 initiated during the first quarter of 2005. Restructuring charges recorded in the same period in the prior year relate to changes in estimated lease costs related primarily to facilities located in Chicago, Illinois and San Mateo, California. See Note 5 in Notes to Condensed Consolidated Financial Statements for more details.

Other Income, Net

The following table sets forth our other income, net for the three and six months ended June 30, 2005 and 2004, 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,
	2005				2004				2005				2004
Other income, net	$	1,588	10	%	$	903	4	%	$	3,061	9	%	$	1,831	5	%

Other income, net consists primarily of interest income on investments. The increase in interest income for the three and six months ended June 30, 2005 as compared to the same period in the prior year is primarily due to an increase in the average rate of return on our investments.

Liquidity and Capital Resources

Cash Flow

As of June 30, 2005, our primary sources of liquidity consisted of $166.3 million in cash, cash equivalents and investments in marketable securities and $72.9 million in long-term investments for a total of $239.2 million in 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 $8.5 million and $9.9 million for the six months ended June 30, 2005 and 2004, respectively. The decrease in cash used in operations is primarily due to stronger cash collection in the first two quarters of 2005 as compared to the same period in 2004 resulting in a decrease in accounts receivable and flat deferred revenue.

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 provided by investing activities results primarily from the net movement from investments to cash and cash equivalents for the purpose of funding current operating activities. Net cash provided (used) by investing activities totaled $7.7 million and less than ($0.1) million for the six months ended June 30, 2005 and 2004, respectively. This increase is a result of less cash required for operating activities compared to the same period in the prior year.

Net cash provided by financing activities totaled $1.7 million and $5.8 million for the six months ended June 30, 2005 and 2004, respectively. Cash provided by financing activities for each period resulted from the receipt of proceeds from the issuance of common stock pursuant to the exercise of stock options. These proceeds decreased for the quarter ended June 30, 2005 over the same period in the prior year due to a decline in the number of stock options exercised during the period.

In October 2004, our board of directors authorized a program to repurchase up to $30 million of our outstanding common stock. Although we may utilize cash during 2005 for the purpose of stock repurchases, the timing of stock repurchases as well as the total amount of cash used for stock repurchases depends on several factors including our stock price, corporate and regulatory requirements and general business and market conditions.

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, 2005, we had $4.6 million of restricted cash and investments, $0.5 million of which are classified as short-term and relate to facility lease agreements that have expiration dates within 12 months, and $4.1 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, 2005.

Contractual Obligations

Our contractual obligations as of June 30, 2005 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, 2004.

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, 2005 were as follows (in thousands):


Year Ending December 31,	Operating Leases Due		Future Sublease Income			Total, Net
2005	$	4,650	$	(1,443	)	$	3,207
2006		6,692		(2,262	)		4,430
2007		6,619		(2,247	)		4,372
2008		6,672		(2,083	)		4,589
2009		6,794		(2,023	)		4,771
2010 and thereafter		16,653		(3,663	)		12,990

	$	48,080	$	(13,721	)	$	34,359

Net operating lease commitments shown above include $21.2 million of operating lease commitments net of contractual sublease income under leases for abandoned facilities which are recorded as restructuring costs in the accompanying balance sheet as of June 30, 2005. 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, 2004 or June 30, 2005 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, Epiphany Software, K.K. (“Epiphany 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. No claims have been made under this indemnification as of June 30, 2005. The fair value of these indemnification provisions were not material to our financial position, results of operations or cash flows for the three and six months ended June 30, 2005.

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, 2005.

Recent Accounting Pronouncements

Share Based Payments

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to FASB Statement No. 123, Share-Based Payment (“FASB No. 123R”) which eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires that such transactions be accounted for using a fair value method. This statement is effective for companies’ first fiscal year ending after June 15, 2005 and allows companies to choose between two of the following methods of adoption: (i) A “modified prospective” method in which compensation cost is recognized beginning with the effective date, or (ii) A “modified retrospective” method which permits entities to restate prior period financial statements based on the amounts previously disclosed in the footnotes to the financial statements under Statement 123.

Exchanges of Nonmonetary Assets

On December 16, 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. Statement 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Statement 153 is effective for nonmonetary asset exchanges beginning in our second quarter of fiscal 2006. We do not expect the adoption of Statement 153 to have a material effect on our consolidated financial position, results of operations or cash flows.

Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (the “AJCA”)

In December 2004, the FASB issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004 (“FAS 109-2”). The AJCA introduces an 85% dividends received deduction for a limited time on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the repatriation provision. We are currently in a net loss position in our foreign operations and have substantial net operating losses both in the U.S. and abroad that can be used to offset taxable income for many years. As a result, we do not expect FAS 109-2 to have a material impact on our financial condition, results of operations or cash flows.

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 Epiphany. 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.

Risks Related to the Proposed Merger with SSA Global Technologies, Inc.

Our proposed merger with SSA involves a high degree of risk, including the following risks.

Substantial expenses will be incurred and payments made even if the merger is not completed. The merger may not be completed. Whether or not the merger is completed, we and SSA and will incur substantial expenses in pursuing the merger. In addition, if the merger is terminated under specified circumstances, we may be required to pay SSA a termination fee under the merger agreement in the amount of $8.23 million, plus expenses of up to an additional $1.65 million. This termination fee could discourage other potential acquirers from seeking to enter into a business combination with us.

Failure to complete the merger could cause our stock price to decline and otherwise harm our business. If the merger is not completed for any reason, our stock price may decline because costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. In addition, if the merger is not completed, our stock price may decline to the extent that the current market price reflects a market assumption that the merger will be completed or the market’s perceptions as to the reason why the merger was not consummated. Failure to complete the transaction could also cause our customers and employees to question the future of Epiphany as a stand-alone company.

If the conditions to the merger are not met, the merger will not occur. Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. We cannot assure you that each of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and we may lose some or all of the intended benefits of the merger.

Risks Related to our Business

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

We incurred net losses of $8.3 million and $14.7 million for the quarter and six months ended June 30, 2005, $14.2 million for the year ended December 31, 2004, and $24.2 million for the year ended December 31, 2003. We had an accumulated deficit of $3.5 billion as of June 30, 2005. We expect to continue to incur losses in the foreseeable future. These losses may be substantial and we may not be able to achieve or sustain annual 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 and maintain profitability.

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, or if we underinvest in one line of products while investing in others, thereby losing competitive technical superiority, 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.

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, Cap Gemini, Deloitte Consulting, and IBM; resellers, including Accenture, Harte-Hanks, Hewlett-Packard, IBM, Mitsucon, Satyam Computer Services and Unisys; hardware and software technology partners, including BEA Systems, IBM, Microsoft, Oracle, SmartPath 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, Knowledgebase Marketing and Merkle. 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 may not be able to 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.

Development of in-house customer relationship management software by our potential customers could adversely affect the growth of our revenues.

Many of our customers and potential customers attempt to develop sales, marketing, customer service and employee relationship information systems in-house, either by themselves or with the help of third-party systems integrators, at times relying on lower cost offshore information technology personnel. In some cases, internal development projects have been successful in satisfying the needs of an organization and have obviated the need for our products within these organizations. To the extent that a large number of our potential customers develop in-house customer relationship management solutions, we may lose opportunities to increase our revenues and customer base and our business may suffer.

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 may 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 three and six months ended June 30, 2005, 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 June 30, 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.

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 do not 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.

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.

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 we do not manage reductions in the size of our business, our operating results will be harmed.

We recently restructured our operations by, among other things, reducing the size of our workforce. We may need to further reduce expenses in the future. If we are unable to effectively address the effects of reducing the workforce, such as the deterioration of employee morale and productivity, unfavorable publicity and the general reduction of available human resources, our business may be harmed. In addition, future expansion in the size of our business, if any, will require that we hire, train and integrate new personnel in key areas. If future expansion becomes necessary and we are unable to successfully expand our workforce, our revenues will be harmed.

If the market for our products does not grow, our revenues may 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 29% of our total revenues for the quarter ended June 30, 2005. 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, 2005, we had 85 employees located outside of the United States.

If we do not 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:

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introduce new and improved customer relationship management software products,

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

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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,

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enhance our software’s ease of use and administration,

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develop software for vertical markets,

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

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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 do not 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 do not 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 do not 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 do not 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 do not do so, this could harm our revenues. We currently receive substantially all of our revenues from direct sales, but we may increase sales through indirect sales channels in the future.

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 do not successfully integrate acquired technologies and employees, our business and operating results will be harmed. To successfully integrate acquired technologies and employees, we must:

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

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

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integrate and retain appropriate personnel,

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geographic complexity,

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combine potentially different corporate cultures,

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

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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. For example, in February 2005, New York University filed a complaint against us in United States District court for the Southern District of New York, alleging patent infringement. 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 could 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. For example, in May 2004, we filed an action in the San Mateo Superior Court for statutory and common law misappropriation of trade secrets, conversion and statutory unfair competition against two individual defendants and a private company comprised principally of our former employees. On June 10, 2004, the Court issued a preliminary injunction against all defendants prohibiting their use or disclosure of certain customer-related Epiphany proprietary information. On January 21, 2005, the Court ordered a second preliminary injunction against one of the individual defendants prohibiting the use or disclosure of certain Company-related information, and a consent judgment permanently enjoining such use or disclosure by the defendants has since been entered. The trial was conducted in June and July 2005 and the matter remains under submission. If we do not 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.

We may need to take additional accounting charges for the impairment of our intangible assets, which would harm our operating results in future periods.

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. We did not identify events or circumstances during the three and six months ended June 30, 2005 which would more likely than not reduce the fair value of previously recorded intangible assets and, thus, we did not take an impairment charge in the quarter ended June 30, 2005. In the future, we may determine that our intangible assets are impaired, which will require us to take an accounting charge in such accounting period. The likelihood that we will take an impairment charge against the carrying value of goodwill or the other intangible assets on our balance sheet is increased when the book value of our assets exceeds the fair market value of our outstanding common stock or where our projections of our near term revenues decline, among other factors. If we take an impairment charge on our intangible assets, our operating results will be harmed in the accounting period when such charge is incurred.

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.

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 Epiphany.

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, 2005, 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, 2005, we held $18.9 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 $0.19 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 and cash equivalents.

As of June 30, 2005, we held $220.3 million in investments in marketable securities and long-term investments. These securities either have maturity dates between three months and two years from the date of purchase or are auction rate securities. These auction rate securities have maturity dates of greater than 10 years, however, we classify them as investments in marketable securities because they have reset dates of less than 45 days and we have the ability and intent to sell them in less than one year from their purchase dates. A decline in interest rates over

time would reduce our interest income from our investments in marketable securities 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 $2.2 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 $1.6 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 $1.6 million.

As of June 30, 2005, we did not have any outstanding debt.

The following summarizes our investments, weighted average yields and expected maturity dates as of June 30, 2005 (in thousands, except interest rates):


	Maturing during 2005			Maturing during 2006			Maturing Thereafter			Total
Corporate bonds	$	13,778		$	24,174		$	4,113		$	42,065
Weighted average yield		1.96	%		2.55	%		3.92	%		2.49	%
Government notes/bonds (1)	$	72,601		$	82,813		$	19,833		$	175,247

Weighted average yield		2.54	%		2.67	%		3.87	%		2.75	%
Auction rate securities (2)	$	3,000		$	—		$	—		$	3,000
Weighted average yield		3.64	%		—			—			3.64	%

Total investment securities	$	89,379		$	106,987		$	23,946		$	220,312

(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 investments in marketable securities 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 Epiphany, 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 4 of Notes to 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 May 19, 2005 and the following matters were considered, voted upon and approved/ratified:

The re-election of Robert L. Joss to serve as a Class III member of our Board of Directors with a term expiring on the date of the 2008 annual meeting of stockholders.


	FOR:	AUTHORITY TO VOTE WITHHELD:
Common Stock:	63,441,250	6,388,357

The ratification of the appointment of Ernst & Young LLP as our independent auditor for the year ending December 31, 2005.


	FOR:	AGAINST:	ABSTAIN:
Common Stock:	69,156.970	253,016	419,621

ITEM 6. 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.

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.

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.


	EPIPHANY, INC.

DATE: August 5, 2005	SIGNATURE:	/s/ KAREN A. RICHARDSON
		Karen A. Richardson
		Chief Executive Officer

DATE: August 5, 2005	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.

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.

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E PIPHANY INC 10-Q